Thursday, November 25, 2010

New home sales fell 28.5% year-over-year

New single-family home sales fell 28.5% year-over-year in October, from 396,000 in October 2009. Month-over-month, the decline was 8.1%:
New home sales tumbled in October while the median home price dropped to the lowest point in seven years.

Sales of new single-family homes declined 8.1 percent to a seasonally adjusted annual rate of 283,000 units in October, the Commerce Department reported Wednesday.

It was the fourth time the sales rate has dropped in the past six months. New home sales are just 2.9 percent above August's pace of 275,000 units — the lowest level on records dating back to 1963.

Top 10 cities where home prices have improved most (or fallen least) in the past year

Many economists believe it could take three years for the industry to get back to a healthy annual rate of sales of around 600,000 homes.

The median price of a home sold in October dipped to $194,900, the lowest level since October 2003.
Building permits are down 4.2% year-over-year.

Happy Thanksgiving

Here's some light humor for the holiday:

Wednesday, November 24, 2010

Mankiw: Eliminate the mortgage interest deduction

Harvard economics professor Greg Mankiw advocates eliminating the mortgage interest tax deduction:
One major tax expenditure that the Bowles-Simpson [deficit reduction] plan would curtail or eliminate is the mortgage interest deduction. Without doubt, many homeowners and the real estate industry will object. But they won’t have the merits on their side.

This subsidy to homeownership is neither economically efficient nor particularly equitable. Economists have long pointed out that tax subsidies to housing, together with the high taxes on corporations, cause too much of the economy’s capital stock to be tied up in residential structures and too little in corporate capital. This misallocation of resources results in lower productivity and reduced real wages.

Moreover, there is nothing particularly ignoble about renting that deserves the scorn of the tax code. But let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab.

Tuesday, November 23, 2010

Real estate shadow inventory up 10% year-over-year

There is now an 8-month supply of shadow inventory:
There's a large number of homes, either already repossessed by lenders or very seriously delinquent, that are poised to be added to the already glutted regular supply of homes on the market.

This "shadow inventory" jumped 10% during the past year, to an eight-month supply at the current rate of home sales, according to a report issued Monday.

According to CoreLogic, a financial information provider, there were 2.1 million homes in this uncounted inventory as of the end of August, up from 1.9 million units 12 months earlier.

Adding the shadow inventory to the visible supply of homes on the market boosted the total housing-market supply to 6.3 million units from 6.1 million in August 2009. At the current sales rate, it would take 23 months to go through the entire visible and shadow inventory of homes — more than three times the normal rate of six to seven months.

The potential extra supply raises the risk of further home price declines, according to Mark Fleming, CoreLogic's chief economist.
For several years now, we've been hearing about how all this shadow inventory was going to hit the market and push down prices. I'm starting to think someone's crying wolf. (You remember how The Boy Who Cried Wolf ends, right?)

Monday, November 22, 2010

Glaeser: Scale back the mortgage interest deduction

Harvard University economics professor Edward Glaeser argues for scaling back the home mortgage interest tax deduction:
REDUCING THE national debt is a great test of our political system. ... Yet last week’s eminently sensible preliminary report of the bipartisan National Commission on Fiscal Responsibility and Reform seems to have brought forth not careful consideration but flights of fury. In particular, the possibility of reforming the home mortgage interest deduction has generated a torrent of ire. While one option mentioned by the report was to eliminate all tax deductions and credits, the more detailed Wyden-Gregg option is to limit the mortgage deduction to exclude second homes, home equity lines, and mortgages over $500,000. Lowering the upper limit on the home mortgage interest deduction should appeal to progressives, who want less largess for the wealthy, and to small-government conservatives, who dislike public paternalism. Unfortunately, the demons of discord seem to have prevented either group from embracing the reform.

The Democrats are haunted by a blue leviathan that calls for massive government transfers for any vaguely middle-class interest group. That monster was working full force last week as progressive pundits argued that capping the mortgage interest deduction at $500,000 would be deeply unfair to middle-class homeowners. Apparently these writers think that the middle class is full of people with million-dollar mortgages. According to the 2007 Survey of Consumer Finance, the median mortgage owed by a family in the top 10 percent of the US income distribution was $200,000. The median price of an existing home sold in September was $171,000. Research by economists James Poterba and Todd Sinai finds that even among households earning more than $250,000, the average mortgage is $300,000.

If liberals defend the home mortgage deduction as a vital bulwark for middle income Americans, then they are ignoring the fact that the home mortgage interest deduction is one of the most regressive parts of the tax code. Poterba and Sinai’s research finds that the average benefit created by the deduction for home-owning families earning over $250,000 is 10 times larger than the average benefit reaped by families earning between $40,000 and $75,000. Progressives also typically worry about global warming, and that concern should lead them to oppose any tax policy, like the mortgage interest deduction, that encourages Americans to build bigger, more energy-intensive homes. ...

Tea Party libertarians should fight the deduction, opposing any use of tax policy to try to manipulate the way we live. Why is it the government’s business to try to bribe us to buy bigger homes and take on more debt? ...

Reforming the home mortgage interest deduction is a good place for both parties to start getting serious.

Thursday, November 18, 2010

Foreclosure scandal a threat to U.S. financial system

That's the word from the Congressional Oversight Panel:
Problems with documents used to process foreclosures may be serious enough to threaten the health of the U.S.’s financial system, a government panel warned Tuesday.

The Congressional Oversight Panel, formed to watch over the $700 billion federal bank bailout, said in a report that the foreclosure-document problems “may have concealed much deeper problems in the mortgage market that could potentially threaten financial stability.”

The panel’s chairman, however, cautioned that it is difficult to know whether such threats will come to pass. “It could turn out to be nothing, but it could turn out to be a big deal,” former Sen. Ted Kaufman, the panel’s chairman, told reporters.

The panel urged the Treasury Department and bank regulators to conduct new stress tests to see whether banks can handle the risk that investors will force them to take back billions in loans packaged into securities. Some investors are trying to force banks to do so, partly as a result of revelations about flawed documents.

Wednesday, November 17, 2010

Upcoming Case-Shiller numbers expected to show price declines

Goldman Sachs expects the September Case-Shiller numbers to show home price declines:
Case-Shiller figures for September aren’t due until later this month, but analysts at Goldman Sachs are forecasting that price drops accelerated into autumn. In a note released Monday, Goldman estimates that the index will show that home prices declined by 0.45% in the three month period ending in September.
The next update of the S&P/Case-Shiller index is due to be released on Tuesday, November 30th.

Friday, November 12, 2010

Houses are shrinking!

Seriously, it's true:
The median home size in America was near 2,300 square feet at the peak of the market in 2007, with many McMansions topping 10,000 square feet.

Today, the median home size has dropped to about 2,100 square feet and more than one-third of Americans say their ideal home size is actually under 2,000 square feet, according to a survey by real-estate site Trulia.

“The whole glow of bigness kind of wore off all of a sudden,” said Sarah Susanka, an architect and the author of “The Not So Big House” book series.

Builders are responding by chopping out rooms that people just don’t use anymore, particularly formal living rooms and sitting rooms.
A couple of points: First, the peak of the market was in 2005 or 2006, depending on whether you're measuring home buying activity or prices, respectively. Second, with so few homes being added to the existing stock there's no way the median home has shrunk by about 10% in three years. The sizes listed are probably the medians for new homes, not all homes, although the author doesn't say that.

Wednesday, November 10, 2010

Lawrence Yun's housing predictions

During the rise of the housing bubble, the National Association of Realtors was a major cheerleader of forever rising housing prices. This blog made a big point of criticizing its chief economists, David Lereah and his successor Lawrence Yun, back then.

So, what are Lawrence Yun's housing predictions now?
Nationwide, homeowners can expect little, if any, increase in home values in 2011, the National Association of Realtors said in a forecast released Friday at the group’s annual conference in New Orleans.

And it will take another two years to clear the foreclosures and short sales on the market, said Lawrence Yun, the group’s chief economist, at a news conference.
Is this what their cheerleading has come to? Have the past four years made them that demoralized? Are they actually being honest now, or is this just the best cheerleading they can do while still sounding believable?

An observation: While the financial industry's reputation has been brutalized in the press, the reputation of the National Association of Realtors has escaped scot-free, despite the major role it played in misleading the American public during the bubble.

Via an old Lawrence Yun Watch blog post, here's a video to remind us of how deceitful the Realtors were back then:

Monday, November 08, 2010

FT: QE2 is about pushing up asset prices

Economist Gavyn Davies, writing for The Financial Times, says this second round of quantitative easing is about pushing up asset prices:
Clearly, the fuss is mostly about asset prices. ... which may encourage the markets to believe that there is a “Bernanke put” underlying the equity market. Almost certainly, the Fed is happy to see rises in equity prices and declines in the dollar, despite warnings that this stance may induce bubbles to develop in the US and overseas.

It is interesting to review market behaviour since Mr Bernanke’s speech at Jackson Hole on 27 August, which indicated that QE2 might be around the corner. Bond yields have hardly moved since that speech, but inflation expectations within the TIPS market have risen by over 0.5 per cent. And commodity and equity prices have risen sharply, by 16 per cent and 11 per cent respectively. These developments are all consistent with a belief that the Fed is intent on reflating the US economy, and that it will succeed in doing so.

Probably the oldest piece of advice in asset management is “don’t fight the Fed”. It usually works. If the economy grows moderately in coming months, while the Fed steadily injects money into the financial system, risk assets could benefit further.

Friday, November 05, 2010

Is the Fed blowing new bubbles?

The Federal Reserve is beginning a new round of quantitative easing, printing money to buy intermediate- and long-term bonds, thus increasing the money supply and lowering intermediate- and long-term interest rates.

This is different from what the Fed normally does to stimulate the economy. Normally it prints money to buy short-term bonds. But, since short-term interest rates are already near zero, the Fed has to take the riskier action of buying longer-term bonds if it wants to stimulate the economy.

Harvard economics professor Martin Feldstein, President Emeritus of the National Bureau of Economic Research, warns that this is dangerous and may blow new bubbles:
The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy.

Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks’ excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar’s international value, bid up the price of commodities and farm land and raised share prices.

Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar. ...

The truth is there is little more that the Fed can do to raise economic activity. What is required is action by the president and Congress...
It sounds to me like Feldstein is saying The Onion was right.

As for other notable economists' thoughts on the Fed's actions, John Taylor is opposed and Paul Krugman is ambivalent.