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.

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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.

Housing Market Collapses, but the Statistics Hold Up

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.

The August housing sales figures released in September 2007 indicated that housing sales had fallen off a cliff in most of the areas of the U.S. that had been at the center of irresponsible mortgage lending. Los Angeles county California lead the way with a 50% decline in houses sales from the previous year. Orlando, Florida and Phoenix, Arizona were not far behind with a 40% drop. House sales in Las Vegas, Nevada were 37% lower than a year before. The collapse in the U.S. housing market would be led by these four housing bubble states: Arizona, California, Florida and Nevada plus two others: Michigan and Ohio, which were suffering economic hardship from declines in U.S. manufacturing.

One of the most fundamental tenants of economics is that price is determined by supply and demand. When demand drops or supply rises, prices should fall. When demand drops a lot, prices usually fall a lot. While there were anecdotal reports of housing prices falling 50% or more at bank auctions in various parts of the country, the overall statistics indicated only modest drops in housing prices in most communities, and even small increases in others. How was this possible, assuming there was no fraudulent manipulation of the numbers (something that should always be considered when two and two doesn't add up to four)? As with many of the U.S. government reports, statistical sleight of hand by the number crunchers was at work .

When housing prices were being compared year over year, there were in reality two different markets being measured. In other words, the comparison was being made between apples and oranges and was therefore effectively meaningless. When housing sales fall dramatically, they don't fall evenly across the economic spectrum. People who buy more expensive homes are more likely to be able to get a mortgage and the high-end of the housing market holds up. People at the lower end get shut out and sales for cheaper homes fall much more than those of expensive homes. The most recent housing market statistics will have a lot more high-priced homes in them proportionately than the previous years statistics and this skews the average and median prices up. It is in fact easy to come up with examples where every house price in a market falls by a significant amount and yet the average and median house price goes up! This was exactly what was happening in the summer and fall of 2007. While the plummeting housing sales numbers were accurate, the officially reported prices in no way reflected actual pricing trends in the market.

Next: Bubble, Bubble, Toil and Trouble

Daryl Montgomery,
Organizer, New York Investing meetup

For more about us, please go to our web site: http://investing.meetup.com/21