by Calculated Risk on 11/09/2005 08:51:00 PM

The Center for Economic and Policy Research released a new report today: "Will a Bursting Bubble Trouble Bernanke? The Evidence for a Housing Bubble". Dean Baker and David Rosnick conclude:

This paper has briefly examined three trends that strongly support the view that the recent run-up in house prices is driven by a speculative bubble, rather than fundamentals. First, it notes the unusual gap between the run-up in home sale prices and rents at both the national level and in many of the most inflated metropolitan markets. .... When such gaps have developed in the past, they usually have been followed by sharp declines in house sale prices.

The second factor suggesting that the current run-up reflects a bubble is the extraordinary pace of home construction in recent years. ... This pace of construction substantially exceeds that rate of new household formation. It is also worth noting that virtually no economists projected a sharp price in home construction in the mid-nineties, so most of the economists who expect the current pace of housing construction to persist, badly erred in their projections for housing construction in the past.

Finally, the wealth effect resulting from the recent run-up in house prices has led to a sharp decline in the savings rate. In recent months, the savings rate has turned negative. If construction continues at its recent pace and real house prices stay at current levels, then the savings rate will become even more sharply negative over the next decade.
...
It is not plausible that an economy will sustain a negative savings rate for any substantial period of time. This would imply that households’ non-housing wealth is continually declining. The more likely scenario is that housing prices will fall back in line with their historic values.
...
The costs of a collapse of the housing bubble will be even greater than the costs of the collapse of the stock bubble, because housing wealth is much more evenly held. The failure of the economics profession to adequately warn of the stock bubble was an act of extraordinary negligence. Missing the housing bubble is an even bigger mistake.

by Calculated Risk on 11/09/2005 06:14:00 PM

The Census Bureau will report the Trade Balance tomorrow morning. The concensus forecast is for a record trade deficit of $61.3B for September.

The impact of the hurricanes is a little uncertain. The Census Bureau has released preliminary trade information for the Gulf Region showing that exports were off about $1 Billion for the Port of New Orleans in September. However, imports were also off (about $0.5 Billion) and other Gulf ports picked up some of the export and import slack. My guess is exports will be impacted slightly - maybe $0.5 Billion.

Crude oil imports were off, but the volume of more expensive refined products increased. My prediction for the petroleum trade deficit is $21.1 Billion SA; a slight increase from the August record of $20.6 Billion.

The West Coast ports of Los Angeles and Long Beach reported record inbound traffic for September. Export traffic was down. Seasonally adjusted, imports from China were probably around the August level.

My prediction: A record trade deficit of $60.5 Billion.

by Calculated Risk on 11/09/2005 04:38:00 PM

DiMartino follows the money:

...it's a good thing the people running the homebuilding companies got out when they did.

So far this year, insiders at Toll have sold $588 million worth of the company's stock – representing nearly 10 percent of the current market capitalization. Robert Toll, chief executive, has liquidated north of $110 million.

As a group, Thomson Research senior quantitative analyst Mark LoPresti said, industry insiders have sold $976 million in 2005.
...
In the last six months, homebuilders have sold, on average, $347 for every dollar they've spent purchasing their own stock. Compare that to all industries, where insiders have sold $31 in stock for every dollar they bought.

Mr. LoPresti said July was the key month for homebuilder shareholders to watch what insiders were doing with their own shares.

"In July alone, homebuilding insiders liquidated 4.8 million shares of stock, the largest number in history, raising $333 million," Mr. LoPresti said.

The last time homebuilder insiders were this aggressive was May 1991, when they sold off 3.1 million shares in one month. This was followed by a 27 percent decline in homebuilder stocks over the next four months.

by Calculated Risk on 11/08/2005 10:32:00 PM

Drs. Tim Duy and William Polley discuss Bernanke and the FED: Changing Times at the Fed This is an excellent discussion of a number of topics: Fed credibility, inflation targeting, inflation measures, "global savings glut" and more.

NOTE: Here is Dr. Polley's blog and Dr. Duy writes the regular Fed Watch feature on Dr. Thoma's Economist's View.

From the WSJ Econoblog: Both Drs. Duy and Polley believe Bernanke's "helicopter drop" comments were misunderstood by the general public. See this 2002 Bernanke speech: Deflation: Making Sure "It" Doesn't Happen Here

Dr. Polley comments:

In one line of his speech, Mr. Bernanke uses the illustration of the "helicopter drop" of money -- an illustration first used by Milton Friedman -- to describe a money-financed tax cut that should have the desired effect of ending the deflation. It was, of course, widely acknowledged that the risk of deflation was slight and that this was a "worst case" scenario.

Fortunately, deflation did not materialize, but many people worried that Mr. Bernanke's use of this illustration weakened his credentials as an inflation fighter. I don't share that concern, but beliefs and expectations are very important in central banking. Any doubt about the Fed's credibility means that they will have to raise the real rate further to re-establish those credentials.

Dr. Duy concurs:

I have worried that continued allegations of Mr. Bernanke as an inflationist -- allegations that I believe are false -- are increasing the possibility of policy error in the months ahead. That said, I believe that my worries will prove to be unfounded at the end of the day.

An excellent discussion.

by Calculated Risk on 11/08/2005 06:31:00 PM

Here are some interesting comments today on the impact of a housing slowdown on the economy:

Marketwatch: Bell 'Toll-ing' for housing market?
Toll Bros. warning fuels worries bubble set to finally pop

"If housing prices do not go up as much and interest rates are rising at the same time, fewer people will be able to take equity out of their homes," said Simon at Pimco.

"People are not only going to feel a lot less rich but they are going to have less money to spend," he added. "That can definitely hurt GDP."

Reuters: U.S. stocks fall on concern about housing slowdown

"A soft real-estate market is not good for the consumer. It is not going to bode well going forward," said Weston Boone, vice president of listed trading at Legg Mason Wood Walker. "You have to take into consideration the rising interest-rate environment. There aren't a lot of catalysts for positive sentiment in the market."

Investors Squeamish on Housing Outlook

"It would be a bit ominous for the economy if we see a dramatic slowdown in the housing sector," said Michael Metz, chief investment strategist at Oppeheimer & Co.

"The whole economy has been built on the wealth impact of the housing sector," Metz said.

What comes next? A slowdown in retail spending or real estate related job losses?