The Gulf's Other Product
5 months ago
Monday, May 30, 2011
We Are Going To Have a Soft Restructuring of Our Reprofiled Debt and Remind Everyone How Rebankrupt We Really Are
http://www.reuters.com/article/2011/05/30/us-eurozone-idUSTRE74Q1YV20110530
Tuesday, May 17, 2011
QE3?
I think everyone will generally agree that the economy continues to struggle in the U.S., the EU is struggling with some members seriously considering the option of restructuring debt, Japan is simply out of the picture for now, China is doing its best to avoid a real estate bubble of its own and overall things are not so honky dory economically for the world. Certainly looking better than say 2007 or 2008, but not out of the woods yet by any means. And so as QE2 comes to an end next month, the question must be, what will the Fed do?
Let me start by noting I was no fan of QE or QE2 and am not supporting any QE3, but last I checked Bernanke is not reading my blog so what I think is in some respects irrelevant. I am a fan of taking our pain now, getting it out of the way and not saddling generations ahead with massive debt. Now I have to note a caveat here. I am financially OK and I know that most in the U.S. are not, so saying take the pain now is much easier for me to say than for many others. I think the pain, accordingly, needs to not all come at once and needs to be taken over time, but I do think it is better to take it now to the extent we can and not simply delay it, which makes it worse for everyone. With that aside, let's discuss a minute whether there will be QE3.
I think there will be QE3. QE2 is coming to a close next month. It has been a resounding failure in my view. Note that this view is tied to its publically announced purpose,, not its real purpose, but from the perspective of the announced purpose it has done nothing. Big banks are still not lending, it is not helping the average American and it is worthless. Now I am not dismissing the prospect that there was a covert purpose here of propping up problematic big banks to help them weather the storm, but that was not the announced official purpose.
So will there be QE3? Well, since QE2 did not work, why the hell not. After all, if it does not work the first or second time the third should be a charm. I am sure there are those in the Fed against QE3 but I suspect Ben has enough natural charm to get the votes he needs for QE3, which will be announced to great fanfare in July. His job is no longer jobs or inflation, it is stock prices and he will do what he needs to support them. Presently he has plenty of ammo to defend such a decision. The economy is still sluggish, jobs are not coming back fast enough, real estate is not rebounding like it should, inflation is still low (if you look at core CPI), and the like. So in my book QE3 is in the cards. I think it will in the long term do much more harm than good, but I think this cake is already baked. Thanks Ben - NOT!
Disclosures: None
Let me start by noting I was no fan of QE or QE2 and am not supporting any QE3, but last I checked Bernanke is not reading my blog so what I think is in some respects irrelevant. I am a fan of taking our pain now, getting it out of the way and not saddling generations ahead with massive debt. Now I have to note a caveat here. I am financially OK and I know that most in the U.S. are not, so saying take the pain now is much easier for me to say than for many others. I think the pain, accordingly, needs to not all come at once and needs to be taken over time, but I do think it is better to take it now to the extent we can and not simply delay it, which makes it worse for everyone. With that aside, let's discuss a minute whether there will be QE3.
I think there will be QE3. QE2 is coming to a close next month. It has been a resounding failure in my view. Note that this view is tied to its publically announced purpose,, not its real purpose, but from the perspective of the announced purpose it has done nothing. Big banks are still not lending, it is not helping the average American and it is worthless. Now I am not dismissing the prospect that there was a covert purpose here of propping up problematic big banks to help them weather the storm, but that was not the announced official purpose.
So will there be QE3? Well, since QE2 did not work, why the hell not. After all, if it does not work the first or second time the third should be a charm. I am sure there are those in the Fed against QE3 but I suspect Ben has enough natural charm to get the votes he needs for QE3, which will be announced to great fanfare in July. His job is no longer jobs or inflation, it is stock prices and he will do what he needs to support them. Presently he has plenty of ammo to defend such a decision. The economy is still sluggish, jobs are not coming back fast enough, real estate is not rebounding like it should, inflation is still low (if you look at core CPI), and the like. So in my book QE3 is in the cards. I think it will in the long term do much more harm than good, but I think this cake is already baked. Thanks Ben - NOT!
Disclosures: None
Thursday, March 24, 2011
The Ss of Investing
I just thought I would touch on some Ss of investing. Let's start with S number one:
1. Sucking Wind: In this category we place housing in the U.S., both existing and new. Both are down significantly, both in terms of sales and median price. Foreclosures, under water homes, unemployment and the like will make this category suck wind for the rest of this year and a bit into 2012, at a minimum.
2. Sucking Wind: Effective wages are stagnant or going down and employment is stabilizing but not rebounding to any degree.
3. Sucks: Inflation is showing its ugly colors. Even the false core inflation numbers are on the rise due to commodities being up significantly - and soon due to Japan related issues. When you figure in fuel and food, we are looking at inflation that is getting significant. One reason for economic/political strife in Europe and the Middle East is that regular folks cannot afford food and other basics.
4. Sucking Wind: Portugal is sucking wind and will need assistance sooner than later. It joins the likes of Greece and Ireland and will also join the list of countries that may ultimately give the finger to the EU.
5. Suspect: China has a real estate bubble that it is doing its best to slowly deflate. Even if it succeeds it will slow China's economic growth, which has greatly assisted the global recovery. If it fails, well we have seen what happens when a bubble bursts. By the way, farm real estate in the U.S. is experiencing a bit of a bubble, probably due to food inflation, and it will likely get much larger in the next couple of years.
6. Sucks: Japan has problems that will drag it down for years, even beyond those that have been dragging it down for a couple of decades already. There will be a trickle effect in numerous respects. Short term supply and manufacturing problems are just the beginning.
There is a lot more Ss out there but this will do for now. Yet the market is up the past few days. Those predicting it to continue in this mode I would put into my last S category- Sophists.
Disclosures: None
1. Sucking Wind: In this category we place housing in the U.S., both existing and new. Both are down significantly, both in terms of sales and median price. Foreclosures, under water homes, unemployment and the like will make this category suck wind for the rest of this year and a bit into 2012, at a minimum.
2. Sucking Wind: Effective wages are stagnant or going down and employment is stabilizing but not rebounding to any degree.
3. Sucks: Inflation is showing its ugly colors. Even the false core inflation numbers are on the rise due to commodities being up significantly - and soon due to Japan related issues. When you figure in fuel and food, we are looking at inflation that is getting significant. One reason for economic/political strife in Europe and the Middle East is that regular folks cannot afford food and other basics.
4. Sucking Wind: Portugal is sucking wind and will need assistance sooner than later. It joins the likes of Greece and Ireland and will also join the list of countries that may ultimately give the finger to the EU.
5. Suspect: China has a real estate bubble that it is doing its best to slowly deflate. Even if it succeeds it will slow China's economic growth, which has greatly assisted the global recovery. If it fails, well we have seen what happens when a bubble bursts. By the way, farm real estate in the U.S. is experiencing a bit of a bubble, probably due to food inflation, and it will likely get much larger in the next couple of years.
6. Sucks: Japan has problems that will drag it down for years, even beyond those that have been dragging it down for a couple of decades already. There will be a trickle effect in numerous respects. Short term supply and manufacturing problems are just the beginning.
There is a lot more Ss out there but this will do for now. Yet the market is up the past few days. Those predicting it to continue in this mode I would put into my last S category- Sophists.
Disclosures: None
Friday, March 4, 2011
Short Sighted
I have taken a step back from posting over the past few months as I have viewed the situation in the U.S. and most other places as temporarily stable. There has been nothing short term to sound alarm bells and I realize my concerns have increasingly become long term. Still, in time, the long term does become the short term, so I offer some thoughts on the long term.
First, let me observe that the government in the U.S. (and especially the Fed) has absolutely no long term planning. It is all about the here-and-now and how to win the next election. It is all about improving current employment numbers, stock values, real estate values and the like, with little to no consideration of what is right for us in the medium and long term. Replacing old debt with more new debt seems to be no issue at all, despite its foolishness from a long term perspective. And it is not just the government. Some prominent economists are on board with this. Just check out Nobel Prize economist Paul Krugman, who is all in favor of throwing more money at the current economy to improve short term numbers:
http://www.nytimes.com/2011/03/04/opinion/04krugman.html
He is critical of any austerity at this point and in favor of throwing more money at the situation. He points out that austerity measures, according the the IMF, do not support "economic activity in the short term." Freakin' A they don't!! Austerity measures are not about short term economic benefit - they are about avoiding longer term massive deficits that lead to much larger problems!!!! Duh, get a handle on this Paul. And the money Republicans are talking about saving in austerity measures, roughly $60 billion last I saw, is laughable. For true austerity to have and impact, it would have to be many, many times that amount. Keep in mind that the extended tax cuts and other measures agreed to by the Administration and (newly
Republican controlled) Congress in December are going to be roughly ten times what Republicans are seeking to cut in these austerity measures. So as they pound their swords on their shields and claim success, I for one am marking the fact that they demanded in the first instance to keep tax cuts in place for the really wealthy that wholly outstrip and austerity they have suggested.
This is not to say the Democrats are doing better. Yes, we would be better off if the extension of tax cuts was not extended to the really rich, but compromising as they did was the worst long term solution possible. And, unlike the Republicans, they are unwilling to make other budget cuts to make up for this mistake. Indeed, given our mess I would support an end to all the Bush tax cuts at all levels to help the deficit, but those seeking reelection in the future would never bite this bullet.
Having cleared this off my chest, let me give a very brief overview of what should be keeping you awake - not today or tomorrow necessarily, but certainly over the next decade:
1. As noted above, the US deficit is at a critical level and getting out of control. This is leading to a serious devaluation of the dollar and, as the dollar gradually loses its reserve currency status, will lead to major financing woes for the US. The Fed is the last major buyer and when QE2 is done later this year there will likely be serious issues that will require real austerity measures instead of the minimal stuff suggested to date.
2. Inflation is in the cards whether you like it or not. Initially people feared all the Fed and government stimulus would lead to inflation, but it did not as it did not really do much to revive the economy. Nope, inflation is due to increased overseas demand, especially China, agricultural issues in various countries, civil uprisings in the Middle East and idiot speculators driving up the prices on some commodities. It will lead to further problems in our economic recovery (if you want to call it a recovery).
3. The EU problems have faded recently but have certainly not gone away. Recent elections in Ireland could lead to a new round of intense negotiations between it and the EU and IMF. Citizens of Ireland are rightly questioning why they should go through decades of recession to pay back debts, at 6%, they incurred to the EU to save Irish banks that owed tons to other EU banks. In other words, "why am I paying through years of recession to save the bastards that caused the problem. Those lending to Irish banks during the bubble should be paying the price instead." I for one share tne sentiment in the U.S. as that is precisely what the government here has done (save the bastards with our tax dollars) but we inconveniently do not have an easily identifiable target like the EU with which to renegotiate.
Now this could get to be rather a sticky situation. Ireland will undoubtedly use the threat of all out default to renegotiate something better than 6%. After all, something like 10% of the national income for the country is going to interest payments alone. So, at a minimum, you can expect them to seek a much lower interest rate if not no interest at all, with deferred payments. With the default hammer, the EU will have to listen.
You think, however, that default is not an option. Well, ask Iceland or Argentina. It turns out it is not that bad of an option, assuming everyone is not doing it at the same time. You see lenders do not look too much at a country's FICO score. They concentrate more on future ability to pay debts. And defaulting on past debt means you are a risk but it also means you have a great deal more capacity to pay off new debt. Now there are other nasty repercussions to default that will likely keep Ireland from going there, but they most certainly will be looking to strike a much better deal with the IMF and EU. And if they do, the other PIIGS will be close behind. For a better discussion of this I highly recommend John Mauldin:
http://seekingalpha.com/article/255652-when-irish-eyes-are-voting
4. The Middle East - need I say more. Who knows what is going to happen there and what impact it will have on oil prices or other economic factors. At a minimum the situation there will be very volatile for several years to come (more so than usual that is).
5. Global Climate - This is probably very long term but we are in the midst of a shift in our climate. I am not just talking global warming here. Our magnetic north is shifting and at a sharply increasing rate, roughly 40 miles a year toward Russia due to core flux. Scientists are speculating on the implications of this for global weather but most do not see it as beneficial. This does not keep me awake at night too much but I thought I would add something to the mix that you have not perhaps already read about.
Disclosures: none.
First, let me observe that the government in the U.S. (and especially the Fed) has absolutely no long term planning. It is all about the here-and-now and how to win the next election. It is all about improving current employment numbers, stock values, real estate values and the like, with little to no consideration of what is right for us in the medium and long term. Replacing old debt with more new debt seems to be no issue at all, despite its foolishness from a long term perspective. And it is not just the government. Some prominent economists are on board with this. Just check out Nobel Prize economist Paul Krugman, who is all in favor of throwing more money at the current economy to improve short term numbers:
http://www.nytimes.com/2011/03/04/opinion/04krugman.html
He is critical of any austerity at this point and in favor of throwing more money at the situation. He points out that austerity measures, according the the IMF, do not support "economic activity in the short term." Freakin' A they don't!! Austerity measures are not about short term economic benefit - they are about avoiding longer term massive deficits that lead to much larger problems!!!! Duh, get a handle on this Paul. And the money Republicans are talking about saving in austerity measures, roughly $60 billion last I saw, is laughable. For true austerity to have and impact, it would have to be many, many times that amount. Keep in mind that the extended tax cuts and other measures agreed to by the Administration and (newly
Republican controlled) Congress in December are going to be roughly ten times what Republicans are seeking to cut in these austerity measures. So as they pound their swords on their shields and claim success, I for one am marking the fact that they demanded in the first instance to keep tax cuts in place for the really wealthy that wholly outstrip and austerity they have suggested.
This is not to say the Democrats are doing better. Yes, we would be better off if the extension of tax cuts was not extended to the really rich, but compromising as they did was the worst long term solution possible. And, unlike the Republicans, they are unwilling to make other budget cuts to make up for this mistake. Indeed, given our mess I would support an end to all the Bush tax cuts at all levels to help the deficit, but those seeking reelection in the future would never bite this bullet.
Having cleared this off my chest, let me give a very brief overview of what should be keeping you awake - not today or tomorrow necessarily, but certainly over the next decade:
1. As noted above, the US deficit is at a critical level and getting out of control. This is leading to a serious devaluation of the dollar and, as the dollar gradually loses its reserve currency status, will lead to major financing woes for the US. The Fed is the last major buyer and when QE2 is done later this year there will likely be serious issues that will require real austerity measures instead of the minimal stuff suggested to date.
2. Inflation is in the cards whether you like it or not. Initially people feared all the Fed and government stimulus would lead to inflation, but it did not as it did not really do much to revive the economy. Nope, inflation is due to increased overseas demand, especially China, agricultural issues in various countries, civil uprisings in the Middle East and idiot speculators driving up the prices on some commodities. It will lead to further problems in our economic recovery (if you want to call it a recovery).
3. The EU problems have faded recently but have certainly not gone away. Recent elections in Ireland could lead to a new round of intense negotiations between it and the EU and IMF. Citizens of Ireland are rightly questioning why they should go through decades of recession to pay back debts, at 6%, they incurred to the EU to save Irish banks that owed tons to other EU banks. In other words, "why am I paying through years of recession to save the bastards that caused the problem. Those lending to Irish banks during the bubble should be paying the price instead." I for one share tne sentiment in the U.S. as that is precisely what the government here has done (save the bastards with our tax dollars) but we inconveniently do not have an easily identifiable target like the EU with which to renegotiate.
Now this could get to be rather a sticky situation. Ireland will undoubtedly use the threat of all out default to renegotiate something better than 6%. After all, something like 10% of the national income for the country is going to interest payments alone. So, at a minimum, you can expect them to seek a much lower interest rate if not no interest at all, with deferred payments. With the default hammer, the EU will have to listen.
You think, however, that default is not an option. Well, ask Iceland or Argentina. It turns out it is not that bad of an option, assuming everyone is not doing it at the same time. You see lenders do not look too much at a country's FICO score. They concentrate more on future ability to pay debts. And defaulting on past debt means you are a risk but it also means you have a great deal more capacity to pay off new debt. Now there are other nasty repercussions to default that will likely keep Ireland from going there, but they most certainly will be looking to strike a much better deal with the IMF and EU. And if they do, the other PIIGS will be close behind. For a better discussion of this I highly recommend John Mauldin:
http://seekingalpha.com/article/255652-when-irish-eyes-are-voting
4. The Middle East - need I say more. Who knows what is going to happen there and what impact it will have on oil prices or other economic factors. At a minimum the situation there will be very volatile for several years to come (more so than usual that is).
5. Global Climate - This is probably very long term but we are in the midst of a shift in our climate. I am not just talking global warming here. Our magnetic north is shifting and at a sharply increasing rate, roughly 40 miles a year toward Russia due to core flux. Scientists are speculating on the implications of this for global weather but most do not see it as beneficial. This does not keep me awake at night too much but I thought I would add something to the mix that you have not perhaps already read about.
Disclosures: none.
Thursday, January 27, 2011
Sorry So Silent for Sooo Long
I have been radio silent for a very long time as the economy here and elsewhere has largely focused on monetary policy, exchange rates and the like, which is not an area where I feel any confidence in posting. Those issues are still front page, but I thought I would add a few thoughts to the discussion.
First, I will truly be surprised if Greece and/or Ireland do not leave the EU this year so they can establish (and devalue) their own currency and at least partially default on some sovereign debt. Iceland did and is already on the road to recovery. Lenders, it seems, have no long term memory.
I expect Ireland to go first as it has political changes early in the year. Sure, there will be EU pressures on them to not do this, but what is good for the EU is not necessarily what is good for Ireland and Greece. The EU is supporting them simply because banks in Germany, France, the UK and other EU associated countries have too much bank debt tied to their sovereign debt. If the EU really cared and wanted to help, the loans from the EU would not be around 6-8% - they would be interest free to help these coutries in need. The people in these countries are not stupid and will figure out in the first six months of this year that their citizens are better off leaving the EU, establishing their own soon to be devalued currency and restructuring debt so that the issues rest with the banks that took the risk and not with the taspayers. I only wish more countries, including my own, put the pain to those who knew they were taking an investment risk instead of taxpayers and our childred, grandchildred and yet to be born future generations who will be stuck with this mess.
Again, I vote for an international procolmation that all debt in the world is extinguished and we deal with the mess and start over. The folks opposing this the most will likely be those that caused our recent mess to begin with and I am fine with that.
Obama
Okay, I like the guy and think he is trying but he still is surrounded by fools. Moreover, I, at this point, see no route for him out of this. He touts "innovation" as our national way out but we have had plenty of that over the years. We simply export all the labor of implementing innovation to other coutries. This is why U.S. companies (with the help of trillions of government support) are doing well while the U.S. population is still struggling - innovation here and production there. Apple is making tons of money but its IPods and IPads are assembled in China in a factory with nearly a half a million workers (and a high suicide rate). Innovation will not change the export of labor.
I have no good answers myself, just the reality that where we are today is not likely to change too much for individuals. Companies and the top paid individuals will do well this year with all the governmnet tax breaks and QE2 support but this will not add many jobs and will add drastically to the deficit. It will take dollars out of the pockets of individuals and put them in the pockets of corporations and their executives (including big banks) who will spend these dollars on foreign labor. Our children are screwed and other than fighting for education spending to not be reduced I am not sure what we can do to save our childrens' future. Otherwise, stupid is as stupid does.
Let me just say I am a bit outraged. I read that the wage freeze Obama announced in his address will save $400 billion over ten years. Compare that to the CBO estimate the next day 0f $1.5 trillion deficit this year. Yes, with over ten years in frozen wages in the federal government we may offset less than 30% of this single year's deficit. Bring out the band.
I am 51 years old and my current retirement plan is finding another country where it makes sense to retire. Ask me if I am kidding . . .? NOT!! The U.S. and most of the EU is truly screwed for a generation or two to come so I am weighing the options for me and my family. Nothing immediate, but probably in the next 10 years. I am serious and you should start evaluating this prospect too.
Disclosures: None.
First, I will truly be surprised if Greece and/or Ireland do not leave the EU this year so they can establish (and devalue) their own currency and at least partially default on some sovereign debt. Iceland did and is already on the road to recovery. Lenders, it seems, have no long term memory.
I expect Ireland to go first as it has political changes early in the year. Sure, there will be EU pressures on them to not do this, but what is good for the EU is not necessarily what is good for Ireland and Greece. The EU is supporting them simply because banks in Germany, France, the UK and other EU associated countries have too much bank debt tied to their sovereign debt. If the EU really cared and wanted to help, the loans from the EU would not be around 6-8% - they would be interest free to help these coutries in need. The people in these countries are not stupid and will figure out in the first six months of this year that their citizens are better off leaving the EU, establishing their own soon to be devalued currency and restructuring debt so that the issues rest with the banks that took the risk and not with the taspayers. I only wish more countries, including my own, put the pain to those who knew they were taking an investment risk instead of taxpayers and our childred, grandchildred and yet to be born future generations who will be stuck with this mess.
Again, I vote for an international procolmation that all debt in the world is extinguished and we deal with the mess and start over. The folks opposing this the most will likely be those that caused our recent mess to begin with and I am fine with that.
Obama
Okay, I like the guy and think he is trying but he still is surrounded by fools. Moreover, I, at this point, see no route for him out of this. He touts "innovation" as our national way out but we have had plenty of that over the years. We simply export all the labor of implementing innovation to other coutries. This is why U.S. companies (with the help of trillions of government support) are doing well while the U.S. population is still struggling - innovation here and production there. Apple is making tons of money but its IPods and IPads are assembled in China in a factory with nearly a half a million workers (and a high suicide rate). Innovation will not change the export of labor.
I have no good answers myself, just the reality that where we are today is not likely to change too much for individuals. Companies and the top paid individuals will do well this year with all the governmnet tax breaks and QE2 support but this will not add many jobs and will add drastically to the deficit. It will take dollars out of the pockets of individuals and put them in the pockets of corporations and their executives (including big banks) who will spend these dollars on foreign labor. Our children are screwed and other than fighting for education spending to not be reduced I am not sure what we can do to save our childrens' future. Otherwise, stupid is as stupid does.
Let me just say I am a bit outraged. I read that the wage freeze Obama announced in his address will save $400 billion over ten years. Compare that to the CBO estimate the next day 0f $1.5 trillion deficit this year. Yes, with over ten years in frozen wages in the federal government we may offset less than 30% of this single year's deficit. Bring out the band.
I am 51 years old and my current retirement plan is finding another country where it makes sense to retire. Ask me if I am kidding . . .? NOT!! The U.S. and most of the EU is truly screwed for a generation or two to come so I am weighing the options for me and my family. Nothing immediate, but probably in the next 10 years. I am serious and you should start evaluating this prospect too.
Disclosures: None.
Wednesday, September 22, 2010
Unemployment
I have just a short observation tonight. I read an article today predicting that companies have ringed as much as they could out of productivity enhancements and should soon be forced into more hiring. I only wish that were true. I left a comment to the article with two main points.
First, I contend that there is a fairly significant level of shadow inventory out there. Official unemployment numbers do not count those that have given up, but this does not mean they will not try again if there is any sign of decent jobs becoming available. If you read the numbers properly you will see that several percent of the employable population has simply given up. They are down, but not necessarily out.
Second, and more importantly, the employed workers have during the last few years had their hours cut rather significantly. This means, despite all the firing, employers have done what they can to keep a staff around should things rebound. And if they rebound, they have a lot of room to take in significant new levels of work without adding to ranks. After all, why hire new workers and pay benefits to new people if you current work force is underemployed. Just getting over folks working short hours will take a good bit of time, even assuming the article I read is correct that companies have already done what they can on productivity enhancements, which is a suspect proposition given the rate of tech innovation these days.
Disclosures: None.
First, I contend that there is a fairly significant level of shadow inventory out there. Official unemployment numbers do not count those that have given up, but this does not mean they will not try again if there is any sign of decent jobs becoming available. If you read the numbers properly you will see that several percent of the employable population has simply given up. They are down, but not necessarily out.
Second, and more importantly, the employed workers have during the last few years had their hours cut rather significantly. This means, despite all the firing, employers have done what they can to keep a staff around should things rebound. And if they rebound, they have a lot of room to take in significant new levels of work without adding to ranks. After all, why hire new workers and pay benefits to new people if you current work force is underemployed. Just getting over folks working short hours will take a good bit of time, even assuming the article I read is correct that companies have already done what they can on productivity enhancements, which is a suspect proposition given the rate of tech innovation these days.
Disclosures: None.
Tuesday, September 21, 2010
"Surge"
Let's talk real estate for a moment. CNNMoney today ran a headline that housing starts had "surged" in August. Yes they said "surge." I just went to the site and now they are down playing the situation just a tad. The current headline notes the housing market is showing a "glimmer" of hope. From "surge" to "glimmer" in one day.
http://finance.fortune.cnn.com/2010/09/21/housing-market-shows-glimmer-of-hope/
Actually, neither is true. Yes, single family home starts are up nicely (10.5%) off of an adjusted down July figure and they were the highest in four months. But they are still horribly low. For some perspective go to the linked chart at Calculated Risk to see the - barely perceptible - "surge."
http://www.calculatedriskblog.com/2010/09/single-family-housing-starts-increase.html
Now in typing the above I almost said that the housing start number was at the "best" it has been in four months but then corrected myself and inserted "highest" instead. This is because at the moment highest is not necessarily best.
You see we have over ten months of existing housing inventory, a bunch of shadow inventory from foreclosures and people just waiting for prices to improve and a lot of homeowners under water. There is no good news here. Until folks get their personal debt within reason, save up a good down payment and qualify for credit to buy a home, building homes serves no purpose. It only adds inventory and depresses prices further. Builders should simply stop building, period, unless they have someone paying them to build a specific home. It will be several years before we work off inventory and new homes make sense, so more construction does not make any sense to me. In my book, it is bad news. And I did not even mention the problems with personal debt levels.
I noted the under water homes above as a problem in part because a lot of home buying comes from people moving more so than first time home buyers and if you are under water or even close to it you cannot move unless you somehow get rid of your current house and still have money to put the down payment on the next one. For a good quarter or more of folks with a mortgage that is simply not an option. Even if they can get their bank to do a short sale they have to save up for a new down payment. And if they do jingle mail they are not getting a new loan any time soon. The only folks under water or close to it who can move are those with money to make up the difference and still pay a new down payment. That is a major disincentive to moving, a major downward pressure on housing and a tough cycle to break. Add in all the foreclosures taking place and it is a toxic mix for at least another year or two (and I fear 5 of more years as the situation is really that bad). Folks lost trillions of dollars in real estate values the past few years and for many that was their piggy bank. Piggy has run away. Did I mention unemployment is increasing and those without jobs cannot buy a home? Did I need to?
http://www.calculatedriskblog.com/2010/09/state-unemployment-rates-in-august.html
So back to the housing starts. From what I have seen it is mostly multi-family starts and these are highly variable. Moreover, to the extent these are being built to rent, the rental market has a glut too, so good luck with that. Build it and they will come is not working here.
I simply do not get why anyone is building anything right now, why anyone is wanting something built or why folks think more starts are good news. More starts, without more buyers, are not good news at all.
Let me add two more things before I am done. First, I read last week that some developers are instituting resale fees. These tend to be hidden in the paperwork but basically they call for the developer to be paid say 1% of the resale price on any property they sell for 99 years. So you buy a property for $200,000 and sell it in five years for $200,000 and you have to send the developer $2000. And everyone who sells that property for 99 years needs to do the same, which will significantly reduce the value of the property. Developers are packaging these fees and securitizing them to turn them into instant cash. Gee, that sounds familiar.
http://www.nytimes.com/2010/09/12/business/12fees.html?pagewanted=all
Second, I have a relevant story about a neighbor of mine. I will call him Joe. Joe bought a run down house down the street a decade or so ago and paid roughly $190,000 for it with $150,000 in mortgage. Over the years the assessed value went up to $250,000 and Joe refinanced, eventually peaking in 2005 at a mortgage of $395,000. I knew Joe had a blue collar job that was respectable but did not pay tons, yet he always had a new car, had ATVs like crazy, had jet skies, a big ass enclosed trailer for everything and a major motor home. His house was nothing great but Joe had all the toys and then some. I would estimate he had a good $200,000 in toys. Joe moved out a few weeks ago and I suspect jingle mail. The house was never worth more than say $250,000 even given the market bubble, so he did well to pump a bank for $395,000. I do not feel sorry for Joe or the foolish bank, but the bank will be lucky to cover half its loan and Joe will be lucky to get any credit for a few years. And this story is repeated millions of times across this great nation.
None of this bodes well for real estate any time soon. And you also have all the problems banks are having foreclosing. Apparently, during the bubble the paper work was not always optimal, a third party entity (MERS - the Mortgage Electronic Registration Systems) may not meet legal muster in its system (which may negate certain mortgage securitizations) and folks are now having to make up affidavits to try to make a case, so it will be a bumpy and perhaps slower mortgage road for many banks going forward. GMAC just stopped all foreclosure activity in 23 states due to certain such issues.
http://www.nakedcapitalism.com/2010/09/how-serious-is-the-gmac-problem-pretty-serious-and-not-just-gmac.html
http://www.calculatedriskblog.com/2010/09/on-gmac-foreclosure-stories.html
Yes, all this mess is obviously going to clear up any day now and we should start building a lot more homes to satisfy the massive pent up demand! That is the good news? You decide.
Update: New mortgage applications have now declined three weeks in a row (and most or refis anyway) and are now at their lowest in six weeks. Sounds like an excellent time to build new houses.
Disclosures: None.
http://finance.fortune.cnn.com/2010/09/21/housing-market-shows-glimmer-of-hope/
Actually, neither is true. Yes, single family home starts are up nicely (10.5%) off of an adjusted down July figure and they were the highest in four months. But they are still horribly low. For some perspective go to the linked chart at Calculated Risk to see the - barely perceptible - "surge."
http://www.calculatedriskblog.com/2010/09/single-family-housing-starts-increase.html
Now in typing the above I almost said that the housing start number was at the "best" it has been in four months but then corrected myself and inserted "highest" instead. This is because at the moment highest is not necessarily best.
You see we have over ten months of existing housing inventory, a bunch of shadow inventory from foreclosures and people just waiting for prices to improve and a lot of homeowners under water. There is no good news here. Until folks get their personal debt within reason, save up a good down payment and qualify for credit to buy a home, building homes serves no purpose. It only adds inventory and depresses prices further. Builders should simply stop building, period, unless they have someone paying them to build a specific home. It will be several years before we work off inventory and new homes make sense, so more construction does not make any sense to me. In my book, it is bad news. And I did not even mention the problems with personal debt levels.
I noted the under water homes above as a problem in part because a lot of home buying comes from people moving more so than first time home buyers and if you are under water or even close to it you cannot move unless you somehow get rid of your current house and still have money to put the down payment on the next one. For a good quarter or more of folks with a mortgage that is simply not an option. Even if they can get their bank to do a short sale they have to save up for a new down payment. And if they do jingle mail they are not getting a new loan any time soon. The only folks under water or close to it who can move are those with money to make up the difference and still pay a new down payment. That is a major disincentive to moving, a major downward pressure on housing and a tough cycle to break. Add in all the foreclosures taking place and it is a toxic mix for at least another year or two (and I fear 5 of more years as the situation is really that bad). Folks lost trillions of dollars in real estate values the past few years and for many that was their piggy bank. Piggy has run away. Did I mention unemployment is increasing and those without jobs cannot buy a home? Did I need to?
http://www.calculatedriskblog.com/2010/09/state-unemployment-rates-in-august.html
So back to the housing starts. From what I have seen it is mostly multi-family starts and these are highly variable. Moreover, to the extent these are being built to rent, the rental market has a glut too, so good luck with that. Build it and they will come is not working here.
I simply do not get why anyone is building anything right now, why anyone is wanting something built or why folks think more starts are good news. More starts, without more buyers, are not good news at all.
Let me add two more things before I am done. First, I read last week that some developers are instituting resale fees. These tend to be hidden in the paperwork but basically they call for the developer to be paid say 1% of the resale price on any property they sell for 99 years. So you buy a property for $200,000 and sell it in five years for $200,000 and you have to send the developer $2000. And everyone who sells that property for 99 years needs to do the same, which will significantly reduce the value of the property. Developers are packaging these fees and securitizing them to turn them into instant cash. Gee, that sounds familiar.
http://www.nytimes.com/2010/09/12/business/12fees.html?pagewanted=all
Second, I have a relevant story about a neighbor of mine. I will call him Joe. Joe bought a run down house down the street a decade or so ago and paid roughly $190,000 for it with $150,000 in mortgage. Over the years the assessed value went up to $250,000 and Joe refinanced, eventually peaking in 2005 at a mortgage of $395,000. I knew Joe had a blue collar job that was respectable but did not pay tons, yet he always had a new car, had ATVs like crazy, had jet skies, a big ass enclosed trailer for everything and a major motor home. His house was nothing great but Joe had all the toys and then some. I would estimate he had a good $200,000 in toys. Joe moved out a few weeks ago and I suspect jingle mail. The house was never worth more than say $250,000 even given the market bubble, so he did well to pump a bank for $395,000. I do not feel sorry for Joe or the foolish bank, but the bank will be lucky to cover half its loan and Joe will be lucky to get any credit for a few years. And this story is repeated millions of times across this great nation.
None of this bodes well for real estate any time soon. And you also have all the problems banks are having foreclosing. Apparently, during the bubble the paper work was not always optimal, a third party entity (MERS - the Mortgage Electronic Registration Systems) may not meet legal muster in its system (which may negate certain mortgage securitizations) and folks are now having to make up affidavits to try to make a case, so it will be a bumpy and perhaps slower mortgage road for many banks going forward. GMAC just stopped all foreclosure activity in 23 states due to certain such issues.
http://www.nakedcapitalism.com/2010/09/how-serious-is-the-gmac-problem-pretty-serious-and-not-just-gmac.html
http://www.calculatedriskblog.com/2010/09/on-gmac-foreclosure-stories.html
Yes, all this mess is obviously going to clear up any day now and we should start building a lot more homes to satisfy the massive pent up demand! That is the good news? You decide.
Update: New mortgage applications have now declined three weeks in a row (and most or refis anyway) and are now at their lowest in six weeks. Sounds like an excellent time to build new houses.
Disclosures: None.
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