Wednesday, May 11, 2005

Home Prices Up, Pay Down: "No Concern" For Fed

St. Louis Federal Reserve Bank President William Poole had a comment on Reuters today. "The regional Fed bank president said that while housing prices were rising quite rapidly in some areas, most of the movement was in a 'narrow segment' of the market' suggesting he saw little risk of a national bubble."

"Poole said home price gains appeared to be mostly explained by the low level of interest rates and rising incomes."

Is anybody at the press conference listening? He had just said this, "Anecdotal reports suggested workers were still 'in pretty plentiful supply. It looks like there's a fair amount of room for expansion of employment without creating a lot of upward pressure on wages.'"

The Financial Times had this out today. "Real wages in the US are falling at their fastest rate in 14 years. In the final three months of 2004, real wages fell by 0.9 per cent. The last time salaries fell this steeply was at the start of 1991, when real wages declined by 1.1 per cent."

43 Comments:

At 12:32 PM, Anonymous Anonymous said...

ah yes, I see your point...

But then, you are expecting the markets to act in a RATIONAL way. They are not, and they haven't been for a while now.

Sooner or later, one would expect the rules of economics to pull these extremes in low interest rates, rising debt levels, rocketing housing prices and all the rest back to values closer to the norm.

For whatever reason, and I've given up trying to figure out why, it hasn't happened....yet.

The NASDAQ was clearly over valued in mid 1998, but it didn't collapse until mid 2000. Housing is in a similar state.

It's like a game of musical chairs...there clearly aren't enough chairs, but when the music will stop is anyone's guess.

 
At 12:35 PM, Anonymous powerpuffgirl said...

This is an outrage. I don't know what he means by "narrow segment", but there are entire markets where the median price has risen 50% in one year and 160-200% over 5 years. A median price increase is NOT a "narrow segment". It implies across the board increases where half the houses fall above a certain range and half below.

Of course, we've seen before where the Fed knows bubbles exist, but actively deny their existence. Meanwhile, the Fed is bringing back the 30yr bond and secretly hopes to solve the conundrum over the yield curve with much higher long rates. Can they pull it off before the bubble pops? Who knows..

 
At 12:40 PM, Anonymous Anonymous said...

Wait, I thought increasing long rate will also pop the bubble.

Ah, the bubble will pop one way or the other.

 
At 1:01 PM, Anonymous Anonymous said...

How can the Fed keep talking about lower rates as a reason for house price gains without talking about drastic shift towards riskier mortgage products and loose lending standards.

Am I the only person who can see that low interest rates may have started this surge in prices, but that Zero Down, I/O, stated income etc is what has kept it going.

 
At 1:10 PM, Anonymous Anonymous said...

It's amazing that the Fed governors are so openly incompetent but the press never calls them on it. Could the Fed be more out of touch with reality? Does anyone take any of their comments seriously?

I can't believe these morons have such control over our economy. No wonder the sky is falling.

You have to wonder how they sleep at night knowing how they've artificially inflated asset prices, grossly expanded consumer debt, and put so many families at risk of losing their homes. And all this while presiding over the lamest economic 'recovery' in American history.

There is a great book waiting to written about this, Ben. Start writing. :-)

 
At 1:12 PM, Anonymous boulderbo said...

Am I the only person who can see that low interest rates may have started this surge in prices, but that Zero Down, I/O, stated income etc is what has kept it going.

no and you're seeing the recklessness in lending making more headlines and filling more articles. what is scary is that there really is no historical precedent for this, it has never been this easy to get into a fully leveraged deal, just what you need when froth gets irrational

 
At 1:19 PM, Anonymous noworries said...

Anyone who gets their information from moutpieces deserves whatever they get.

Same thing in the stock market. When the market goes up, it's because people are "bargain-hunting" or "bullish". When it goes down, they are "profit-taking". There's no room for negativity. When something bad happens that is difficult to explain away with platitudes, it becomes a "conundrum" or an "anomaly".

So if home prices go up, it must be because incomes are rising. If it's pointed out that incomes are falling, then that's even more bullish because it shows how strong the demand is for housing that it can go up even if buyers have less money. Either way, it's all good. Until it isn't. Then it's a "soft patch" or a temporary lull.

Robert Prechter's group has (i think) coined a nice phrase for this. Stock market bulls always say that the market climbs a "wall of worry". In other words, there are always problems out there but the market finds a way to overcome then. But when the market goes down, as it did by 50-80% from 2000 to 2002, there are always buyers along the way who think the bottom is in. Prechter calls this the "slope of hope".

 
At 1:36 PM, Anonymous Anonymous said...

It is different this time.

We may not see a recovery after the burst for a long, long time.

 
At 1:48 PM, Anonymous Anonymous said...

But when the market goes down, as it did by 50-80% from 2000 to 2002, there are always buyers along the way who think the bottom is in. Prechter calls this the "slope of hope".

That is funny, because what the Bubble "Optimists " at the Fed and the NAR are really saying is "Don't worry the Bubble will not burst the will be plenty of opportunity continue screwing the public as they fall all over themselves trying to catch falling knifes". How refreshing and considerate of them. I learned from my own experience with stocks and I will hold off buying RE until it reaches historic fair value. I do not care if that means renting for another 4-6 years. Look it took the last Real Estate Bubble years to
reach fair value, the same with Japan.

 
At 1:53 PM, Anonymous Anonymous said...

But when the market goes down, as it did by 50-80% from 2000 to 2002, there are always buyers along the way who think the bottom is in. Prechter calls this the "slope of hope".

That is funny, because what the Bubble "Optimists " at the Fed and the NAR are really saying is "Don't worry the Bubble will not burst as much as it will deflate that way there will be plenty of opportunity continue screwing the public as they fall all over themselves trying to catch falling knifes". There will still be opportunities for folks to bankrupt themselves as RE loses 10-15% in value for
3-4+ years. How refreshingly honest and considerate of them. I learned from my own experience with stocks and I will hold off buying RE until it reaches historic fair value. I do not care if that means renting for another 4-6 years. Look it took the last Real Estate Bubble years to
reach fair value, the same with Japan.

 
At 3:40 PM, Anonymous Anonymous said...

I dunno, has the Japanese market reached "fair value" yet??

 
At 4:21 PM, Anonymous Anonymous said...

When our chickens stopped laying eggs we ate them. I think the fed looks at us like chickens, we serve their purposes, we're expendable.

 
At 4:27 PM, Anonymous American in Japan said...

"I dunno, has the Japanese market reached "fair value" yet??"

Nope. According to the government, prices here are still falling - 15+ after the collapse.

 
At 4:44 PM, Anonymous Anonymous said...

Off topic, but...

Came across a few websites run by recent homebuyers of KB Homes who are protesting the shoddy workmanship and treatment they are getting from the company. Are there more sites like these?

www.kbhomesink.org
www.kbhomesbusted.net

 
At 5:29 PM, Anonymous Anonymous said...

http://www.kbhomessuck.com/

anybody catch the house bubble discusion with the homebuilders on cnbc today. Of course no bubble. a few markets with speculators could see a flattening. blah blah blah

 
At 5:37 PM, Anonymous Anonymous said...

by the way, has anyone figured out what percentage and $ value of housing exists in the bubble markets. Everyone talks about regional bubbles, which is somewhat true, but most of the population lives in the bubble regions don't they?

 
At 5:52 PM, Anonymous Anonymous said...

Speaking of KB Homes, I was out in LA for a few days. I visited this outfit called Calearth in Hesperia that does environemental dome buildings (I wasn't to impressed but that's off topic...) but the most interesting aspect for me was the sprawl of houses that now surrounded this earthy complex out in the So Cal desert. The irony is that it represents the exact opposite of Calearth....

There were at least 4 developers, Frontier, KB and two others. They had each hired kids to hold signs. They stood at the side of the road waving them frantically. (Maybe the houses are not selling that well?) The houses are shoddy OSB construction but look reasonable from the outside. Here in DC the houses are ugly on the outside and crap inside. (At least the CA bubble offers a modicum of aesthetics.) How much does it cost to live out in the desert maybe 80 miles from the coast? Starting in the 300s according to the signage..

 
At 6:47 PM, Anonymous Anonymous said...

I just sold my KB home. Owned it for 2.5 years. The framing looked like it was put toghether by the three stooges. Cheap materials and Poor workmanship. When we first moved in I really thought the roof was going to cave in on us. However thanks to our CA bubble I was able to make a really nice profit on the sale.

Currently renting and waiting things out.

 
At 8:19 PM, Blogger John Law said...

if a nice area is undervalued, it won't be that way for long.

 
At 8:53 PM, Blogger bubbleman said...

when the average joe thinks he is an expert on anything to do with stocks, bonds, real estate, etc. SELL. the sure signs of a bubble is when the common man becomes an expert.

when a construction worker i knew was touting several internet stocks back in the late 1999, i knew the end was near - I SOLD.

recently, a car mechanic told me that housing in CA will continue to increase even though rates are going up. ????? he made no sense. and while i tried to give him alternative views, he would not listen - i was too late. a realtor got to him first. i just sold my house...

for realtors, mortgage brokers, constructions workers, etc. i wish you the best in your new careers. your easy money run is up.

big al killed the dot.com bubble and he is on a mission to kill speculation in housing.

 
At 9:05 PM, Anonymous Anonymous said...

There are a lot of dot-com survivers participating in the current housing bubble.

They are either thinking that they can correctly time this bubble once again, or that "it is different this time".

Last time I check homes are not quite as liquid as stocks...

 
At 9:22 PM, Anonymous meetmeinstlouislouie said...

---most of the movement was in a 'narrow segment' of the market' ---

That Poole---what a jokester!

I guess California, Florida, Arizona, DC, NYC, the Northeast, the Northwest, the Carolinas, Virginia, Nevada are but a sliver of the big picture these days.

I guess if it ain't happ'ning in St. Louie, Missouri, the Poole-ster don't pay no 'tention to it. Guess that's why they call it the "Show Me" state.

 
At 9:35 PM, Anonymous Anonymous said...

"""when a construction worker i knew was touting several internet stocks back in the late 1999, i knew the end was near - I SOLD."""

if that poor construction worker knew anything about arbitrage he would have sold the internets and bought the homebuilders -- what a shame.

 
At 9:39 PM, Anonymous Anonymous said...

"if that poor construction worker knew anything about arbitrage he would have sold the internets and bought the homebuilders -- what a shame"

Maybe we should sell the homebuilders and buy the internet now? Or gold?

 
At 9:46 PM, Anonymous Anonymous said...

More like sell the HBs and go long cash...wait out the storm. the fallout is too big to try to pick the winners before it materializes.

 
At 9:46 PM, Blogger bubbleman said...

think google! going to 300....gold sucks, big al will kill it with rising rates...

 
At 10:04 PM, Anonymous Jim in Venice said...

"More like sell the HBs and go long cash...wait out the storm. the fallout is too big to try to pick the winners before it materializes."

Tell me if I'm crazy:

My fiancee and I are young, and we make good salaries in positions and industries that are pretty well recession proof. Is it wrong of me to actually hope that a recession is coming? I feel like if everything crashes down, it will be a chance for us to buy a house and other investments (stocks) at low prices. Is this accurate?

 
At 10:06 PM, Blogger John Law said...

I think no matter where you live, the amount of liquidity is so great it reaches just about everywhere. it probably won't matter where you live, the liquidity could be shut off.

[Typically, housing markets are driven by local factors. The report said that if national factors are playing a more important role, the most import factors to examine would be the “availability, price, and terms of mortgage credit.” ]

http://www.prudentbear.com/midweekanalysis.asp

 
At 10:09 PM, Blogger bubbleman said...

Anyone who gets their information from moutpieces deserves whatever they get.

right on brother....you need to read between the b/s. those stiffs in ny and d.c. will f us every time with their postive spin...while we are buying, they are selling. i heard a rumor than even greenspan sold his house! ha, ha

 
At 10:29 PM, Anonymous Anonymous said...

Jim in Venice,

It is not wrong to hope for a recession, for business cycle is a feature (not a bug) of capitalism. Just like the four seasons.

AG thinks that he can avert a recession, which I think is quite laughable.

However, if we think a recession is coming, we better position ourselves to profit from it.

 
At 10:32 PM, Anonymous Anonymous said...

Maybe we can use the money we save each month from renting instead of paying mortgage to buy LEAPS puts in the bubble industry.

(Option investing entails risks and is not suitable for all investors)

 
At 4:33 AM, Anonymous Anonymous said...

At 10 this morning the National Association of realtors will release first quarter mean housing prices for metropolitan areas across the nation. I see from my locale near Hartford CT- that housing prices (single family homes and especially condo's are skyrocketing. In the first quarter alone prices are up at least 10%.

 
At 5:27 AM, Anonymous Anonymous said...

4:33 AM Anon,

Most likely that home price number will have a large increase to it... but it will be the result of including condos as an existing single family home... this is a new development... remember, condo sales and condo sales prices are now being included in the existing single family home numbers... this is not an apples to apples comparison, especially when it comes to year-over-year comparisons... i wish everyone the best of luck...

 
At 8:18 AM, Anonymous Anonymous said...

http://www.bankrate.com/brm/news/mortgages/20050512a1.asp

Interest-only mortgage deja vu
Commentary

"When my mailbox first started to fill with questions about interest-only mortgages a few years ago, I smiled; I knew a flash in the pan when I saw one. Interest-only mortgages were the standard mortgage in the 1920s, but they disappeared during the Great Depression, and for good reason. This sudden renewal of interest would not last -- or so I thought."

 
At 8:32 AM, Anonymous Anonymous said...

"The great irony would be that we never recognized the true origins of the Great Depression. The stock market wiped out Wall Street, but it was average people defaulting on mortgages that sank our economy."

http://www.baltimoresun.com/news/opinion/oped/bal-op.fortunes09may09,1,5793982.story?coll=bal-oped-headlines&ctrack=1&cset=true

 
At 8:42 AM, Anonymous Anonymous said...

Ben,

In my mind, the change in methodology of how existing single family homes is measure is such a huge story.... and no one is covering it... Below are the 2004 sales numbers... presently, condo and townhome sales are now included in the 2005 sales for the first time ever... this represents about 850,000 in home sales...

2004 sales in millions
Jan = 6.04
Feb = 6.12
March = 6.48
April = 6.64
May = 6.80
June = 6.95
July = 6.72
Aug = 6.54
Sept = 6.75
Oct. = 6.75
Nov. = 6.94
Dec. = 6.675

 
At 8:55 AM, Anonymous Anonymous said...

"The great irony would be that we never recognized the true origins of the Great Depression. The stock market wiped out Wall Street, but it was average people defaulting on mortgages that sank our economy."

I have never heard this statement before - where can I find out if it's true?

 
At 9:03 AM, Anonymous Anonymous said...

8:42 AM Anon,

Ok. So, March 2005 should've been about 7.2 million and i believe it was 6.9. Is that right?

 
At 9:20 AM, Blogger Ben Jones said...

8:42 Anon,
Do you have links for that data?

8:55 Anon,
I have read that home where a big source of the depression. The government had to set up a precurser to the resolution trust corp. just to handle the volume.

 
At 9:41 AM, Anonymous Anonymous said...

"In the United States, at that time, there was no banking regulatory commission, no Federal Deposit Insurance Corporation, nor any other government means of controlling bank policies or interest rates. This meant that banks could take huge risks in making loans, and were not required to maintain any reserve cash to cover deposits. Once the loans were in default, the bank’s capital was often exhausted, and depositors could simply not get their money."

no expert.. just googling the G. Depression.

 
At 9:55 AM, Anonymous Anonymous said...

"At twelve-thirty the officials of the New York Stock Exchange closed the visitors gallery on the wild scenes below. One of the visitors who had just departed was showing his remarkable ability to be on hand with history. He was the former Chancellor of the Exchequer, Mr. Winston Churchill. It was he who in 1925 returned Britain to the gold standard and the overvalued pound. Accordingly, he was responsible for the strain which sent Montagu Norman to plead in New York for easier money, which caused credit to be eased at the fatal time, which, in this academy view, in turn caused the boom. Now Churchill was viewing his awful handiwork."
-- The Great Crash, Kenneth Galbraith 1954

 
At 9:56 AM, Anonymous Anonymous said...

I thought the purpose of FDIC is purely psychological. Do think FDIC is capable of handling a major banking crisis without massive taxpayer bailout or printing activities?

If major banks run into problems because of their OTC derivative positions turn bad...

 
At 9:57 AM, Anonymous Anonymous said...

Great Depress... (more research)

"Banking Crisis
1. The stock market bubble and the highly leveraged purchases made during the roaring twenties had left a banking system with massive loans on its books. Corporations suddenly found that revenues were dropping and expenses were rising. The combination of rapidly rising unemployment, a poor savings rate, and a stalled economy put enormous pressure on the banking system. The banks began declining loans to individual and corporations that needed credit in order to survive. They started demanding payment of outstanding loans, many of which couldn't be repaid. The combination of the demands by the banks and rising interest rates only made the situation for the economy worse. Dis-inflation soon turned into deflation. During The Great Depression, deflation reached levels that had never been experienced before and at the depths, prices had fallen by 50%. This left the banks with loans that were collateralized by assets of insufficient value to repay the loans. Depositors soon realized that many banks did not have recourse to enough collateral to recover loan principals and started withdrawing deposits allowing the banks to collapse. Prices fell farther, causing more deflation; and more deflation caused asset prices to fall even farther making the banking system even more insolvent. We are now seeing signs of a burgeoning deflation that could be devastating considering the record level of debt now in existence. There are billions in shaky loans ripe for default.
http://www.jasmts.com/library.php?page=depression

 

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