by Calculated Risk on 10/01/2005 10:50:00 PM

The NYTimes offers a few anecdotes of homeowners using their houses as ATMs. This has allowed homeowners in financial trouble to stall off bankruptcy. A few quotes from the article:

"When you're living in a place with home values up 50 percent, you have what Alan Greenspan calls a piggy bank," said Elizabeth Warren, a Harvard law professor and an author of "The Fragile Middle Class" (Yale University Press, 2000), a study of bankruptcy. "The bubble has operated like wreckage from the Titanic - you could climb on and float along for a while. The question is for how long."
...
"Some people have been spared filing the petitions because they have home equity," said Andrew Thaler, a bankruptcy trustee on Long Island. "My guess is when the housing market flattens, people are not going to be able to sustain the lifestyle they've been maintaining, and you'll suddenly see a lot more bankruptcies."
...
"Two or three years ago, mortgage companies were giving money to anyone," Mr. [Heath Berger, a bankruptcy lawyer in Woodbury] said. "They didn't care whether they could afford it, just that they had a house. Now I'm seeing all these people who never had the income to pay these loans in trouble."

Professor Warren of Harvard believes that disaster lurks as homeowners borrow against their homes to forestall bankruptcy. When the stock market tumbled five years ago, people in trouble could sell stocks to stay afloat, she said. But home equity doesn't work the same way. As she put it, "You can't sell a part of your home like you could a stock in the stock market bubble."
...
"When a family uses its home like a piggy bank and then a job loss, a divorce or an increase in the adjustable-rate mortgage leaves them unable to make the payments, the family is out of options," Professor Warren said. "That's true before and after Oct. 17. Borrowing against a home leaves a family with the fewest possible options when something goes wrong."

"After Oct. 17, bankruptcy gets harder for everyone - more expensive, more traps, less coverage," she said. "And that means more families are set up to lose their homes."

Housing prices do not need to fall, just flatten, and then I believe serious problems will be revealed.

by Calculated Risk on 9/30/2005 09:32:00 PM

This hurricane and typhoon season is very active in the Pacific Ocean too.


Click on photo for larger image.

Typhoon Longwang is threatening Taiwan and is expected to make landfall this weekend.

Here is the projected track from the US Navy.

And here is the most recent Guam IR satellite loop - incredible. The typhoon will probably impact the entire island of Taiwan.

by Calculated Risk on 9/30/2005 05:29:00 PM

Occasionally people ask me: "Can there be a bubble when so many people think there is a bubble?"

The answer is: The prevailing opinion on housing is that there is no bubble. From MarketWatch:

A survey out this week from RBC Capital Markets shows U.S. homeowners have little regard for talk of a housing bubble; nearly 60% expect that the value of their homes will increase at least 5% annually over the next several years -- not a bad guess given home prices historically have risen a percentage point or two higher than inflation every year.

But one-quarter of homeowners say they still think their houses will go up in value 10% or more a year, despite strong price hikes in most parts of the country in the last few years that economists say aren't sustainable. Only 3% of homeowners said they think their home will decline in value -- pessimists who probably fear they mistakenly jumped into homeownership.

Greenspan sees a little "froth". Others see some local bubbles, but not a national problem. Only 3% of homeowners think prices will decline.

Only a few contrarians think there is a housing bubble. If the contrarians are correct this time (and I think they are), when sentiment changes, housing prices will start to fall.

by Calculated Risk on 9/29/2005 02:55:00 PM

CNN had an online poll today on the cause of rising gas prices. Without getting into the flaws of online polls (a self selecting sample), this poll shows several other problems. First the results:

Q: What do you think is the main cause of rising gas prices?

Cause	percent	votes
Hurricanes	4%	6738 votes
Lack of refining capacity	21%	33619 votes
Price gouging	65%	104096 votes
Other market forces	10%	16527 votes

My first problem with this poll is the lack of a clear time period being considered. The primary reason for the price spike in the last month was the loss of refining capacity due to damage from hurricane Katrina. For the month of September, an answer of "hurricanes" or "lack of refining capacity" would be reasonable.

However gas prices have been rising for some time. This wasn't due to hurricanes or the lack of refining capacity. Instead this was due primarily to market forces.

Regardless of the time frame used, "price gouging" (the most popular answer) is incorrect.

by Calculated Risk on 9/29/2005 01:17:00 PM

Knight Ridder reports: Economists mention the ‘R’ word

Economic forecasters and Wall Street analysts are quietly hedging their bets after months of rosy reports about a vibrant U.S. economic outlook. They’re now mentioning the growing possibility of recession.

Why? Soaring gas prices, nightmarish home-heating costs this winter, plunging consumer confidence, rising interest rates and falling new-home sales.

The article quotes Ed Yardeni of Oak Associates:

"The U.S. economy has been remarkably resilient in recent years, but consumers may start to postpone discretionary spending to build some cushion to pay their higher heating bills on top of paying more to fill up their gasoline tanks," he wrote to investors. "In other words, I am not sure that the economy is resilient enough to withstand the one-two punches from the Katrina-Rita tag team."

Yardeni said it was "increasingly likely" the U.S. economy soon could face a six-month bout of stagflation — in which prices rise but wages and hiring stagnate — the economic curse of the 1970s.

Also the Conference Board reported that the help wanted market weakened in August, BEFORE the storms hit: U.S. Help-Wanted Advertising Index Declines Four Points

The Conference Board Help-Wanted Advertising Index - a key measure of job offerings in major newspapers across America - declined four points in August. The Index now stands at 35, down from 39 in July. It was 37 one year ago.

In the last three months, help-wanted advertising declined in seven of the nine U.S. regions. Steepest declines occurred in the West South Central (-19.4%) and West North Central (-10.8%) regions.

Says Ken Goldstein, Labor Economist at The Conference Board: "Key market indicators gave ground just before the storms and flooding. While print want-ad volume rose a bit in June and July, it sagged to May levels in August. Consumers' concerns about finding a new job were also essentially the same in August as in May, but declined noticeably in September, after the hurricanes and flooding. Latest readings show that job growth has been downsized significantly. Before the storms, there was a chance for 150,000 to 175,000 jobs per month over the near term. However, prospects may now be reduced by as much as half of that."

However, online help wanted "ad volume continued to edge higher".

It appears the economy was starting to weaken prior to the devastation of Hurricanes Katrina and Rita. But one thing is certain, all problems will be blamed on the hurricanes.