by Calculated Risk on 12/18/2005 03:40:00 PM

From Knight Ridder: Boom likely over in housing market. The article contains comments from FDIC Chief Economist Richard Brown and Federal Reserve Bank of Chicago Senior Economist Richard Rosen.

...homeowners will no longer be able to use houses as piggybanks, cashing in on gains in appreciation periodically through low-cost refinancings. And many will be forced to hold on to a house or condominium for a long time as they wait for prices to rise.

The problem is that rising mortgage rates are putting an end to the easy money that underpinned increasing home prices, said Richard Brown, chief economist of the Federal Deposit Insurance Corp. in Washington.

"Price increases have far outstripped income growth for a long time, particularly in the last two years, but that period is coming to an end," he said.

The so-called golden age for mortgage lending is about over after lasting about 20 years, he said.

"The end of the boom probably is not far away," Brown said. "It likely will lead to a long period of price stagnation, but not technically a bust."

And from Federal Reserve Bank of Chicago Senior Economist Richard Rosen:

Home prices "have been rising far more rapidly than rents for the last four years. This probably is what Federal Reserve Chairman Alan Greenspan meant when he pointed to froth in the housing market," said economist Richard Rosen of the Federal Reserve Bank of Chicago.

He said a huge drop in long-term mortgage rates since 1985, when they were around 12 percent, to a recent rate near 5 percent "meant that you could afford more house for the same monthly payment."

Rosen compared the United States with Britain, where mortgage rates have been rising for about two years. Here, the uptick in rates began later.

"In Britain, if housing was a bubble, it didn’t burst," he said. "When mortgage rates rise, prices flatten, but they may not actually decrease."

One warning sign for the housing market, Rosen said, is that more and more owners are putting property on the market, and real estate is taking longer to sell.

"The risk is that if sales slow, there will be too much supply, creating price risk," he said.

Note: this article was orginally published on Dec 9th.

by Calculated Risk on 12/18/2005 01:58:00 AM

From the Washington Post: Agents Aplenty Career-Jumpers Looking For Easy Commissions Made a Low-Percentage Play

The story is interesting, especially these facts:

Seduced by the housing boom and its promise of ever-higher prices with ever-bigger sales commissions for agents, the number of licensees in Maryland, Virginia and the District has just about doubled in the past six years, according to local licensing agencies, with the Northern Virginia real estate association adding about 300 new agents a month. Nationally, the number of licensees was at a record high of more than 2.5 million at the end of 2004.

The previous post showed the increase in agents for California. It appears the D.C. area had a similar increase. But now that the market appears to be slowing:

... a slowing of the market could have big consequences. When the housing market slumped the last time, about 20,000 salespeople and brokers in Maryland jumped ship from 1990 to 2000, regulators said.

Craig Cheatham, chief executive of the Association of Real Estate License Law Officials, said, "I think by now that, with the number of people who are out there in real estate, there are a lot of people who are not making money."

But the NAR says its surveys show that real estate never has been "something you get rich quick in," said spokesman Walter Molony. In its latest survey, in August, those in the business for two years or less earned only $12,850. However, for those with more experience, the past two years were very good. Those with six to 10 years' experience earned a median $58,700, up 18.6 percent from 2002. Those who had at least 26 years earned $92,600, up 37.2 percent.

by Calculated Risk on 12/16/2005 05:34:00 PM

One thing with housing is certain, the Real Estate agent boom continues unabated.


Click on graph for larger image.

This graph shows the number of licensed Brokers and salespeople in California for each November.

The California Department of Real Estate reports the total number of agents in California is now 471,818, up 1.1% from last month, and up 13.7% from last November.

Also California's EDD reported today for November:

Within nonfarm industries, nine sectors saw month-over seasonally adjusted job gains and two sectors saw month-over job declines. Sectors with increased employment, in order of job gain, were:

Construction (8,000);
Trade, transportation and utilities (7,900);
Professional and business services (7,200);
Information (6,100);
Financial activities (1,300);
Leisure and hospitality (1,300);
Manufacturing (500);
Other services (300); and
Natural resources and mining (100).

The good news is the state added jobs in a number of sectors, but construction employment is still the strongest sector - even during a period when, according to the EDD: "It is not unusual to see [construction employment] soften towards the end of the year."

by Calculated Risk on 12/16/2005 02:28:00 PM

A couple of blogs have responded to my post dismissing the Samwick, et. al. Social Security proposal. Let me reiterate, I respect Professor Samwick's intentions, but I think his efforts are misdirected.

The first blogger, Arnold Kling at Econlog writes:

Even if one were to accept the premise that the fiscal problem is larger elsewhere, this is a phony argument. CR is acting like an angry teenager, sticking his fingers in his ears and saying "I'm not listening to you."

But the premise is also wrong. If we allocated a larger share of payroll taxes to Medicare instead of SS, we could argue that Medicare is not a problem but SS is the big issue. We should be looking at the challenge of funding spending as a whole, not looking at the arbitrary allocation of taxes to different programs. In terms of overall spending, Social Security is a gigantic issue.

Finally, it is disingenous to whine that we need to solve the other problems first, without offering a solution. Overall, this stance of "solve X and Y before you tackle Z" comes across to me as mere demagogic rhetoric, the end result of which will be that X, Y, and Z will remain unsolved.

Skipping over Kling's personal attacks, Kling is completely wrong - both about my suggestions and about the underlying economics.

First, although not included in my Social Security post (for brevity), just last week I wrote that there is good news for reforming health care in America:

... there is hope for the health care system. Currently the US has the most expensive health care system per capita in the World, and some of the worst outcomes for a first world nation. This offers an opportunity to reform the US healthcare system, and luckily there are several examples of systems that provide better outcomes for substantially lower costs. (See Angry Bear's and Kash's posts on the left under Topics: The U.S. Healthcare System)

So I'm not suggesting moving money from bucket A to bucket B; I'm actually suggesting reforming the entire system and dramatically cutting the costs and improving outcomes.

But Kling really goes astray when he suggests looking at "spending as a whole". The real issue in all of these debates is who pays the taxes and who receives the benefits.

As a mental exercise, imagine if we eliminate SS spending and the SS payroll tax - what happens? The General Fund deficit stays exactly the same and we would need to address the significant General Fund shortfall. Would Kling then suggest raising taxes on lower and middle income Americans to cover the shortfall? That seems to be Kling's suggestion.

So I believe we want to do the exact opposite of what Professor Kling suggests; for some programs we want to analyze each program and revenue source separately.

Two Lenses


One of the skills of a successful executive is to be able to manage with two lenses: a wide angle lens (to see the big picture) and a telephoto lens to zoom in on problems. But just like a photographer, the executive needs to know when to use each lens.

Its not that I'm "not listening", I'm prioritizing.

I believe there is no need to discuss the details of Professor Samwick's proposals; the wide angle lens shows Social Security is irrelevant.

by Calculated Risk on 12/15/2005 07:19:00 PM

DataQuick reports: Southland home sales strong, prices hit new peak

Southern California home sales remained at near- record levels last month as prices continued their climb to new heights ...

A total of 27,637 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 3.0 percent from 28,489 in October, and up 0.6 percent from 27,459 for November last year, according to DataQuick Information Systems.

A decline from October to November is normal for the season. The strongest November in DataQuick's statistics was in 1988 when 29,303 homes were sold. The slowest November was in 1991 when 13,537 homes were sold. So far this year 326,746 Southland homes have been sold, virtually unchanged from 326,880 for the first eleven months of last year.
...
The median price paid for a Southern California home was $479,000 last month, a new record. That was up 1.3 percent from $473,000 in October, and up 15.4 percent from $415,000 for November 2004. Annual price increases have been in the mid teens since April.
...
The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,238 last month, up from $2,169 for the previous month, and up from $1,830 for November a year ago. Adjusted for inflation, current payments are about the same as they were in the spring of 1989, at the peak of the prior real estate cycle.

by Calculated Risk on 12/15/2005 07:16:00 PM

DataQuick reports: Slower Bay Area home sales, steady price increase

Bay Area home sales continued to slow on a year-over-year basis while prices continued to climb, a real estate information service reported.

A total of 9,717 new and resale houses and condos were sold in the region last month. That was down 7.5 percent from 10,508 for October, and down 10.8 percent from 10,897 for November last year, according to DataQuick Information Systems.
...
Last month was the third-strongest November.
...
The median price paid for a Bay Area home was $625,000 last month, a new record. That was up 1.8 percent from $614,000 in October, and up 17.3 percent from $533,000 for November a year ago. Annual price increases so far this year have ranged from 17.2 percent to 20.5 percent.
...
The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,921 in November. That was up from $2,815 in October and $2,350 for November last year. Adjusted for inflation current payments are 16.5 percent higher than at the peak of the last real estate cycle in the spring of 1990.

Indicators of market distress are still largely absent. Foreclosure rates are low, down payment sizes are stable and there have been no significant shifts in market mix, DataQuick reported.

by Calculated Risk on 12/15/2005 02:22:00 PM

From Professor Samwick at Vox Baby:

Along with Jeff Liebman of Harvard University and Maya MacGuineas of the New America Foundation, I am pleased to announce the "Nonpartisan Social Security Reform Plan."

My response was blunt:

Professor, I appreciate your efforts, but ...

The two most pressing fiscal challenges for the US are: 1) the health care system and 2) the General Fund Deficit (close to $600 Billion this year alone).

Social Security is irrelevant when compared to those two problems.

I suggest fixing the most serious problems FIRST, and then returning to Social Security.

Ranking the Challenges

Any good manager would 1) measure the problem and then 2) solve the largest problems first. With that approach, here are the three largest fiscal challenges facing the United States:


Click on graph for larger image.

This chart shows the relative sizes of the three major fiscal challenges over the next 75 years. The NPV for the General Fund deficit is based on deficits equal to 5% of GDP. Note: the fiscal 2006 general fund deficit will be close to 5%.

The estimates for Medicare and Social Security are from the GAO report (pdf): The Long Term Fiscal Challenge

From the GAO report:

"Health care is a bigger problem than Social Security. Participants acknowledged the need for Social Security reform but emphasized that Social Security is a relatively small part of the long-term fiscal challenge when compared to spending on health care. ... Several participants observed that few members of the public are aware of this. Rather, the general public impression is that solving Social Security would solve most of the longterm fiscal challenge, and this is not correct.

And on the General Fund deficit:

"Participants agreed that a key moral context is the impact federal budget deficits will have on future generations."

Conclusion

The debate should be focused on the two major issues: Health Care and the General Fund deficit. Without addressing those issues first, reforming Social Security is irrelevant.

by Calculated Risk on 12/15/2005 11:07:00 AM

The Orange Country Register sponsored a roundtable on real estate this week. The participants included "economists, real estate executives, consultants, a researcher and a broker" and the comments were unsurprisingly mostly positive.

This discussion of exotic loans was interesting:

... the panelists weighed in on risks and benefits of creative financing, prospects of widespread foreclosures, and solutions to the housing crunch.

The prevalence of easy money is a concern, and much of it originates in Orange County, according to Scott Simon, who heads the mortgage investment team at the Pimcobond firm in Newport Beach.

"This is the hub of creative credit in the world," Simon said.

Simon said some lenders have dramatically increased the amount of interest-only loans they make in recent years. The trend has helped increase the percentage of Americans who own homes, but has led to a number of buyers borrowing too much, he said.

A day of reckoning for some buyers could be in the offing, according to Simon and some other panelists.

Several panelists said homeowners most at risk of foreclosure are those who bought homes since 2003, have no equity, and have adjustable mortgages with very low rates. Most buyers before 2003 have built up a fat cushion of home equity to fall back on if mortgage rates rise, they said.

The number of homeowners at risk of foreclosure probably is in the range of 7,000 to 8,000, said Chris Cagan, director of research and analytics with First American Real Estate Solutions in Santa Ana. That total would represent 7 percent to 8 percent of local buyers over the past two years, he said.

Cagan said that if all of those at risk defaulted, it would add about two months' supply of homes for sale to the market, not enough to sink it.

I think there will be additional factors impacting the economy if housing prices flatten. Not only will some recent buyers be at risk of foreclosure, but there will be less employment in RE related industries and less equity extraction to fund consumer spending and home improvement projects.

by Calculated Risk on 12/14/2005 06:13:00 PM

The Economist is amazed by the American consumer:

FOR several years now, economists have been watching American consumers with the same mixture of astonishment and anticipation that wide-eyed fans bring to endurance sports: amazing that they’ve made it so far, but how much longer can they go on like this? Strong consumer spending has underpinned America’s robust economic expansion, even as most other industrialised countries have struggled to get their economies back on track. But consumers have been running down savings to sustain this level of spending; the personal savings rate has actually been negative since June. Booming house prices and low interest rates have enabled consumers to take on more debt without suffering much, but with interest rates now climbing, Americans have begun to feel the pinch. Data from the Federal Reserve show that the percentage of household disposable income devoted to servicing debt was a record 16.6% in the third quarter.

Yet the consumers soldier on.

A nice summary article.

by Calculated Risk on 12/14/2005 04:55:00 PM

The Orange County Business Journal quotes PIMCO's Bill Gross:

"Housing in the next month or two will display extreme weakness, and the Fed will stop,"

The short article adds:

Gross, Pimco's chief investment officer, predicts a rate cap of 4.5%, though others see at least two more hikes by the Federal Reserve.

Two predictions to check back on in a couple of months.


Click on graph for larger image.

According to Dr. Altig's calculations, the Fed Funds Futures shows at least two more rate hikes. This is a regular feature at Macroblog.

Right now I think hikes to 4.5% in January and 4.75% in March are likely. Although I agree with Gross that the end of the rate hikes is near.