by Calculated Risk on 8/29/2005 01:54:00 AM

Dr. Krugman writes in the NY Times about Greenspan and the Bubble:

At the conference, Mr. Greenspan didn't say in plain English that house prices are way out of line .... What he did say ... that "history has not dealt kindly with the aftermath of protracted periods of low-risk premiums." I believe that translates as "Beware the bursting bubble."

But as recently as last October Mr. Greenspan dismissed talk of a housing bubble: "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely."

Wait, it gets worse. These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks ...

Then Dr. Krugman asks the question we've all been asking: How bad will it be?

The U.S. economy is currently suffering from twin imbalances. ... domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit ...

One way or another, the economy will eventually eliminate both imbalances. But if the process doesn't go smoothly - if, in particular, the housing bubble bursts before the trade deficit shrinks - we're going to have an economic slowdown, and possibly a recession. ...

A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more competitive on world markets, leading to higher exports and lower imports.

So there's a rough ride ahead for the U.S. economy ....

by Calculated Risk on 8/29/2005 12:14:00 AM

My most recent post is up on Angry Bear: Housing and Recession

Every time I sat down at my computer today, I found myself checking on hurricane Katrina. I am in shock. The residents of New Orleans are in my thoughts tonight. A couple of days ago I thought this storm might impact the already tight gasoline supplies, but I didn't think it would become a potentially catastrophic storm.

Hopefully the storm will weaken before landfall.

Best to all.

by Calculated Risk on 8/28/2005 09:22:00 AM

The LA Times has two related articles this morning on borrowing and bankruptcy. From "Equity Is Altering Spending Habits and View of Debt":

People are cashing out so quickly that the term "homeowner" may soon be inaccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. These days, it's approaching an even split.

This spend-now-rather-than-save-for-later phenomenon has produced undeniable benefits. Experts attribute much of the nation's economic growth to cash-out refinancings, home equity loans and other methods of tapping rising home values.

This is behavior is being encouraged by industry "experts":

"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."

He called it "very unsophisticated."

Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing."

The financial services industry is doing all it can to avoid letting consumers be foolish. Ditech.com touts home loans as a way to pay off credit cards, and Morgan Stanley says they're a good way to fund education expenses. Wells Fargo suggests taking a chunk out of your house to finance "a dream wedding."

The entire article is fascinating, but this anecdote shows poor financial planning:

He bought his condo in expensive Marin County, north of San Francisco, for $510,000 in April 2004. The bank offered to finance the whole thing, but he decided to be a little conservative and put 5% down.

By January, the condo was worth $555,000, and Levy refinanced. He took out $25,000 in cash, less than the bank offered to give him. The money paid off what he describes as "really ugly" credit card debt.

The interest rate on the credit card had been more than double the rate on his mortgage, so he saved about $600 a month. Furthermore, his mortgage interest is tax-deductible; his credit card interest was not.

"It used to be that all debt was created equal and all debt was evil," Levy said. "But the tax breaks alone make a pretty compelling case to use home equity to finance just about everything."

Although money is fungible, paying for short term assets with long term debt is poor financial planning. Imagine going to a fast food restaurant and buying a hamburger on your credit card. Then you borrow money against your house to pay off your credit card debt. Now you are financing lunch for 30 years!

The other article in the LA Times, "A fresh calamity?", fits nicely with the first.

Under the new bankruptcy regulations, homeowners will no longer necessarily be able to hand the keys to the bank and move on. Lenders will, in many cases, have the option of coming after them for virtually everything else they've got -- income, money in bank accounts and other assets.

Homeowners who have refinanced may have unwittingly put themselves at the greatest risk. State regulations will still offer financial protections for buyers who have their original mortgages.

"There is no doubt this law will make it harder for some people to walk away," said Gary Painter, a professor at the USC School of Policy, Planning and Development. "It definitely could hurt homeowners."

For homeowners that are heavily in debt, and have refinanced or used a HELOC (Home Equity Line of Credit), this might be their future.

I wonder who is going to look "foolish" and "unsophisticated" in the coming years.

by Calculated Risk on 8/27/2005 06:38:00 PM

From FED Chairman Alan Greenspan's closing remarks at Jackson Hole, Wyoming:

"... the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely."

Emphasis added. I believe prices will decrease. And the following, on the relationship between home equity extraction and the currenct account (mostly trade) deficit, is important in how the imbalances will unwind:

"The surprisingly high correlation between increases in home equity extraction and the current account deficit suggests that an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports, and a corresponding improvement in the current account deficit."

And part of Greenspan's conclusion is a little scary:

"Surely difficult challenges lie ahead for the Fed, some undoubtedly of our own making, and others that will be thrust on us by market or other forces."

by Calculated Risk on 8/27/2005 12:03:00 AM

Gasoline stocks have continued to drop and are now near the bottom of the normal range.

Click on graph for larger image.

This graph is from the DOE.

It is possible that we might see a regional spike in gasoline prices unrelated to the price of oil. With possible major hurricane Katrina bearing down on the gulf coast, a drop in the already tight supply might occur.


The National Hurricane Center provides frequent updates on tropical storms. Although the exact location of landfall and intensity are difficult to predict, it appears Katrina will pass over extremely warm waters and make landfall in the Gulf Coast late Monday. This could disrupt several refineries including the 300,000 barrel-a-day Chevron Pascagoula, Mississippi facility.

Meanwhile demand for gasoline has remained strong.


This graph shows the Year over Year % increase in demand for:

1) Year to date.

2) Last 8 weeks compared to similar period last year.

3) Last 4 weeks compared to similar period last year.

(SOURCE: DOE)

Year to date demand for gasoline remains strong. For the shorter periods there is some normal variability, but there is no clear evidence of weakening demand for either period: the last 8 weeks and the last 4 weeks compared to 2004.

This is an update to an earlier post that discusses how the US economy has become more dependent on oil for transportation purposes as opposed to other uses of petroleum.