by Calculated Risk on 9/26/2005 04:26:00 PM

Bloomberg reports: Greenspan Says Speculation Having 'Greater Role' in Home Prices

Sales of vacation houses, or homes that aren't always occupied by owners, are "arguably at historically unprecedented levels," Greenspan said in the text of his remarks to the American Bankers Association annual convention in Palm Desert, California. "This suggests that speculative activity may have had a greater role in generating the recent price increases than it customarily has had in the past."

MarketWatch adds: Greenspan weighs in on home prices, Drops may not be fatal, even as housing fuels spending

A new study, co-authored by Greenspan, has found that about four-fifths of the rise in home-mortgage debt has been due to homeowners taking some cash out of the rise in their property's value.

"It is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences," Greenspan said.

As a result, consumer spending would decline if mortgage rates rise and home turnover and opportunities for mortgage refinancing cash-outs decline, he added.

There also would be some positive developments, as the personal savings rate would likely rise, and the trade deficit would narrow given the likely drop in imports of consumer goods.

"How significant and disruptive such adjustments turn out to be is an open question," Greenspan said.

Here is the Greenspan study (PDF): Estimates of Home Mortgage Originations, Repayments, and Debt on One-to-Four-Family Residences

A few comments: 80% of the increase in mortgage debt "has been due to homeowners taking some cash out". That is a huge amount. If cash refis were cut in half for the last year, GDP would have been flat and if there were no cash out refis, GDP would have declined 3.1%. (Update: assuming cash out goes to consumption) And that is just the direct impact and does not include any secondary effects of layoffs in the housing and retail industries.

I do agree with Greenspan's comment: it is difficult to predict how disruptive the coming adjustment will be, but a recession is likely.

by Calculated Risk on 9/26/2005 10:44:00 AM

CBS reports: Existing Home Sales Hit 2nd Highest Level

The National Association of Realtors reported Monday that sales of existing homes rose 2 percent in August to a seasonally adjusted annual rate of 7.29 million units, a sales pace that was exceeded only by an all-time high of 7.35 million units in June.
...
The strong demand pushed prices up to a record level of $220,000 last month, a gain of 15.8 percent from August 2004. That was the biggest 12-month increase since a 17.2 percent increase in July 1979.
...
While the Realtors predicted that Hurricane Katrina, which came ashore in New Orleans in late August, would impact sales in September, they said the impact in August appeared to be minimal.

Inventories increased from 2,759,000 in July to 2,856,000 in August. This is about what I expected. Existing Home Sales are a trailing indicator and are mostly sales in June and July. Tomorrow's New Home Sales is more interesting and might show the first signs of a slowing housing market.

by Calculated Risk on 9/26/2005 12:03:00 AM

My most recent post is up on Angry Bear: Housing: Buy or Rent?

The inherent problem with the buy vs. rent calculation is estimating the future value of the house. As long as prices are going to continue to appreciate, it doesn't matter what you pay for the house. But when appreciation stops; price matters!

A couple of posts I recommend:

Dr. Duy's Fed Watch: Dejá Not A great series on trying to read the FED's mind.

"I continue to think that Greenspan & Co. are sending increasingly not-so-subtle messages that the days of low interest rates and easy policy are at their end. This is a message for Congress and the Administration, not just the financial markets. Indeed, something unexpected may be happening – a concerted effort to end any sense of a Greenspan-put in the markets or the economy as a whole. It will undoubtedly be interesting to watch this chapter in Fed history play out."

Responding to supply shocks Dr. Hamilton cautions about future FED Funds increases, at least until the full impact of Katrina can be assessed.

UPDATE: Two more on the FED:

Macroblog: Funds Rate Probabilities: Keep On Truckin' *AT Least One More Time)

And Dr. Polley asks some questions: Differing opinions on the Fed

I'll throw out these questions to the blogosphere: What are the dangers of a pause in the rate hikes? What are the chances that the market would misinterpret it and see it as a signal that the Fed is done raising rates or that they see recession on the horizon? If you were on the FOMC, what would you do between now and the end of the year to minimize that risk? Do you think that these risks would cause the Fed not to want to pause at all, but treat "measured pace" as meaning 25 b.p. per meeting until they feel they're at the neutral funds rate? Would that be good policy?

Best to all.

by Calculated Risk on 9/24/2005 02:31:00 PM

UPDATE: Status added to some refineries (see list).

The AP reports: Feds Optimistic That Houston Refineries OK

Federal officials were "cautiously optimistic" Saturday that one of the largest concentrations of Texas refineries near Houston escaped serious damage as Hurricane Rita veered farther to the east.

But the Energy Department said it was too soon to assess the impact of the storm on a cluster of refineries in the Port Arthur-Beaumont area that caught the direct impact of the hurricane as it came ashore.

Based on computer modeling and initial reports, department spokesman Craig Stevens said, "We're cautiously optimistic about (the Houston) ... region" and "that the petroleum supply will be OK."

"But we really need to look at the Port Arthur region and other areas directly impacted. ... It may still be two or three days before we get a sense of the actual picture," he said.

As mentioned in the article, the biggest concern is for the refineries in the Port Arthur-Beaumont and Lake Charles areas. These include:

		CRUDE OIL
		THROUGHPUT
COMPANY	LOCATION	CAPACITY (B/D)	STATUS
FAR EASTERN TEXAS		1,013,500 (Total)
ExxonMobil	Beaumont, Tex.	348,500
Valero	Port Arthur, Tex.	250,000	4 feet water, 2 to 4 weeks
Motiva	Port Arthur, Tex.	235,000	flooded with 4-5 feet water, no date
Total	Port Arthur, Tex.	180,000
WESTERN LOUISIANA		593,300 (Total)
Citgo	Lake Charles, La.	324,300	minor damage reported
ConocoPhillips	Westlake, La.	239,000
Calcasieu	Lake Charles, La.	30,000

Four refineries remain shut down from Katrina: three in New Orleans and the Chevron refinery in Pascagolua, Mississsippi.

Four refineries (ChevronTexaco, located in Pascagoula, MS; ConocoPhillips, located in Belle Chasse, LA; ExxonMobil, located in Chalmette, LA; and Murphy Oil, located in Meraux, LA) remain shut down, and expectations are that these refineries, which represent about 5 percent of total U.S. refining capacity, could be shut down for an extended period.

For production, the Minerals Mining Service reports that 100% of GOM oil production is shut-in:

Today’s shut-in oil production is 1,500,898 BOPD. This shut-in oil production is equivalent to 100% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

Today’s shut-in gas production is 7.488 BCFPD. This shut-in gas production is equivalent to 74.88% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

The immediate concern is the loss of refining capacity. For the short term, the loss of oil production is not critical (see Dr. Hamilton's Economic effects of Rita)

by Calculated Risk on 9/23/2005 07:44:00 PM

The NYTimes has an article comparing buying and renting in New York and San Francisco: Is It Better to Buy or Rent?

"... renting might deserve another look right now. After five years in which rents have barely budged while house prices in New York, Washington, Los Angeles and elsewhere have doubled, renting has become a surprisingly smart option for many people who never would have considered it before.
...
Add it all up - which The New York Times did, in an analysis of the major costs and benefits of owning and renting, including tax breaks - and owning a home today is more expensive than renting in much of the Northeast, Florida and California. Only if prices rise well above their already lofty levels will home ownership turn out to be the good deal that it is widely assumed to be."

Check the graphics on the left of the article. The New York house, selling for $1 Million $750 thousand (corrected) could be rented for $2400 per month. A $1 million house in San Francisco rents for $2500 per month. The article compares the total costs for buying and renting, including all tax deductions and renting comes out ahead unless property values continue to rise faster than historical norms.

The analysis was very generous to buyers. They assume the homebuyers receive the entire benefit of the interest and property tax deduction. The article correctly points out this may not be true:

"Don't be buying a house because you think you're saving on the taxes," said Frank Borges LLosa, owner of FranklyRealty.com, a brokerage in Arlington, Va. "You'll save even more by not buying and renting."

Mr. LLosa added: "I'm not saying not to buy. I'm saying don't buy just for the tax reasons."

Many homeowners also do not receive the full deductions from home ownership. In the Northeast and California, homeowners now have so many deductions that some must pay the alternative minimum tax. This tax effectively wipes out part of their property-tax deduction, further cutting into the benefits of home ownership.

Other homeowners do not itemize their deductions or, if they do so, end up with total deductions only a little larger than the standard deduction that the government offers to all taxpayers, even renters.

"A lot of people hugely overvalue the mortgage deduction," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal group in Washington, "because they compare it to no deduction instead of comparing it to the standard deduction."

The article also points out some of the extra benefits of ownership, like stability and being able to choose the "color of their living room walls", but there advantages to renting too - like being able to move easier.

If I was moving to a new bubble area, I would definitely rent.