March Consumer Confidence and the Housing Market

 

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 Conference Board's March Consumer Confidence number came in at 70.2 this morning. As has been the case for the last four years, hope for a better tomorrow is holding the number up. It certainly wasn't the real estate market, which has been shown to be weak once again.

A healthy consumer confidence number is 90 or above. This number has not been this high at any point since the "recovery" began in mid-2009. It has instead ranged between a deep recession level in the 40's and a milder recession level in the 70s. What has caused repeated rises and falls in the number are changes in the Expectations sub-component. How people view current conditions has remained dismally low.

This is how it works. Consumers are bombarded with stories from the news media about how the economy is heading up and then they are asked if they think the economy will be better in six months. Not surprisingly, many answer yes and this causes overall consumer confidence to rise. As the months go on and they don't see any real improvement they become more pessimistic and they don't  think things will be better in six months and then the number falls. This scenario has played out multiple times in the last three years.

Expectations for a better future zoomed to 88.4 in February, but fell back somewhat to 83.0 in March.
The Present Situation Index, however, was a very poor 46.4 in February, but rose to 51.0 in March. While these numbers are not good, they are much better than some Present Situation numbers during the "recovery" year of 2011. Those were at depression levels. The worst number last year however wasn't the Present Situation one, but the Jobs Are Plentiful reading. This was statistically indistinguishable from zero at one point. Since negative numbers are not possible in the report, the reading has not gotten worse.

There have been two running news stories since the beginning of 2012 that have buoyed the consumer confidence numbers — an improving employment situation and a recovering housing market. Both of these may prove to be illusory. The hype about the real estate recovery is already starting to unravel. 

U.S. home prices dropped for the fifth month in a row in January according to the S&P/Case-Shiller home price index. They are now down 34.4% from their highs in July 2006. The National Association of Realtors has reported that existing home sales slipped 0.9 percent in February to an annual rate of 4.59 million units. As for pending contracts, a whopping 33% were canceled last month. While many have pointed out that home sales were much better in February 2012 than they were in February 2011, they usually neglect to mention that most of the U.S. was snowed in last February and this February was one of the warmest on record. The real recovery seems to have been one in the weather.

The sharp differences in weather from year to year can impact any economic statistic that is seasonally adjusted. The employment numbers are in this category. They may have been juiced up by a warmer winter as well. If so, U.S. consumers will start to become less hopeful about the future as they have before and the confidence numbers will start drifting down later this year.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

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.

The Canary in the Coal Mine, the Foxes Guarding the Chicken Coup

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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The government in Iceland collapsed yesterday. Severe economic decline combined with rising prices (a combination that the U.S. press constantly says can't exist together, but which reality indicates can) did the present administration in. The government received sweeping powers, which included potentially unlimited control of every business in the country, in an attempt to fix it. This approach never worked in communist countries and certainly wasn't going to work in Iceland either. Government policies in Iceland, just as in other developed economies, made the financial crisis possible. Since it was the government that allowed the economy to get beyond repair, it is not surprising the same government couldn't fix it.

The key to solving the Credit Crisis is to stop rewarding people for failure and instead punish them for it. Leaving the foxes in charge of the chicken coop is a guarantee that nothing will be fixed. A new study came out this morning showing that at least 90% of the top executives at banks and brokers that are receiving U.S. government bail out money are still at work. The very same people who made the bad decisions that have destroyed the financial system are being rewarded for doing so. In many cases, they are still receiving bonuses, paid by the U.S. taxpayer, for their 'excellent' performance. Why should anything get better under such circumstances? The newly appointed Treasury Secretary, tax cheat Timothy Geithner, is a strong advocate of government bailouts, so don't expect much change on that front. Based on his own personal behavior, he also obviously thinks there should be one set of rules for the people in charge and another for everyone else. How effective is he going to be in showing the corrupt and incompetent Wall Street elites the door?

Under such circumstances, it is not surprising that consumer confidence hit a new all time low of 37.7 in January. The present situations index, which measures how consumers feel about the current economy, declined further to only 29.9. The gloomy mood of consumers is translating to lower retail sales in the last many months and will create increased unemployment and bankruptcies in the retail sector in the not too distant future. Consumers are not only being hit by the threat of unemployment, but the two major pillars of wealth in the economy, the stock market and home prices, have pulled the rug out from under them. Just today, the Case Shiller home price index for November declined 18.2% year over year. A separate report a few days ago indicated house prices in California had dropped 38%.

While tiny Iceland can be bailed out by the World Bank, who is going to bail out Great Britain or the U.S.? The collapse phase of the Credit Crisis showed up first in Iceland because its small economy doesn't have the same degree of buffers and interdependencies that protect larger economies (at least in the short term). Iceland looks like the canary in the coal mine that expires first when exposed to toxic gas and warns the bigger miners to get out before the same thing happens to them. In our current economic situation, the bigger miners are just not taking the appropriate action to save themselves.

NEXT: The Latest from Davos Switzerland

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.