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.

The Economy's House of Cards

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.


Foreclosure stats for February indicate that 308,000 U.S. households received some type of foreclosure related notice during the month. Of all U.S. residential mortgage holders, 15% have either missed some payments or are in foreclosure. Mainstream news outlets reported these depression level numbers as 'good news' because the rate of foreclosure activity was only 6% higher in February than the huge level that had been reached a year earlier.

Housing is at the epicenter of the economy's problems and the situation has consistently gotten worse since the market peak in September 2005. The decline has continued even though there are numerous federal and state programs aimed at shoring up the housing market. Government policy seems to have been highly effective at creating the housing bubble, but impotent in cleaning up the mess. President Obama stated in a speech in Mesa, Arizona in February 2009 that his administration's housing programs would help three to four million homeowners avoid foreclosure through loan modification programs.  More than a year after that speech, the latest figures indicate that 116,300 home mortgages have been modified through federal programs. At that rate, it will take as long as 34.4 years to fulfill Obama's promise.

The abysmal failure of its loan modification efforts seems to have led the administration into new directions. As part of last November's "Home Affordable Modification Program", the federal government will now pay to get people out of their homes by encouraging short sales. A short sale in real estate is when a bank agrees to accept less than the outstanding mortgage owed as payment for a house. The government's plan pays the owner $1500 and the bank $1000 to agree. Real estate agents get much more however. They have to appraise the house (a major arena for corrupt practices during the housing bubble) and get a commission for arranging the sale. Neither homeowners, nor banks are likely to be pleased with this gift to the real estate industry - an industry known for its generous political contributions.

It was noted in news reports by early 2006 that U.S. foreclosure rates were starting to climb and a possible crisis was imminent. After four years, government programs haven't 'fixed' the problem, nor are they likely to in the foreseeable future. Mainstream news outlets are now reporting that U.S. foreclosures this February experienced their lowest rate of increase in four years. Foreclosures are continuing to go up, but at a slower rate. The numbers are not getting better. A casual reader of the news might miss that important point.

The ultimate nightmare ending of a housing collapse in a bad economy can be seen in Detroit today. The mayor of Detroit has just suggested bulldozing up to a quarter of the city. In some areas only one or two buildings are occupied per block. Faced with a $300 million budget shortfall, the cost of maintaining city services for these areas is prohibitive. Youngstown, Ohio and Flint, Michigan already have programs to demolish empty neighborhoods. Kansas City just voted to close down half of its schools and along with a number of Midwestern industrial cities might be implementing such programs in the future. Federal assistance will be needed to help Detroit implement its program. Perhaps this new housing aid program will be called the "Home Bulldozing Modification Program".

Disclosure: None

NEXT:

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.

New Homes Reveal Old Problems With Government Statistics

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 U.S. New Home Sales report released on December 23rd indicated a drop of 11.3% in November. Analysts had expected a gain. According to the previous Commerce Department reports, new homes sales had risen every month since April. They were expected to rise again in November because a government tax credit for new home buyers was originally scheduled to end in the beginning of the month (it was extended to June 2010), so analysts had assumed that there would be a rush of last minute buyers. There may have been and without them the drop might have been much greater than 11%.

New Home Sales is almost certainly the most inaccurate of the economic reports issued by the U.S. government. I can say this with some certainty because it would be almost impossible to produce something more error ridden. One of the major news services stated in their coverage of the November report, "Government statisticians have low confidence in the monthly report, which is subject to large revisions and large sampling and other statistical errors. In most months the government isn't sure whether sales rose or fell." Read that last sentence again and then consider that if the U.S. government is willing to issue an official report on housing that is about as accurate as picking numbers randomly out of a hat, how much can you trust the GDP, CPI, PPI (the two major inflation reports) and Non-Farms Payroll reports. Also note that the mainstream financial media seems to be well aware of the lack of reliability, but doesn't mention it except on very rare occasions when the news is particularly bad.

If the New Homes Sales report is so prone to inaccuracy why not just fix the problem? This is indeed a good question. The statistical tools to make this report better have been known for decades and yet the U.S. Commerce department doesn't seem to be able to apply them. It can be assumed that this isn't done because they don't want to do it. Statistically sloppy work is extremely prone to manipulation after all, solidly done work is not.

When confronted with this problem, you will get a more accurate picture of what is taking place by looking at many months of data in aggregate and comparing it to the previous year (the errors will cancel out at least to some extent). In the first 11 months of 2009, new home sales are down 24% from the first 11 months in 2008. Inventories have been falling throughout 2009 and are now at 38 year lows. The number of homes under construction or planned for construction have fallen to a record low. If new home sales were rising between April to October as the Commerce Department reported, why are home builders building fewer and fewer homes? That doesn't look like an industry in recovery as the public has been repeatedly told. For some reason, we seem to have gotten a glimpse of the true state of the housing market in the November New Home Sales report. Perhaps the guy in charge of producing cheerful statistics was on vacation? Somehow, I'm sure he'll be back soon.

Disclosure: Not relevant.

NEXT: Investing Themes for the Next Decade

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.

Dubai Default Damages Denial

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.

Our Video Related to this Blog:

Real estate bubbles and their subsequent collapses frequently accompany financial crises, especially the ones that linger and last a long time. The current Dubai default is merely the latest episode in the unwinding of a global real estate glut. Local authorities denied there was any problem right up to the end. Until the excesses are wrung out of the system, sustainable economic recovery is not possible - and even then it's not guaranteed. The crisis in Japan began 19 years ago and they have yet to get their economy fully functioning again. Japan also provides the worse case scenario for a drop in real estate prices - 90% for residential real estate and 99% for class A office buildings in Tokyo. While Dubai might not get that bad, real estate price drops there could be considerable.

The UAE central bank has pledged to provide funding for both domestic and foreign banks in an attempt to prevent bank runs in the region. It is estimated that a quarter of Dubai's $80 billion in real estate debt came from UAE banks. British and eurozone banks may hold as much as 70% of the remaining $60 billion. Exposure in the U.S. and Japan seems to be fairly minimal. Stock markets have been closed in the Gulf region due to an Islamic holiday since the crisis unfolded on Thanksgiving day. Dubai and Abu Dhabi opened on Monday and were down 7% and 8% respectively. The extent of contagion to other bourses in the region remains to be seen. Dubai is particularly vulnerable because it is not an oil producer, the other oil-rich countries in the region should ultimately be in much better shape.

The price of oil is recovering today and briefly peaked above $77 a barrel . Light sweet crude was down as much as 7% at one point the day after Thanksgiving. Oil is in a seasonally weak period until next March however, so this is likely to keep a cap on any possible rally for the next few months. Even at current levels, oil is causing inflation to return to Western countries. The eurozone just announced that year over year consumer inflation turned positive in November for the first time since last April (this inconvenient news seems to gotten buried in U.S. mainstream media coverage). Rising oil prices were cited as the cause. The inflation figures will start increasing soon in the U.S. for the same reason. The eurozone monetary authorities, just like the U.S. monetary authorities, consistently deny that inflation will be a problem. Nevertheless, the ultimate inflation indicator gold keeps hitting new all-time highs.

The U.S. dollar spiked higher on Thanksgiving day and Friday as a safe-haven trade. The move was exaggerated by low volume with most American traders gone for the holiday. The trade-weighted dollar got well above the 75.00 support level that it broke decisively early last week. However, in early Monday morning trading, it once again fell below this level dropping as low as 74.49 before starting a new rally. The dollar can't seem to stay up for more than a day or two and it consistently hits new yearly lows. The U.S. government denies it has a weak dollar policy. The market seems to disagree.

Disclosure: Long gold.

NEXT: Falling Supply and Rising Demand Cause Gold to Soar

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.

More on the Real Estate 'Recovery'

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 bubble in real estate caused the Credit Crisis and cleaning up the mess in real estate is the key to getting the financial system and ultimately the economy back to normal functioning. Articles have appeared in the mainstream press stating that residential real estate has bottomed and prices are headed up. You would have to ignore the overwhelming amount of bad news coming out of the real estate sector in order to believe this.

The Mortgage Banker's Association recent numbers for mortgage applications for home purchases are falling. The four-week moving average is down 0.7%. So demand is down during the heavy buying summer season. So prices are supposedly going up, even though demand is falling. Well that could happen if supply was falling even faster as is the case with oil. Don't hold your breadth though. The worse form of real estate supply is still rising rapidly. Mortgage defaults are expected to come in at 3.85 million this year compared to 2.7 million last year according to Moody's.com.

It is estimated that 14 million (out of a total of 52 million) mortgage holders in the U.S. had negative equity in their homes by the end of the first quarter of this year. Moody's predicts that that number will rise to 17.5 million by the first quarter of 2010. In a recent report, Deutsche bank estimates that nearly half of U.S. mortgage holders will have negative equity in their homes by the first quarter of 2011. By the first quarter of this year, 50% of subprime borrowers were underwater as were 77% of Option-ARM mortgage. Mortgages on homes with negative equity are where defaults and foreclosures come from. There seems to be a potentially unlimited supply of these in the next few years.

Home builder Toll Brothers earnings report today illustrates quite clearly how the mainstream media is handling real estate coverage. The report was described as upbeat. Toll said that signed contracts were up 44% and only 9% of buyers backed out. While the percentages look good, the total number of homes sold were only 792. Toll also stated that demand was so strong that it scaled back on incentives. Revenue was down 44% however because of much lower prices charged for their houses. Slashing prices at that level seems like one giant incentive to me. The market is also so 'good' that Toll is writing down its land and house inventory by $90 to $160 million. The stock of course went up on the upbeat news of collapsing revenue and massive write downs. You should assume that the overall U.S. real estate market is just as 'upbeat' as the Toll Brothers earnings report.

NEXT: Fed's Actions Speak Louder Than Words

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.

Sellers Return for Second Day of Trading

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:

Traders returned from their holiday vacations on Monday and the usual beginning of the year buying was more than matched by selling. All the major stock indices were down on the day as trading volume, while still low, rose from Friday's anemic levels. Oil and energy related stocks were once again the big winners as they were on the first trading day of the year and those gains were made on another day of high volume.

While the market went down yesterday, the selling wasn't relentless as it was in the beginning of 2008. The Dow and Nasdaq were both down 0.9%, while the S&P500 dropped only 0.5%. Small caps had the smallest loss, just as they had the smallest gain the day before. The Russell 2000 being down only 0.2%. There just doesn't seem to be much interest in small caps one way or the other.

Oil and energy related stocks not only performed the best for a second day in a row, but were way ahead of every other industry group. The ETF Oil was up almost 5%. A large percentage of energy related stocks had significant moves up, even though the market as a whole was dropping. While major money is clearly flowing into this sector, this does not mean you need to rush out and buy into it. Oil looks like it is only in the first stage of its bottoming process. The big money is drawing a line in the sand however and telegraphing quite clearly that it will be picking energy stocks up on price drops. The second best performing stock group on Monday was another inflation related sector, Agriculture.

The worst performing groups were most of the same Credit Crisis and recession impacted groups that did poorly on Friday. Savings and Loans were once again at the bottom and shared that space with Real Estate, Office Products, and (somewhat surprisingly) Food and Beverages. Semiconductors and Computer Software were only slightly less bearish. Retail, Consumer Products, Apparel, and Media Companies rounded out the list of groups with the least buying interest.

After two more days of trading, there will be a more complete picture of where investing money is flowing into and out of in what is the most importing trading period for the market all year. In 2008, the picture was clearly ugly and this was the basis of the New York Investing meetup predicting that it would be a bad year for U.S. stocks. So far, the picture for 2009 looks like it will be more nuanced.

NEXT: Seesaw Market Action Continues on Day Three of 2009

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 Inflation Versus Deflation Argument - Part 5

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.

If the deflationists aren't really discussing consumer price inflation, what is it that they are really talking about? To figure this out, it is helpful to seperately analyze the two components of the deflationist argument, bank credit and money supply, since they operate in very different ways and combining them obfuscates the picture.

Since people don't take out a bank loan to buy a quart of milk or a tank of gas, but they do borrow to buy a house and financial instruments, there is a direct relationship between bank credit and asset prices. The effects of increases or decreases in bank credit are likely to show up relatively quickly in prices for real estate, bonds, and stocks. Only much lately are they likely to impact consumer prices and even then they will represent only one of many components (currency exchange rates being potentially far more important).

This proposed direct relationships between credit and asset prices and currency and consumer prices seems to be well supported by real world observations. In the late 1920s U.S. there was a massive increase in credit and strong bull markets in housing, stocks, and bonds, yet consumer prices were dropping. Even though the U.S. currency didn't float at the time, capital was flowing into the New York from around the world and if the value of the dollar had been market driven, it's exchange rate would have been rising. A similar picture exists for Japan in the 1980s, although there was an even more massive asset bubble and the Yen was experiencing a far more significant rise that the U.S. dollar would have had in the 1920s.

In contrast, the U.S. in the 2000s was a period of declining currency values, the dollar peaked in 2002 and lost more than a third of its value by 2008. Bank credit expansion during this period led to massive bubbles in real estate and related debt instruments, with the S&P testing its 2000 bubble high in late 2007. When bank credit began its severe retraction, prices for real estate, non-government bonds, and stocks had significant drops. Consumer prices on the other hand accelerated higher. One major reason was the rising price in commodities. Since commodities are priced in dollars, they will go up if the U.S. dollar goes down.

The other component of the deflationist argument, money supply, has an obvious lagged effect on consumer prices. Changes can show up many years later. An examination of a money supply chart from the 1970s illustrates this quite clearly. M3 growth peaked in 1971, yet U.S. consumer price inflation didn't have an intermediate term peak until 1974 and the final high wasn't reached until 1980. The large rise in M3 in 2008 isn't likely to have its full impact on consumer inflation until some time in the 2010s.

Since deflation inevitably follows serious inflation, the deflationists at some point will be correct that there will be deflation in the United States. Worrying about deflation now though is like closing your windows and turning up your heat in May because you are worried about a cold winter coming.

For notes related to this talk, please see, 'Inflation vs Deflation Argument' at:http://investing.meetup.com/21/Files

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

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

Economic Predictions for 2008

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 December 12, 2007 meeting of the New York Investing meetup focused on the likely economic scenarios for the coming year. A video, entitled 'Economic Predictions for 2008' summing up these predictions can be found on You Tube at: http://www.youtube.com/watch?v=bZLsD2DHvLw.

The most important themes cited for 2008 were inflation and recession. Even though inflation is and has been under reported by the U.S. government since the 1980s, it was our opinion the even the manipulated numbers, let alone the real ones, would start to become noticeably higher. We predicted that as inflation was climbing, that the U.S. economy was likely to be gripped by recession (with negative job creation in each of the first 3 months of 2008, it now looks like the U.S. economy was in recession in the first quarter of the year). We also pointed out that it was unlikely the government would be reporting that we were in recession (the government GDP figures are unreliable, just like the inflation figures) until the recession was well under way or even over.

A widening out of the credit crisis with credit card debt, car loans and student loans being impacted was also mentioned in the talk (defaults in all of these loan types were rising significantly in the first quarter of 2008). A big drop in commercial real estate and a continuing weakness in residential real estate were also predicted (foreclosures continue to hit multi-year highs).

Special mention was made of the problems with bond insurers (monolines) and how their condition would continue to deteriorate, but the rating agencies might fail to lower their ratings appropriately because of political pressure (the official lowering of the ratings of these companies could lead to financial chaos). Bond insurer SCA's credit rating was lowered substantially in March 2008, but the rating agencies were still mostly maintaining ratings on the industry leaders MBIA and Ambac.

More bailouts of banks and broker-dealers with the assistance of the Fed was also predicted. The behind the scenes purchase of Country Wide Financial by Bank of America as the secret behest of the Federal Reserve (something denied by Bank of America) was given as an example. The Sovereign Wealth fund purchases of parts of major U.S. financial institutions, certainly with the knowledge and approval of the federal authorities, was also cited as a type of bailout that would continue to take place. Citibank in fact received just such a bailout (for the second time) in mid-January. Of course, the Bear Stearns bailout in mid-March was the most spectacular example of the of the accuracy of this prediction.

Finally it was predicted that the U.S. dollar would continue to drop and this would eventually lead to some form of currency intervention by the G7 countries (most likely late in the year, particularly after the election). Unless the Fed choices to raise rates substantially, this intervention will fail.

NEXT: The First Four Trading Days of 2008

Daryl Montgomery
Organinzer, New York Investing meetup

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

Subprime Housing Leads to Subprime Financial Institutions

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 housing reports released in October 2007 which indicated the state of the market in September were even more dismal than those of the prior month. Nationally, foreclosures had doubled year over year and they had gone up as much as 500% to a 1000% in the worst hit bubble areas of the housing market. Existing Home Sales were down 23% nationally. Although also down substantially, New Home Sales were nevertheless reported as increasing (huh?).

The September 2007 New Home Sales report was a classic example of how the financial media frequently reports bad news as good and hopes people only read the headlines and not the fine print. The New Home Sales report originally indicated that there had been 795,000 houses sold in August. The report then indicated 770,000 houses sold in September. This drop of 25,000 was heralded by the media as a increase of 4.8%. This happened because the sales figures for August were revised downward to 735,000 (by almost 8%, an incredible error for a statistical report) and the September figure was above this number, so this indicated that sales were going up! The first thought of any rational person should of course have been, 'if the numbers for August were actually much lower, why shouldn't the ones for September be much lower as well?' Even a casual look inside the September report lent substantial support that this was indeed the case. Sales in the West, probably the worst hit housing area in the U.S., were supposedly up 38% - a completely absurd number and an indication that the September numbers were being overstated just as the August numbers had been.

Despite the complete devastation in housing sales., median house prices were reported up 2.5%. The statistical tricks that led to this impossible outcome were discussed previously in this blog in the posting, "Housing Market Collapses, but the Statistics Hold Up".

House sales were falling off a cliff because mortgage money was disappearing. By October 2007, 183 mortgage lenders had already closed their doors since the previous December. One that didn't was Countrywide, the largest mortgage lender in the United States and therefore presumably too big to fail. What kept Countrywide afloat was a $2 billion capital infusion in August from Bank of America. Barron's reported that there were rumors that this bailout had been secretly arranged by the U.S. federal government. If so, it would only be the first of many bailouts that the Feds would have to arrange to prop up failing American financial institutions. Shortly thereafter, one of the major British mortgage lenders, Northern Rock, experienced a run on the bank - the first in England since the 19th century. Northern Rock had been known for it 125% mortgages and when word got out that it needed an emergency loan from the Bank of England, depositors queued up for blocks desperate to get their money out. While the Bank of England directly provided capital to keep Northern Rock going, this approach would prove to be no more successful than the more circumspect American one. Both Countrywide and Northern Rock would barely survive into 2008.

Next: What Banks and Enron Had Common

Daryl Montgomery
Organizer, New York Investing meetup

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

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

The New York Investing meetup predicts the current bear market in Aug 2007

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.

After having warned its members that the subprime crisis would soon start impacting the stock market in July 2007 (days before it actually happened), the New York Investing meetup followed this up in the August 8, 2007 meeting with a prediction of a crash or Bear Market. By January 23, 2008 both the Nasdaq and the Russell 2000 had fallen over 20% and were officially in Bear markets.

The August meeting emphasized that the Bull Market was over, that earnings wouldn't save the Market (a common claim by the financial media pundits at the time), the hardest hit sectors would be the bubble sectors of the Bull Market, real estate and financials, and short-covering rallies would be the key to profits on the long side in the future. It was even predicted that one or more broker-dealers would fail, with Bear Stearns name mentioned. The most important point made in the talk "Crash or Bear Market" (http://investing.meetup.com/21/files/) was that the Federal Reserve would not be able to save the stock market with its usual liquidity injections into the financial system. It was emphasized quite strongly that the U.S. dollar was in precarious shape and that any attempt to save the U.S. stock market with rate cuts would ultimately fail because of the damage it caused to the dollar. Future events would more than bear out this prediction.

Next: Bernanke Get in His Helicopter and Does His First Money Drop on Wall Street

Daryl Montgomery

For more information about the New York Investing meetup, please see: http://investing.meetup.com/21