by Calculated Risk on 9/20/2005 03:26:00 PM

The media is picking up the recent No Bubble paper: Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions

From the SFGate: Bubble won't burst, Study finds Bay Area housing prices in line with economic growth:

The recent, rapid price increases stem not from a speculative frenzy but from basic economic factors, including low interest rates, strong income growth and abnormally low prices in the mid-1990s, said researchers at Columbia University and the University of Pennsylvania's Wharton School.

"The bubble fears are over people paying money for housing today because they're expecting unreasonable (price increases)," said Todd Sinai, associate professor of real estate at the Wharton School. "Our calculation says that if people are expecting something reasonable, house prices today are justified -- and they are in San Francisco."

Over in the UK the BoE is arguing there is no bubble. From Reuters: Possible no housing market bubble-BoE's Nickell

The housing market, which rose 123 percent between early 1999 and the middle of last year, may well not have been in a bubble, Bank of England policymaker Stephen Nickell said on Tuesday.

Nickell said a fall in long-term real interest rates from about 4 percent in the mid-1990s to around 2 percent by 2000 was one factor that has likely driven a substantial rise in the equilibrium house price to earnings ratio since the mid-1990s.

"Of course, there is a good deal of uncertainty here, but it is clear that it may be legitimately argued that there has been no housing bubble whatever," Nickell told an academic audience.

Nickell also said that low inflation, the rise in two-salary households and increased levels of job security and rapid prospective earnings growth may also make it more sensible for households to borrow more now than they have in the past.

The paper is not worth reading, but I suppose I'll write a review (JS did a nice job in earlier comments).

by Calculated Risk on 9/20/2005 02:19:00 AM

Here are some excellent sites:
National Hurricane Center
U.S. Navy Storm Site
Weather Underground Note: See Jeff Master's blog.


Click on photo for larger image.

Rita nears the Keys. From the NHC Satellite Floater one.

Key West Radar and Miami Radar.

The Oil Drum: They are discussing the possible impact on oil and gas production.

I'm sure there are many more excellent sites. For most hurricanes the fear is greater than the actual damage. Hopefully that will be true with Rita. Unfortunately Katrina lived up to the hype.

From an economic perspective, Rita is a huge concern since so much oil and gas production is already shut-in. Another serious disruption of the GOM facilities could cause a significant price spike for oil, natural gas, gasoline and heating oil this winter.

For tomorrow, the concern is about the Florida Keys.

by Calculated Risk on 9/19/2005 04:05:00 PM

The National Association of Homebuilders reports: Home Builder Optimism Edges Down Further In September

Home builder optimism in the market for new single-family homes remains in a positive zone this month, albeit with some further erosion from the cyclical high in June, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

"Many builders appear to be taking on a more cautious attitude because of uncertainties in the economy and this post-Katrina environment, particularly with regard to sales expectations in the near term," observed Dave Wilson, NAHB president and a custom home builder from Ketchum, Idaho.

The overall HMI declined two points in September to a score of 65, which is the lowest it has been since July of 2003 when it also hit 65. This was the third consecutive month of declines since June’s 72 reading.

"As expected, the housing market is beginning to show signs of cooling and builders are reacting to that," agreed NAHB Chief Economist David Seiders. "While the HMI survey was taken immediately following Hurricane Katrina in early September, a combination of factors are likely in play, and Katrina impacts are only one part of the equation. In fact, the current HMI does not include responses from Katrina-hit areas, which typically account for about 2 percent of survey responses."

Weird. NAHB President Wilson blames it on Katrina and then NAHB economist Seiders admits Katrina is not a factor - yet.

Here are the components. UPDATE: Note that "Traffic of Prospective Buyers" has gone negative.

by Calculated Risk on 9/19/2005 03:13:00 AM

There have been some interesting housing articles over the last few days. This one I liked the title: Hurricane Watch for Real Estate

"The next hurricane bearing down on the United States isn't headed for one of our coasts — it's aimed for a direct hit on our economy.

Coming after Ophelia in the alphabet, its name begins with an R, as in "real estate bubble." And it's going to leave a path of destruction, starting with plummeting real estate values and hemorrhaging bank balance sheets. Banks have been stuffing those balance sheets with mortgage assets: in 1980, mortgage-related assets were 20 percent of total bank credits; now, in 2005, they are 61 percent of that total."

And there have been several articles discussing the surge in inventories, like this one: Inventory surge signals housing cool-down. The Housing Bubble has recently reviewed several of these articles.

And this article was interesting: Report: Mortgage brokers, appraisers fueling foreclosure increases. Blaming the mortgage brokers seems incorrect. Using the drug analogy (thanks to Tanta) if there were no junkies, there would be no crack dealers. But what might be most interesting is this is happening in a non-bubble state - wait until the bubble states slow - all the poor quality loans will be exposed:

"Aggressive mortgage brokers and appraisers are contributing to the rising foreclosure rate in Ohio, where mortgages fail more than any other state,"

And on a similar theme, this was an excellent article in the LA Times: Cheap Loans Are Under Fire. And then there is James Cramer complaining that housing is slowing (after touting the sector recently): Hope the Fed Sees Housing's Cooled

Stuff's not moving. Especially second-home stuff. It's like the spigot just shut off. And prices are now coming down, maybe dramatically.

There, that's my take on what's happening right now in the housing market, a market that has suddenly gone from great to just plain awful, particularly on the high end.

But take it from someone who has money on the line: The great home bubble ain't a bubble, it's a market, and the market's soft. And in all markets where there's softness, there is excess inventory, which means, alas, lower prices.

And finally, arguing for no housing bubble (via Dr. Thoma): Housing Bubble Trouble? Not if There’s No Bubble

"For the past several years, Chicken Littles have squawked that the sky -- or the ceiling -- is about to fall on the housing market... Yet basic economic logic suggests that this apparent ... bubble is anything but. Even in the highest-price cities, housing is, at most, slightly more expensive than average."

Like Professor Thoma, I'd like to read the actual paper, but in the mean time please call me Chicken Little!

by Calculated Risk on 9/19/2005 12:49:00 AM

This week's post is up on Angry Bear: The Debtor Society. Also, the FOMC will meet on Tuesday. Check out Dr. Duy's Fed Watch: What Will Be the Fed's Message? and Professor Polley's Picking up the (measured) pace? Of course the media is reporting: Katrina May Persuade Fed to End Rate Hikes

I hope everyone stays safe in the Florida Keys and the Gulf Coast later this week. Best Regards to all.

by Calculated Risk on 9/19/2005 12:15:00 AM

Once again a possible hurricane is threatening the Gulf of Mexico (GOM). As I wrote last week on Angry Bear, the oil and gas situation seems stable but precarious.


Click on map for larger image.

Long range hurricane forecasts are subject to large amounts of error, but right now Tropical Storm Rita is projected to hit the Texas coast late next week as a hurricane. This could threaten oil and gas producing interests in the GOM and refineries along the Texas coast.

Here is a map of oil and gas interests in the GOM. Also, a Simmons report on the impact of GOM hurricanes (a couple of years old).


When I initially wrote about the possible economic impact of Katrina (several days before the storm hit the gulf coast), I was concerned about the low inventories of gasoline.

Now we have the added worry that a significant portion of oil and gas production is already shut-in due to Katrina. The graph from the EIA's Daily Report compares the recovery from Katrina as compared to Ivan last year.

Hopefully the storm will dissipate, although on its current track it is expected to cross very warm waters and encounter little shear. Rita bears watching as the week progresses.

by Calculated Risk on 9/16/2005 09:53:00 PM

This is a summary of three commentaries on housing and the economy. Writing in the Financial Times, Jim Pickard notes many of the incorrect predictions on housing over the last few years (an amusing read).

"For some critics, the doom-monger phenomenon calls to mind the crazy men with placards who like to forecast the end of the world."

Hopefully I'm not crazy or a prophet of doom, but I do think the housing boom is nearing the end (or already peaked). At least in the UK, Pickard thinks so too:

"And yet the pessimists’ time seems to have arrived at last. Just because they got it wrong before there is no reason to believe they are more likely to be wrong now, as some would have you think. In fact, the reverse is surely true. In a few years’ time, it may be the mortgage companies and housebuilders, which have long lived on a diet of unbridled optimism, which look foolish in retrospect - whether house prices fall in nominal terms or only in real terms.

But ironically, many commentators have become so weary of being caught out yet again that they have fallen silent on the subject. Andrew Oswald, the Warwick University professor, for example, now refuses to talk publicly about house prices.

There is a widely used expression in stockmarkets that the right time to buy shares is when the last seller has sold. Perhaps the right time to sell residential property is when the pessimists have given up and the last buyer has bought."

Gary Shilling is even more direct: Housing Bust Ahead

"The link between residential real estate and the state of the economy has to do with Americans' dismally low saving rate. Leaping house prices make consumers feel wealthy so they save less and borrow more. Extracting money from their homes when they either refinance or move and take out a bigger mortgage, all too many homeowners use borrowed funds to make up for their declining incomes and huge energy bills. Baby boomer[s] ... think ... that ever rising home values will bail them out."

Shilling sees a National bust:

"The next housing bust might be national.
...
Today's boom is national in scope: low interest rates, loose mortgage-lending practices and investor caution over stocks following the 2000-02 bloodbath. Yes, today's boom is mainly on the coasts, but that's where the population and income are concentrated. When the U.S. bubble breaks, it will affect more families than the recent stock slump, since 69% of families own their abodes while 50% own stocks.

Shilling concludes:

This is a dire forecast. Still, a severe nationwide break in house prices could destroy enough net worth and spawn a big enough financial crisis to shift the good deflation of excess supply I foresee to the bad deflation of deficient demand.

And finally, on Stephen Roach:

"The world as we know it," Stephen Roach says, "must come to an end."

The article summarizes many of the global imbalances and then offers Roach's take on Katrina and the US economy:

Mr Roach found many reasons to take exception with the conventional wisdom on Katrina. Rather, he poses another troubling question: Could Katrina be the tipping point for the US economy? As he puts it, "by living beyond its means, America's energy-shocked, post-Katrina economy may be lacking in the resilience financial markets seem to be banking on".

In Mr Roach's reckoning, the US is a "shoestring economy" – there has never been a leading economic power that has tried to do "so much with so little". The US has been expanding its spending at home and abroad at a time when the fiscal spigot has next to nothing left, meaning it is unable to respond to even the slightest shock, let alone a massive disruption like Katrina, Iraq or some other unforeseen catastrophe. "All three major pieces of domestic saving – personal, government and business – are likely to be reduced further by the combination of higher energy prices and post-Katrina aftershocks. For America's saving-short economy, that will fray the shoestring all the more."

In my view, whether the US economy has reached a "tipping point" depends on housing. Housing is the key. If the boom ends, mortgage extraction will end, and the US consumer will be forced to live within their means. That isn't necessarily "dire" and I'm not wearing a sign proclaiming the "End of the World as We Know It" - but I do think these are interesting economic times. Achieving a soft landing, expecially without fiscal and public policy leadership, seems impossible.

by Calculated Risk on 9/16/2005 03:10:00 PM

Import traffic at the Port of Long Beach increased 6% compared to July, breaking the record traffic of last fall's heavy shipping season. A total of 306 thousand loaded cargo containers came into the Port of Long Beach, compared to 289.5 thousand in July and breaking the previous record of 296 thousand last November.

The Port of Los Angeles import traffic showed a 3% decline in August. However imports of 343 thousand containers were still near the all time high.

For Long Beach, outbound traffic was up 3.5% at 110.7 thousand containers - also a record. At Los Angeles, outbound traffic was down 3% to 95 thousand containers.

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 record imports from China for August.

by Calculated Risk on 9/15/2005 08:53:00 PM

The Independent reports:

Record levels of mortgage and credit card debt have left families "potentially vulnerable" to a sudden economic shock, the International Monetary Fund warned yesterday.

The world's chief financial watchdog said households in countries such as the UK and US were exposed to asset prices such as housing that were being used as collateral for their debts.

"These developments increasingly expose the household sector to the performance of asset markets," it said in its biannual review of financial stability. "Most likely, substantial asset price declines would undermine consumer confidence and reduce personal consumption."

The Sydney Morning Herald reports on the IMF warnings on global imbalances:

Imbalances between the US and the rest of the world were "clearly unsustainable" and the "issue is not whether but how they adjust", the fund said in its September 2005 World Economic Outlook.

It expects the US current account deficit to remain stuck at an unprecedented 6 per cent of GDP, matched by large surpluses in Japan, emerging-Asian and oil-exporting countries.

"Hence the United States' net external position would continue to deteriorate, reaching a record 50 per cent of GDP by 2010, matched by rising net creditor positions in the rest of the world," it said.

The IMF report canvasses a scenario where investors lose confidence as a result of these imbalances and dump US assets, causing a rapid fall in the value of the US dollar and a surge in protectionist economic policies across the world.

The IMF report said the combinations of protectionist pressures and falling demand for US assets could trigger volatile exchange rate adjustments and heighten the risk of a global economic slump.

The warnings just keep coming and no action is taken. Are people growing numb to all the debt warnings? This reminds me of a new movie coming out (I haven't seen it, just the Ads) "Cry Wolf".

by Calculated Risk on 9/15/2005 07:24:00 PM

Here are the forecasted August oil numbers using the same model (described here). The ERPP (Energy Related Petroleum Products) trade numbers for August are forecast to be:

Forecast: Total NSA ERRP Imports: $24.2 Billion

Total SA ERPP FORECAST:
Imports SA: $23.5 Billion (seasonal factor estimated at 0.972 for Aug)
Exports SA: $2.4 Billion
Balance ERPP: $21.1 Billion

I am forecasting a record average price per barrel of $52.94 compared to July's record of $49.03.

Imports SA and NSA will set records in August (again). The $21.1 Billion Petroleum deficit compares to the SA July deficit of $18.48 Billion. It appears oil imports will add approximately $2.6 Billion to the SA August trade deficit.

It is highly probable that the SA August Trade deficit will break the record deficit set in February of $60.4 Billion.