Sunday, May 15, 2005

SF Fed President Speaks On Bubble, Economy

The president of the Federal Reserve Bank in San Francisco, Janet Yellen did an interview with ContraCosta Times. Is the interviewer paying attention. "There are some fundamentals that explain why housing is doing so well at the moment. A key one is low interest rates. Mortgage rates remained quite low, and they really haven't risen a lot since the Fed started to tighten monetary policy. Incomes are rising. People feel more optimistic about the future."

Why would low interest rates make house prices go up? The issue of rising incomes is touched on in the interview as well.

"The Bay Area economy has roughly stabilized, but we haven't regained what we lost. We're just growing modestly. I don't think the IT sector has revived and is growing robustly enough at this point to really generate strong growth in jobs here."

The Bay area hasn't had a big population increase. The interview makes one wonder just how rigorous the selection process is for the Fed.

"Is it a bubble? Nobody ever knows for sure until one pops. I wouldn't rule out the possibility that there's a bubble and we could have house price declines ahead."

10 Comments:

At 10:07 AM, Blogger realist said...

"is it a bubble? nobody ever knows for sure until one pops."

i am so tired of hearing that chickenship non-response, response. if she can't recognize this bubble, she need to find another job.

 
At 10:17 AM, Blogger Melody said...

AFFLUENZA
By Eric J. Fry

Warning: A virulent epidemic is sweeping the nation.

How many more victims the epidemic might claim is anyone's
guess. But suffice to say that the rapid spread of this
contagion is a serious national problem, which may produce
several dire consequences...like falling home prices, for
example.

Although the disease manifests itself in a variety of ways,
it often produces behavior characterized by reckless
borrowing and insatiable consumption. The disease, known as
"affluenza," has infected millions of Americans already,
but has reached epidemic proportions among California
homeowners.

The onset of symptoms is often accompanied by a sense of
euphoric invulnerability. Unfortunately, this delusional
rapture promotes additional high-risk behavior, which
usually worsens the infection. Many victims succumb to the
disease, but the condition is treatable. Early diagnosis
can promote a highly efficacious response. Curtailing high-
risk activities, for example, can reduce the infection and
– sometimes – restore the infected host to an asymptotic
state known as "solvency."

But many folks – because they are oblivious to their
condition – continue borrowing and spending until the
disease reaches its final and most serious phase, also know
as "insolvency."

We are not anticipating a widespread outbreak of
insolvency. More likely, the growing awareness of the risks
posed by affluenza will inspire a gradual return to low-
risk behavior, like saving money and re-paying debts.
Sadly, such practices, while healthy for the individual,
are highly toxic for the national economy and for the
country's over-inflated real estate markets.

But that's a problem for another day. Let's take a quick
peak at the current state of the epidemic...

(Forgive us, dear reader, for directing our financial gaze
once more toward the west, specifically toward Orange
County, California. It's not our fault that the county's
many quirks recommend themselves as fodder for the Rude
Awakening.)

Orange County is a bastion of wealth – the real kind. But
it is also a bastion of "faux wealth" – the kind that
subsists on a cocktail of high-risk borrowing and
perpetually appreciating home values.

"Orange County has evolved into a metropolis fit for a
marquee," writes Scott Duke Harris for the L.A. Times
Magazine. "Once a humble supporting character in the great
American drama, it now comes across as an action hero on
steroids, all pumped up and shiny for the 21st century with
a swaggering prime-time sobriquet: 'The O.C.'

"OC is all about the good life now," Harris continues, "and
livin' it extra-large...Orange County is a hot-zone for a
contagious social condition that compels people to live
beyond their means."

One ad agency exec interviewed for the LA Times story
refers to the county's conspicuous consumption as
"affluenza." The effects of the disease are showing up in
the county's housing market, where the median home price
has doubled over the past five years to a whopping
$660,000.

If this manic home price appreciation were powered by a
corresponding income growth, we might have little cause for
concern...But it is not.

Instead, home prices are booming on the back of a related
boom in high-risk mortgage lending, especially interest-
only (IOs) mortgage lending. As the graph below
illustrates, interest-only loans in California were
virtually non-existent four years ago, but comprised nearly
half of all mortgage originations last year. Orange County,
itself, has witnessed a similar surge of IO financing, as
has the entire nation.

 
At 10:19 AM, Anonymous tomb more said...

(Nobody knows for sure until one pops.)

Kind of reminds me of those stories you read about people who have to be carried to the hospital for removal of 200-lb tumors. By that point, they usually can no longer stand or leave the house.

One might ask, how could a person let a growth on their body grow to 200 lbs? Didn't they realize that something was amiss when the tumor was 1-lb? Or 10 lbs? Or 100 lbs?

At some point, my guess is that the poor person probably went from thinking "maybe I've gained a little weight" to "this is looking pretty serious" to "i'm too scared to do anything so I won't think about it and maybe it'll go away".

Where are we right now with housing? Are we still in the "this is looking serious" phase or have we moved to the "too scared to think about it" phase?

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

"Is it a bubble? Nobody ever knows for sure until one pops."

Captain, did we really hit an iceberg?

Perhaps. But we won't know for sure until we sink.

 
At 10:33 AM, Blogger Ben Jones said...

Melody,
Please post links, or maybe quotes. You are posting about ten times what I am. Thanks.

 
At 10:46 AM, Blogger Melody said...

Sorry Ben. I'm going to take a xanax and chill out.

 
At 10:46 AM, Anonymous Anonymous said...

Real Estate Economist Gary Watts Forecast:
Housing prices will appreciate 15% over the next 12 months! This is not just a number pulled out of thin air, the following will tell you why as well as comparing Gary's record this century with actual outcomes.

Chapman University's Forecast
2000 - 8.0%
2001 - 7.7%
2002 - 2.8%
2003 - 2.0%
2004 - -2.7%
2005 - -7.4%

Gary Watts' Forecast
2000 - 12.5%
2001 - 12.0%
2002 - 10.0%
2003 - 15.0%
2004 - 25.0%
2005 - 15.0%

Actual
2000 - 13.0%
2001 - 10.1%
2002 - 16.8%
2003 - 19.1%
2004 - 23.8%
2005 - ?

 
At 11:23 AM, Anonymous Anonymous said...

Are you suggesting we should believe in his prediction because of 5 data points? Past performance is no indication of future success.

BTW, How well did his predictions do between 1989 and 1994?

 
At 11:48 AM, Anonymous chimpy the chump said...

Obviously Watts has been wildly bullish and he has been correct. But that's because we are in a mania. Bubbles also overshoot and then they overcorrect.

Lots of pros were bullish about the stock market in the '90s, but no one did (or could have) predicted the ferocity of the gains by 2000. And most of those same pros who felt we were due for a correction could have (or did) predict a 50% SPX or 80% Nasdaq decline by 2002.

Manias make folks look like geniuses for a while and then, suddenly, they look like chumps.

 
At 4:12 PM, Anonymous Anonymous said...

Gary Watts is paid by the larger real estate brokers to give motivational speeches to legions of Realtors.

 

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