Housing Hype Fades with Sales Numbers

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


During last summer and fall, the mainstream media was filled with glowing reports of recovery in the U.S. housing market. Government programs were juicing the numbers, which doesn't represent recovery of anything, but that wasn't the spin the media put on increased home sales. Special tax credits, which are still in place, were behind the better numbers. They are losing their affect though and the housing market is already beginning to turn down again.

According to the NAR (National Association of Realtors), existing home sales fell 0.6% in February to a seasonally adjusted 5.02 million units. This is the third monthly drop in a row. The impact of the 'seasonal adjustments' seems to have caused sales in the snow-buried Northeast and Midwest to rise significantly during the month. The overall number would have been much worse without the supposed strong sales in those geographic areas. Inventories of homes on the market, which are not seasonally adjusted, jumped 312,000 to 3.59 million. This represents an 8.2 month supply based on current sales rates. The median sales price was $165,100, down 1.8% year over year.

While the federal government has a number of programs to prop up the housing market, including funneling questionable mortgages through the FHA (Federal Housing Administration) and its blank-check support of nationalized and money-bleeding Fannie Mae and Freddie Mac, the first-time home buyers credit was the most immediate impetus for increased sales during the second half of 2009. The credit was originally slated to expire on November 30th, but at the last minute was extended to this April 30th and expanded to include non first-time buyers. Nevertheless, sales started to dip after November. It is now clear that the credit merely sped up purchases that were already going to take place and higher sales last fall mean lower sales early this year.

Existing home sales peaked in 2005 at 7,075,000. The latest number at 5,020,000 represents and almost 30% drop - and we are now entering the fifth year since the top. The pattern of sales from the homebuyer's tax credit indicates that it was too little to fix what is a massive systemic problem. House prices went too high during the bubble, actually doubling or more in a four-year period in some cities, and they need to come down to market clearing prices. Until this happens, the market cannot recover and grow again, nor can the overall U.S. economy.

Disclosure: None

NEXT: Will Expanding Euro Crisis Continue to Benefit U.S. Stocks

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Home Sales Fall Expectedly

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


U.S. home sales figures for December were out this week. Existing Home Sales fell 16.7% and New Home Sales fell 7.6%. The mainstream media reported the numbers as a surprise. There was nothing surprising about them at all. The U.S. real estate market was being propped up with special government tax credits and when it looked like those credits would disappear at the end of November, homebuyers disappeared with them.

The federal government's tax credit for homebuyers, originally only for new buyers, was renewed until next spring and extended to include people who already own homes. People shopping for homes didn't know that this would happen though, so they rushed to buy before the original November 30th deadline. It looks like the credit accelerated already intended purchasers, rather than actually creating new ones. Existing Home Sales figures started rising in April 2009 (there was a dip in August) and then they fell apart in December after the intended tax expiration date. The drop in Existing Home Sales was the largest in over 40 years.

The U.S. government has instituted a number of programs other than tax credits to directly or indirectly prop up the housing market. HERA - the Housing and Economic Recovery Act of 2008 - resulted in a purchase of an estimated $220 billion in mortgage backed securities by the Treasury Department and is the vehicle for keeping Fannie Mae and Freddie Mac afloat.  The feds provided $300 billion to the FHA for its 'Hope for Homeowners' program. The legislation was signed into law in July 2008 and was considered the solution to stabilizing the housing market; apparently hope was all that was delivered however. The Obama administration's 'Making Home Affordable' program from early 2009 was intended to offer assistance to seven to nine million homeowners with loan modification to prevent foreclosure. How successful have these programs been? New Home Sales fell 22.9% to 374,000 units in 2009 - a record low (sales were at a 1.4 million annual rate in October 2005). So far, foreclosures have hit a record 237,052 in the third quarter of 2009. Figures for the fourth quarter haven't been released yet.

Instead of spending huge amounts of taxpayer money to support the housing industry, it would be best to let prices adjust to realistic market levels.  It was government programs that created the housing bubble in the first place, which in turn led to the Credit Crisis. Home prices went to unsustainable levels based on historical trends. They need to come back down to those trend levels before the market can start a true recovery. Until that happens, the market will have to have continual government money pumped into it to keep sales and prices up. Even then, the housing situation can continue to deteriorate - and it shouldn't be unexpected when it does.

Disclosure: None

NEXT: The State of the Union for Investors

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

GDP Revision Indicates Recession Isn't Over

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The final report for third quarter GDP was released on December 22nd. The numbers were revised down ... again. According to the latest government figures, GDP grew by 2.2% last quarter. Previously it was 2.8%. Before that, it was 3.5%. Do you note a pattern here? The rosy 3.5% number got the most media attention as the first release always does. Far fewer people pay attention to the final number. Even this number is likely to be revised downward in future multi-year revisions as were the numbers for all of 2008.

There were three major sources of growth in third quarter GDP. In order of importance they were: government stimulus, government stimulus and government stimulus. The Cash for Clunkers program, a government give-away to the auto industry and people who were foolish enough to buy gas guzzling vehicles, added 1.7% to the GDP total. Government backed housing initiatives, including tax credits for home buyers and FHA mortgage insurance, may have added another 1.0%. Those were only two small components of government spending however. Overall, increases in federal spending were up 7.9%. Subtract all of these components and there was negative GDP growth in the third quarter and the recession is ongoing.

While the government spending component of GDP is robust, the consumer and business components are still weak. Since they are essentially most of the real economy, this should be cause for concern. The latest revisions had consumer spending, commercial construction, and business investment (now down 5.9%) as weaker. Consumer spending, which accounted for 72% of the economy before the Credit Crisis, was still listed as up 2.8%. How this is possible with double digit unemployment, record drops in available consumer credit, and a rising savings rate is one of the mysteries of our time. There is no obvious source of money to fund this supposed increase in spending.

The sad state of the economy is evidenced by the business inventory number, if not by the headline GDP number. Inventories dropped by $139.2 billion in the third quarter compared to a drop of $160.2 billion in the second quarter. This lower drop added almost 0.7% to the 2.2% GDP total. Yes, when it comes to inventories, all it takes if for things to get less worse for GDP to go up. Keep this in mind when you see a positive GDP number. Don't assume it means that things are getting better.

Mainstream economists are now forecasting GDP growth in the strong 4% range for the 4th quarter. Meanwhile, the Fed is stating that it is keeping interest rates at zero for the foreseeable future. The Obama administration proposed a new stimulus package less than two weeks ago and the House passed an additional $100 billion in economic aid last week. While the powers that be keep telling the public everything is not just fine but getting better with the economy, their actions indicate that there is still panic on the Potomac. Perhaps they know something that they're not telling us?

Disclosure: Not applicable.

NEXT: The Santa Claus Rally and the January Effect

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Future U.S. Bailouts - FHA, FDIC, PBGC, U.S. States

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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There is no end in sight for U.S. bailouts stemming from the Credit Crisis. Once you've bailed out wealthy Wall Street bankers (and there are a handful of Federal Reserve programs for this in addition to $700 billion TARP program), it isn't politically tenable to say no to pensioners, savers, homeowners. and local governments. It should be kept in mind that the Credit Crisis didn't create the problems, but merely exposed the rot in the system that had been there for many years. As Warren Buffett most famously said, "you only know who's swimming naked when the tide goes out". Well, a lot of U.S. government operations have been swimming naked for years and the Credit Crisis caused the tide to go out.

The problems center around housing, banking, pensions, and government operations that don't have the money printing ability of the federal government. The government already nationalized massive housing loan entities Fannie Mae and Freddie Mac in 2008 and these have become bottomless pits for government aid. Fannie lost $18.9 billion in the third quarter of this year and requested an additional $15 billion in funding. Things would be even worse, if much of the loans that had previously been handled by Fannie and Freddie weren't now being insured by the FHA (Federal Housing Administration). The FHA is now backing loans that would have made a crooked subprime mortgage broker blush in the heyday of the housing bubble. When it comes to getting FHA insurance these days, bad credit, a spotty work history, and even a previous foreclosure aren't deal breakers. Not surprisingly, FHA finances are spiraling downhill fast and warnings about a need for a bailout are already becoming louder.

The FDIC has temporarily solved its need for a bailout, with temporarily being the operative word. On November 12th the FDIC mandated that banks pay three years of their insurance premiums up front. This will provide the FDIC's insolvent bank deposit insurance program with an immediate cash infusion of $45 billion. Unfortunately, the FDIC itself estimates that its funding needs will be $100 billion in the next four years. Assuming they only need that amount (which is possibly very optimistic), they will still have a serious short fall. There have been 123 U.S bank failures as of mid-November and the ones on November 13th cost the FDIC approximately a billion dollars. That's for just one week. At that rate, the FDIC would be out of money again in 45 weeks.

The PBGC (Pension Benefit Guaranty Corporation), a government chartered company that insures U.S. pensions is another operation which is heading toward a bailout. In its 35 years of operation, it has lost money in 29. Losses have even taken place when the U.S. economy was strong and the stock market rallied. In bad years, the PBGC loses even more money. So far in 2009, it has taken over 144 failed pension programs compared to 67 in 2008. It was $22 billion in the red this year. According to an inspector general's report, the PBGC's former director was alleged to have had improper contacts with Wall Street. When questioned by a congressional panel, he took the Fifth Amendment (refusing to answer because it might incriminate him). Fannie Mae and Freddie Mac executives also had serious ethical problems. Corruption and bailouts seem to go hand in hand.

While California's budget woes are well known, there are nine other U.S. states that are in serious financial trouble and an additional ten not far behind them. California has a $121 billion budget gap and is resorting to IOUs to make payments. According to the Pew Center, the nine other states in serious trouble are Arizona, Michigan, Nevada, Florida (states hit hardest by the housing downturn along with California), Rhode Island, Oregon, New Jersey, Illinois and Wisconsin. High unemployment and reduced business activity have caused tax receipts to plummet and are behind the current fiscal distress. There is little evidence the problem is getting better despite claims by the federal authorities and mainstream economists that the recession is over. The federal government has the same problem as the states, but it just prints money to make ends meet. While the feds can bail out the states, who's going to bail out the U.S. when money printing doesn't work anymore?

NEXT: The Art of Inflation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Subprime Crisis #2 Coming Soon

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

It constantly amazes me that the people running the government and reporters who cover the government seem incapable of doing arithmetic at the first grade level. This is usually all that is necessary to foresee a disastrous outcome in the future. This is certainly the case with the impending FHA (Federal Housing Administration) crisis which will be blowing up soon. The FHA insures mortgages that have less than a 20% down payment. It is currently insuring four times as many mortgages daily as it did in 2006 at the height of the last subprime crisis and has 5.4 million loans on its books. A prominent congresswomen recently stated, "without the FHA there would be no mortgage market" right now.

In congressional testimony the head of this government agency recently stated that the FHA's finances were sound. Oh really? The FHA claims to have $30 billion in cash reserves. How long will that last considering that there are $675 billion in loans on the books and 24% of the loans from 2007 are troubled and 20% of the 2008 loans are troubled so far (these numbers can rise). Those percentages could be worse in 2009 and after. If more than 4.4% of the loans insured by the FHA go bad, it could be out of money, assuming (probably foolishly) that the $30 billion they claim in cash is unencumbered. If not, the percentage could be much, much less than 4.4%.

How is it possible that there be even more problem loans on the FHA books from this year and in the future? Anecdotal reports from some areas of the country say that as much as 100% of recent housing purchases are insured by the FHA. All you need to get this insurance is apparently a 3.5% down payment. A spotty employment record doesn't disqualify you, nor does having filed for bankruptcy in the past. Even more eye popping, having a previous mortgage that went into foreclosure does not keep you from getting a new loan insured by the FHA! The FHA business model is roughly equivalent to a company offering $100,000 life insurance policies for $100 to hospital patients who are on life support. Yet, the head of the agency claims that their finances are in good shape.

The FHA is only one of many new bailouts coming. A number of state and local governments are falling deeper into the red. Tax receipts are coming it at even lower levels than anything previously thought possible (another mystery of the 'recovering' economy). Small and midsized banks are falling like dominoes because of their commercial loans going sour. The FDIC insurance fund is already insolvent and the government will have to step in to prop it up. The Credit Crisis is by no means over, we have simply finished phase one and are about to enter phase two. But don't worry, the U.S. government has a printing press and can print all the money necessary to solve these upcoming problems.

NEXT: Dollar Breaks Support ... Again

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Latest Washington Free Lunches

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. stock market rally continued yesterday, with metals, steels and other infrastructure plays frequently having double digit rallies from usually extreme oversold conditions. What set off the rally was president-elect Obama's announcement over the weekend of the largest infrastructure-spending package since the 1950s to stimulate the U.S economy. The plan to upgrade America's deteriorating bridges and roads, increase energy efficiency in buildings, computerize health records, and increase use of broadband is certainly laudable and economically constructive unlike the visionless money-wasting programs of the historically incompetent Bush administration. While this lunch may be a lot tastier than what has been dished out in the last 8 years, the bill is still going to have to be paid one way or the other however.

An examination of the federal government's record so far in handling the housing crisis (which I would like to remind you that it helped to create and encourage) indicates that government action in that arena has so far been ineffective. Before the credit crisis U.S. foreclosures were running around a million a year. It looks like they will be about 2.25 million this year even after several government programs were instituted to limit the problem. A study just released by the Comptroller of the Currency indicates that over half of borrowers risk losing their homes again only six months after their loans have been renegotiated to lower monthly payments. Even worse, the government through the FHA is once again encouraging lenders to provide these same type of 'bound to default no matter what' loans. A recent Business Week cover story, "Subprime Wolves are Back" reveals that the FHA is supporting 100% insured loans (the government picks up the tab when they go bad) through mortgage lenders with spotty and even criminal records.

Meanwhile the Auto bailout proceeds in Washington. The current figure being discussed is $15 billion, which should stave off bankruptcy for the big three until sometime in the Spring of 2009. After that of course, another bailout will be needed and probably another and even another as well. The idea of a Car Czar is catching on adding another bureaucratic layer to an industry that is drowning because of its own bureaucratic sludge. Expect the auto bailout figures to rise next year, just as the banking/broker bailouts will. Add these figures to the up to one trillion dollars in the Obama proposed infrastructure spending - or at least that's the initial figure (pick whatever multiple you like to come up with the actual one).

It is my belief that all of these government programs and the ones that follow will indeed save the economy and once again make it robust, at least for awhile. It is not possible to spend almost unlimited amounts of money without causing inflation. When the spending is coming from essentially printing the money being spent, you can add major currency devaluation and the possibility of hyperinflation. Yes, we will get out of the frying pan, but we will wind up in the fire.

NEXT: China's Trade Gap and the Global Economic Future

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The House of Cards Economy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Housing continues to deteriorate. There are now 12 million homes in the U.S. with mortgages that exceed their value. This pool of houses which is particularly vulnerable to abandonment and foreclosure represents almost a quarter of all mortgaged residential properties . By the end of 2008, it is estimated that there will be a million bank owned properties for sale, which would represent a third of homes on the market. The situation is already much worse in trend leader California, where over 50% of existing home sales were foreclosed properties last month. Median prices there have dropped 34% from the high so far. The rest of the U.S. could follow California, although increased government efforts to prop up the housing market are trying to prevent further erosion.

Last quarter 766,000 U.S. home owners received at least one foreclosure notice. Only six states accounted for a majority of foreclosure activity - Arizona, California, Florida, Michigan, Nevada, and Ohio. The last four of these states are battlegrounds in the presidential election and Arizona would be too if McCain didn't represent it in the senate (nevertheless McCain's lead in the polls there is surprisingly small even though Arizona is one of the states most likely to support a Republican candidate for president). Foreclosures were worse in the beginning of the quarter and the rate even declined by 12% in September. While it looks like the number of foreclosure notices will be lower in the future, this won't be taking place because of improvements in the housing market.

The rate is being lowered by new laws have been enacted in a number of states to delay the repossession process and the FHA is attempting to renegotiate loan terms for a number of mortgage holders at risk. Foreclosure statistics are indeed very much affected by the ease of foreclosure which varies by state and should not be considered as an absolute indication of the strength of a state's housing market. New York for instance currently has a low foreclosure rate because it is necessary to go to court first and this means a foreclosure can take well over a year, longer if the judge doesn't wish to be cooperative. The FDIC is also trying to delay or prevent foreclosures. The first thing they did when they took over IndyMac was to stop all foreclosures and they are continuing to do so.

Delay does not mean preventing the inevitable however, it usually only means it only takes more time to get there. U.S. housing was in a bubble and prices became way extended on the upside. They are going to have to come down at least to the long-term mean - and we still have a long way to go to get there - before a sustainable recovery in real estate is possible. This will be an important precondition to a healthy economy as well. A look at the past suggests this linkage. Housing prices fell approximately 50% nationally in the U.S. between 1930 and 1940. The economy wasn't in such great shape then either.

NEXT: Black Friday Panic Grips World Markets

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.