by Calculated Risk on 8/17/2005 11:32:00 AM

The WSJ covers housing today:

How Will Home Boom End? Even If Prices Don't Collapse, Some Owners Will Feel Pain; Big Mortgages, Little Equity

Near nation's capital, a hot market cools

The Energy in Real Estate, By John Makin, Wall Street Journal Editorial Excerpts can be found at EconomistView. (Thanks to Dr. Thoma)

by Calculated Risk on 8/17/2005 12:00:00 AM

Dr. Leamer, economist and UCLA Anderson Forecast Director, said today:

"It's going to take several more months of information before we know whether this month was the turning point, but it sure smells like it,"

I agree. I'd like to see an increase in inventories, a drop in sales and the flattening of prices over several months before I call the top - but it sure "smells like it" right now.

Leamer said he suspects the affordability crunch is putting the brakes on San Diego's market, where the annual price appreciation has tumbled from the 30 percent range last year to 5 percent this year.

"Rising interest rates are making it just a little less affordable for certain home buyers, and when you pull out that fraction of buyers in a fragile market, that might be enough to turn the thing around," Leamer said

Columnist Bonnie Erge expressed my view succinctly in Waiting for the Bubble to Burst:

It's bubble-bursting time, if you ask me.

by Calculated Risk on 8/16/2005 10:25:00 PM

The online world receives another treat today as Dr. Altig of Macroblog discusses the labor market with MaxSpeak's Max Sawicky and Tom Walker. Check out the WSJ Econoblog: Debating Job-Market 'Slack'.

I'd like to make my own small mundane contribution. In January I cut Mr. Bush some slack with regards to job creation during his first term. Bush's first term, with a net loss of 759K private sector jobs (a gain of 119K total jobs), has to be considered disappointing. However there were some reasons for the poor net job creation, the most compelling being that the economy was clearly overheated when Bush took office.

Looking forward there are no clear reasons why the US economy shouldn't see more normal job growth during Bush's 2nd term. With the economy adding 1.7 million working age people per year (according to the Census Bureau), the US economy should expect a minimum of 6.8 million net jobs created during Bush's 2nd term.

On the upside, the participation rate could increase and the economy could add close to 10 million net jobs. This is a realistic upside; the economy added 10.8 million jobs in Reagan's 2nd term and over 10 million jobs during each of Clinton's terms in office. The economy is larger today, so as a percentage gain, 10 million jobs would be less than for the Reagan or Clinton presidencies.

So for Bush's 2nd term, anything less than 6.8 Million net jobs will have to be considered poor. And anything above 10 million net jobs as excellent. Of course, in additional to the number of jobs, the quality of the jobs and real wage increases are also important measures.

For the quantity of jobs, the following graph provides a measurement tool for job growth during Bush's 2nd term.


Click on graph for larger image.

The blue line is for 10 million jobs created during Bush's 2nd term; the purple line for 6.8 million jobs. The insert shows net job creation for the first 6 months of the 2nd term - currently just below the blue line.

I will update the graph each month.

by Calculated Risk on 8/16/2005 02:41:00 PM

For those that need more housing stories, I recommend the following sites:

UPDATE: Also REOWire Stories and commentary. "insight for the default servicing industry"

Patrick's Housing Crash Blog (story links)

Housebubble.com (story links)

Ben Jones' The Housing Bubble 2 (Commentary)

Prof. Pigginton's Econo-Almanac Based in San Diego.

And writing of San Diego, here are two articles on San Diego housing:

As housing slowdown takes hold in San Diego, experts differ on depth

Home inventory soars as buyers take their time

by Calculated Risk on 8/16/2005 12:20:00 AM

Amid stories of record home prices are signs of caution. Like these comments:

"Up until two weeks ago, the overwhelming number of professional articles and opinions rendered was that there is no housing bubble. Now more and more people are starting to refute the evidence that there isn't a bubble," DeSalvo [commercial broker with Premier Properties] said. "That is not to say that the market is going to crash but that it is going to slow down."

"The immediate danger in that is with rising interest rates, mortgage rates are going to pick up and it is going to create a different kind of real estate environment," he said. "Those that got the adjustable mortgages and the interest-only mortgages will be the first ones to tumble when that happens."

DeSalvo said another danger is that people getting high-risk loans now are going to try to sell as soon as the market starts to level off to get their money out.

"Everybody was doing it in the stock market, now everyone is doing it in real estate," DeSalvo said. "If they are lucky they will get away with their skin."

And from National Association of Realtors spokesman Walter Molony:

Perhaps the most interesting aspect of the current market is the high amount of residential speculation, he said. People are getting equity lines on their existing homes because of the appreciation and investing it in another house or property.

"The immediate danger in that is with rising interest rates, mortgage rates are going to pick up and it is going to create a different kind of real estate environment," he said. "Those that got the adjustable mortgages and the interest-only mortgages will be the first ones to tumble when that happens."

Real estate has traditionally been a long-term investment market and it should remain that way, Molony said. Instead, real estate has become the new stock market — the place for everyone to look to make a quick buck, even if that means taking out a high-risk loan, he said.

"That is very risky behavior. You cannot count on an abnormal market indefinitely," Molony said. "People are getting excited about buying homes in a hot market and there are loan officers out there who do not have a historical perspective and have never experienced a market with increasing rates and declining rates."

And from Economy.com's Analyst Gus Faucher:

"We're worried about a bubble in the housing market," said Economy.com's Faucher. But he does not envision the sort of splat that flattened stocks after the dotcom collapse.

"We expect that (increases in) house prices could slow or even turn negative on the coasts because those have seen the biggest run," he said.

And finally from Edward Edward Leamer of UCLA's Anderson Forecast:

He thinks that correction is coming and that it will be a doozy. "The situation gets worse and worse," he said, referring to "the elevation of prices beyond their fundamental values."

Leamer said eight of the last 10 housing corrections since World War II have precipitated recessions, the two exceptions being in the early 1950s and early 1960s, when spending on wars in Korea and Vietnam sustained growth.

by Calculated Risk on 8/15/2005 09:53:00 PM

Import traffic at the Port of Long Beach fell 2% compared to June, just below the highs of last fall's heavy shipping season. The Port of Los Angeles will report in the next couple of days.

For Long Beach, the number of loaded inbound containers for July was 289 thousand, down 2% from June and up 2.7% from July 2004. Outbound traffic was up 4% at 107 thousand containers rebounding to the levels of May.

The quantity of containers says nothing about the content value, but provides a rough guide on imports from China and the rest of Asia. With these numbers, I expect imports from China to be off slightly for July, and exports to China to be up.

NOTE: The OffPeak initiative (adds late night hours to port operations) started on July 23rd to handle the expected heavier late summer / fall imports.

by Calculated Risk on 8/15/2005 06:01:00 PM

Earlier I posted excerpts from an economic letter by the Federal Reserve's Glenn D. Rudebusch, Senior Vice President and Associate Director of Research: Monetary Policy and Asset Price Bubbles.

Dr. Thoma directs us to some additional comments by Rudebusch. Also see Professor Thoma's related comments on interest rates and balancing the economy: The Insurance Value of Increasing the Federal Funds Rate.

by Calculated Risk on 8/15/2005 04:28:00 PM

Back in March I wrote (in jest) that they were giving away free money in The OC (Orange County, CA). At that time the median home price in OC was $555,000.

Over the next few months median home prices rose to $603K. That was a total of $48K in FREE MONEY (not really free of course) since local RE Broker Gary Watts' prediction of $70,000 in gains this year for the median home.

Now the OC Register is reporting a slight dip in home prices to $601,000 for July. Still $46K in 6 months is well on its way to Mr. Watts' $70K annual appreciation prediction.

by Calculated Risk on 8/15/2005 12:42:00 PM

Bill Fleckenstein writes the Contrarian Chronicles for MSN Money. This week he touches on housing:

'To get a feeling for the budding inventory problem in many previously hot markets, let's look at a less-hot market (via the following vignette from a reader of this column): A publicly held home-building company (which shall remain nameless) in Columbus, Ohio, has been buying back homes from financially distressed owners and reselling them, at reduced prices, only to folks who are approved for conventional mortgages. As the reader says: "The inventory of homes is growing -- including one cul-de-sac where a staggering 13 of 20 homes, all less than three years old, are already up for sale."'

And on subprime mortgages:

'... a contact in the subprime-lending arena (lenders who specialize in making loans to borrowers with less-than-stellar credit records) suggests to me that it's becoming increasingly difficult for originators of subprime mortgages to sell them at a profit. Unless all of these are booked on the originator's own balance sheet, we'll start to see credit being cut off to the more marginal real-estate speculators -- the driving force, at the margin, behind the real-estate market.'

Fleck concludes:

'...the macro winds have shifted, I believe, and none of those shifts has occurred in a way that is bullish for U.S. assets. Bottom line: It's my opinion that a top is being formed (or is already in place), both in the housing market and the stock market. That spells trouble for an economy built on the unsustainable strategy of trying to speculate our way to prosperity.'

Fleck has been very bearish for a number of years. He was early (but correct) on the NASDAQ. And he has also been early on housing.

The housing market was very strong in the 2nd quarter. However it does appear that inventories are building and, as Fleck suggests, a top may be close.

by Calculated Risk on 8/15/2005 12:38:00 PM

CNN reports:

Single-home price growth over the 12 months ending June 30 was the strongest in history, according to the National Association of Realtors.

In its quarterly survey, NAR found that U.S. home prices rose at an annual rate of 13.6 percent, to a median price of $208,300.

Of the 149 metro areas surveyed, 67 showed gains of more than 10 percent.

David Lereah, NAR's chief economist, called the increases unprecedented. "When you look at appreciation of home prices relative to the overall rate of inflation, these are the strongest increases on record," he said.

See the article for a list of the top 10 markets. Durham, North Carolina is #9?