New bubble book

This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Ken Rogoff

Book description:

Throughout history, rich and poor countries alike have been lending, borrowing, crashing—and recovering—their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"—claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. This book proves that premise wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes—from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much—or how little—we have learned.

Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts—as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.

An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.

This book is from Princeton University Press. Reinhart is an economics professor at the University of Maryland and Rogoff is an economics professor at Harvard.

Video: CNBC Case-Shiller discussions

A sensible discussion of yesterday's S&P/Case-Shiller Home Price Index numbers:



Here's a conversation with our old friend David Lereah:



If Sue Herera pronounced David Lereah's name correctly, then I've been saying it wrong for years. She said "Leh-ray", while I've always pronounced it "Leh-ree-uh". Oops!

Here's an interview with S&P's David Blitzer:



Meanwhile, on CNBC's Realty Check blog, Diana Olick argues that the bounce in home prices is "seasonal and federally fueled."

July Case-Shiller numbers

The S&P/Case-Shiller Home Price Index is up again:

“The rate of annual decline in home price values continues to decelerate and we now seem to be witnessing some sustained monthly increases across many of the markets” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The two composites and all metro areas are showing an improvement in the annual rates of return, as seen through a moderation in their annual declines. Looking at the monthly data, the 10-City and 20-City Composites and 18 of the 20 metros areas increased in July. In addition, both Composites and 13 of the MSA have had at least three consecutive months of positive prints. These figures continue to support an indication of stabilization in national real estate values, but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures.” ...

As of July 2009, average home prices across the United States are at similar levels to where they were in the autumn of 2003, From the peak in the second quarter of 2006, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%.

In terms of annual declines, despite the overall improvement, all metro areas and the two composites remain in negative territory, with 14 of the 20 metro areas and both composites in double digits. On the positive side, Cleveland, Dallas and Denver are nearing in on positive territory with July readings of -1.3%, -1.6% and -2.9%, respectively. Las Vegas posted its lowest index level in July since its peak in August of 2006, resulting in a 54.8% peak to trough decline.

In the monthly data, only Seattle and Las Vegas showed monthly declines. Thirteen of the 20 metro areas had three or more consecutive positive returns; and 16 MSAs and the two composites reported monthly returns greater than +1.0%.

The Washington, D.C. area is up 1.6% month-over-month (seasonally-adjusted), and down 9.8% year-over-year.

This table shows the non-seasonally-adjusted numbers for all twenty cities:

Click to enlarge the image.

Arlington ghetto rap

For those Bubble Meter readers who think Arlington, Virginia is da bomb:

American migration trends

Americans are constantly moving, but where are they going?

Art Hall, executive director of the Center for Applied Economics at the KU School of Business, said he uncovered three key themes to American population shifts by looking at annual data collected by the Internal Revenue Service on county-to-county migration:

He found that

• Populations are relocating to coastal areas (with the major exception that inhabitants for the first time are taking flight from California's prohibitively priced seaboard)
• People are moving out from major metropolises to smaller cities
• The general migration trend in the U.S. now is eastward rather than westward

...

"In a sense, the exurbs are what's happening. What you'll see is that folks are moving out of the city cores into the periphery. They're willing to move away from the big cities into the medium-sized metropolitan areas."

Teaser rates still exist

And they always will...

Shadow inventory

Foreclosures in waiting:

Henry Fishkind, an Orlando-based housing economist, says some banks tell him they “are holding back [foreclosed-home] inventory” to avoid depressing prices any more than necessary. “It’s in their interest” to avoid flooding the market, and regulators haven’t forced them to do so, he says. That suggests that the backlog of homes headed for foreclosure will be stretched out over several years. ...

Jack McCabe, a housing analyst in Deerfield Beach, Fla. ... points to the temptation for borrowers to stop paying their mortgages because they don’t believe they will ever have equity and expect banks to take a long time evicting them. Mr. McCabe says he knows people who haven’t paid their mortgages in more than a year and still haven’t been evicted. “Some people are saying, ‘I could pay my mortgage bill, but why?’”

Prices to Fall Over the Fall & Winter Months

During the summer months, in many major metropolitan areas places price declines have turned to prices increases. According to the Case Shiller Price Index housing prices in June were up in Chicago, San Fransisco, Washington - DC, Minneapolis, New York and Los Angeles. Reflecting these and other metropolitan areas the 20 city composite index rose 1.4%. It had also posted a smaller price increase in May. This reversed a long period of prices declines in the index which started in August 2006.

Where do prices go from here? Will prices decline, remain stable or increase in the fall and winter months?

There are many factors which are likely to contribute to driving down prices in most metropolitan areas during the fall and winter months. Here is a list:

• Higher Mortgage Rates
• Possible Expiration of 8,000 Home Buyer Tax Credit
• Continued Job Losses
• High Foreclosures
• Seasonal Price Declines

Higher Mortgage Rates

Mortgage rates for buyers with good credit became very low over the summer months. Mortgage Rates Daily has a terrific graph to illustrate this point. Mortgage rates are likely to rise over the coming months towards 5.5% for a 30 year fixed.

Possible Expiration of 8,000 Home Buyer Tax Credit

The Federal Government's 8,000 home buyer tax is set to expire on November 1st 2009. It may be extended, it may not be. If it is not then this will certainly put downward pressure on housing prices.

Job Losses will continue

With the millions of job losses over the past year and the growing number of people falling off of unemployment rolls the downward pressure on housing will increase. Don't expect job gains until at least spring 2010.

Foreclosures

Foreclosures continue to remain at very high levels. Hundreds of thousands of new foreclosure notices arrive each month. Banks have a large backlog of foreclosed houses and condos waiting to be sold, "RealtyTrac, in its August 2009 U.S. Foreclosure Market Report, disclosed that foreclosure filings were reported on 358,471 U.S. properties during the month, representing a decrease of less than 1% from July, but still an increase of nearly 18% from August 2008.The report shows that one in every 357 U.S. housing units received a foreclosure filing in the month." RTT News. These amount of foreclosures per month will continue at a very high rate as we head into the colder months.

Seasonal Price Declines

Housing prices have a seasonal component which is that prices tend to do 'better' in the spring and summer months than the fall and winter months. This has been true during regular market periods as well as during the housing bubble and bust years. Many housing price indices (Realtor's and Case Shiller) are seasonally adjusted because of the strong seasonal component.

Summary

Due to a variety of factors prices in most major metropolitan areas are likely to fall during the fall and winter months. Don't expect spring 2009 to be the bottom.

An interview with Michael Moore

His new documentary about the financial crisis is called Capitalism: A Love Story. It comes out October 2nd.

As a free market capitalist, I don't agree with the views he expresses in this interview (and probably the movie), but I'm generally a fan of his works. He's got a good sense of humor.

Note: Despite Poppy Harlow's claim in the interview, in practice shareholders have very little say in hiring and firing boards of directors and CEOs.

When shareholders don't vote, those votes are not discarded. Instead, usually those votes are automatically cast in favor of re-electing directors. Furthermore, many companies have plurality voting rules, which means that even if a director gets less than 50% of shareholder votes, they still win if they get more votes than their nearest competitor. Since they have no competitor, they automatically win re-election under plurality voting rules.

As for CEOs, they usually have one seat on the board of directors. Since the board of directors fires the CEO, the CEO already has one vote cast in his favor. Therefore, it usually takes a supermajority of the other directors to fire a CEO.

Shareholder rights is an area that definitely needs reform, but most congressmen are clueless. They'd rather spend time dictating executive pay.

Update: At least one reader appears not to have understood the paragraph I have now highlighted in red above. Shareholder elections do not work the way most people think they do. The way votes of apathetic, nonvoting shareholders are counted makes the math daunting for those shareholders who actually do care. See the comments for my second attempt at explaining it.

Update #2: It appears that the shareholder voting system I was complaining about will end on January 1, 2010. Hurray! See the comments for details.

Economists should stop ignoring bubbles

Yale economist Robert Shiller has constructive criticism for his own profession:

The widespread failure of economists to forecast the financial crisis that erupted last year has much to do with faulty models. This lack of sound models meant that economic policymakers and central bankers received no warning of what was to come.

As George Akerlof and I argue in our recent book Animal Spirits, the current financial crisis was driven by speculative bubbles in the housing market, the stock market, energy and other commodities markets. Bubbles are caused by feedback loops: rising speculative prices encourage optimism, which encourages more buying and hence further speculative price increases — until the crash comes.

You won’t find the word “bubble,” however, in most economics treatises or textbooks. Likewise, a search of working papers produced by central banks and economics departments in recent years yields few instances of “bubbles” even being mentioned. Indeed, the idea that bubbles exist has become so disreputable in much of the economics and finance profession that bringing them up in an economics seminar is like bringing up astrology to a group of astronomers.

The fundamental problem is that a generation of mainstream macroeconomic theorists has come to accept a theory that has an error at its very core — the axiom that people are fully rational.

Home prices could fall another 14%

From BusinessWeek's Hot Property blog:

Daniel Alpert, Managing Partner at Manhattan boutique investment bank Westwood Capital, says that home prices could fall another 14% by the time the slump is over.

To understand why, it helps to divide the metros into two separate categories, rather than to lump all of them together, he argues. According to his analysis, home prices in 13 of the 20 metros included in the Case Shiller index could continue to drop: Denver, Washington D.C., Atlanta, Chicago, Boston, Detroit, Minneapolis, Charlotte, New York, Cleveland, Portland, Texas and Seattle. The former bubble markets where prices fell early and fast are likely closer to the bottom, he said. They are: Phoenix, Los Angeles, San Diego, San Francisco, Miami, Tampa, and Las Vegas.

As I've said before, Phoenix and Las Vegas are starting to look fairly valued compared to their historical values.

"Most brokers out of business January 1st 2010"

Interesting comments left by a reader on a recent MarketWatch.com article:

I work for a bank, I'm a loan officer. This year we went from 580 minimum Fico for Government loans (VA/FHA) to 620, then to 640, soon to be 660. Appraisals now have to go through an HVCC system (on conventional loans) that are holding up closings, reducing values and costing buyers more. FHA just annouced today guideline changes that will essentially put most brokers out of business January 1st 2010, Taylor Bean & Whitaker, previously the 4th largest Ginnie Mae servicer and most lenient lender (privately held company) got taken over by the feds and shut down in July. The $8000.00 tax credit for 1st time homebuyers (which essentially became a way to go FHA with no down payment) ends October 31st. And....as mentioned above, FHA is going to either need a bailout themselves or they will dramatically increase the fees to do an FHA loan. The fed buy back of Treasuries and Mortgage backed securites ends the end of November (unless one or both programs are extended, we'll probably know next fed meeting).

Folks, the bubble was all about giving a loan to anyone who had a pulse. That credit is long, long gone, and IMO getting harder to get. No more easy money. 49% of the USA has a credit score below 669. I am guessing (based on actual sales experience this year) that a good 1/3 of all people who could buy a home two years ago are now toast. That doesn't even include people who are now unemployed and without work or who just recently go re-employed (2 years work history now, no gaps for a house loan). The housing market has further to fall and will not bounce back to prior levels for a long, long time. Sorry everyone. Sorry.

Lawrence Yun speaks

Here's a CNBC interview with our favorite person, National Association of Realtors chief economist Lawrence Yun. He is arguing for an extension of the first-time home buyer tax credit. Basically, he wants to use our tax dollars to prop up a bubble.



More tax money to be wasted:

When Congress passed an $8,000 tax credit for first-time home buyers last winter, it was intended as a dose of shock therapy during a crisis. Now the question is becoming whether the housing market can function without it.

As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.

In the view of the real estate industry and some economists, all that money is well spent. They contend the credit is doing what it was meant to do, encouraging a recovery in the housing market that is gathering steam. Analysts say the credit is directly responsible for several hundred thousand home sales.

Skeptics argue that most of the money is going to people who would have bought a home anyway. And they contend that unless it is allowed to expire on schedule in late November, the tax credit is likely to become one more expensive government program that refuses to die.

The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the program to $15,000 and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: $50 billion to $100 billion. ...

On the other side of the issue is the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. It labeled the original credit as one of the worst provisions of the stimulus package, on the grounds that the money is a bonus for people who would buy a house anyway. The center has an even dimmer view of extending the credit to all buyers.

“Is this the best way to spend money we don’t have?” asked senior fellow Roberton Williams.

Dean Baker of the Center for Economic and Policy Research called the credit “a questionable redistributive policy” from renters to home buyers, but said that he used it himself when he bought a house.

He wrote on his blog: “Thank you very much, suckers!”

So basically, money that could be used to help the poor or improve our schools would be used to prop up a bubble instead.

If Congress is intent on a housing tax credit, it would be more efficient and less expensive to have a homebuilding tax credit that only went to purchases of newly-constructed homes. Building new homes creates many construction jobs and increases the supply of housing. A greater housing supply then pushes down the cost of housing, both for new homeowners and renters.

By contrast, the way the proposed credit mostly would work is that there is a tax credit any time an existing home changes hands. If I sell an existing home to you, you get a tax credit. If you then sell an identical home to me, I get a tax credit. No construction jobs are created and the supply of housing does not increase when an existing home changes hands.

These tax credits don't just come out of thin air. Instead, other taxpayers are essentially paying part of the cost of your home. (Or you are paying part of the cost of someone else's home.) But if a tax credit is going to be extended anyway, a homebuilding tax credit gives the U.S. economy far more bang for the buck than a home buying tax credit.

Hat tip: Nonpartisan

CNBC housing discussion

No more housing ATM

From yesterday's Wall Street Journal:

Many ... Americans have been forced to accept that they'll be living in their current place for a long while, even if they'd planned to flip or trade up. While sales of low-cost housing are picking up, for many, a house is back to what it traditionally was: a long-term financial commitment, a sturdy shelter and a place to hang your hat.

Happy anniversary!

It feels like it's been much more than just one year.

Whitney: Home prices to fall another 25%

Star bank analyst Meredith Whitney predicts home prices will fall by a quarter from current levels:

Home prices in the US could fall by another 25 percent because of high unemployment and another leg down will come for stocks, banking analyst Meredith Whitney told CNBC Thursday.

"No bank underwrote a loan with 10 percent unemployment on the horizon," Whitney said. "I think there is no doubt that home prices will go down dramatically from here, it's just a question of when."

Local governments and states are chronically under-funded and "most states are under water," adding to the problem of low private consumption, she said.

"If you look at the drivers for unemployment I don't see that reversing very soon," Whitney said.

More homeowners cutting their asking prices

More people are cutting their asking prices when trying to sell their home:

More than one in four U.S. homes for sale on Sept. 1 had their prices cut at least once since landing on the market, up slightly from a month earlier, a study showed on Friday. ...

Driving the increase was the pending expiration of the government's $8,000 tax credit for first-time home buyers — part of the stimulus bill — and summer months which are the peak sales period, according to data compiled by Trulia.com.

The average discount was 10 percent from the original price, unchanged from August. On average, sellers dropped their price by $39,378, Trulia said. ...

Home sellers looking to sell their property before the tax credit expires in November will continue to cut prices in hopes of attracting home buyers in search of discounts, [Trulia co-founder and CEO Pete Flint] said.

The Google Real Estate Index

Here is a graph of Google searches for real estate–related terms since the beginning of 2004, a sign of interest in the topic:


Google's description of the data being measured:

The Google Real Estate Index tracks queries related to "real estate, mortgage, rent, apartments". ... The index is set to 1.0 on January 1, 2004 and is calculated and displayed below as a 7-day moving average.

Recession perhaps not over

Last month, as the unemployment rate took a reprieve from its upward spike, I speculated that the recession might be over. Friday's release of the August unemployment rate showed a resumption of the upward spike, suggesting that the end of the recession may be yet to come.

Here's a graph of the official unemployment rate over the past ten years. Gray bars indicate recessions:


Here's a graph of the official monthly job loss numbers during this recession:


For conspiracy theorists who don't trust the government, here are the job loss numbers from the private ADP Employment Report. Notice that ADP measures job losses in August as being roughly 50% higher than the BLS numbers:

End of housing crisis is a "mirage"

Fortune says the housing recovery won't last:

Earlier this year, as many as half of all transactions nationally were resales of foreclosed properties, largely at low prices. Since then, so-called organic sales (those not involving distressed properties) have risen while foreclosure sales have remained stable. This improved mix — together with cheap financing and a couple of popular tax incentives — helped to revive prices in some hard-hit areas. ... But with schools opening up again and the summer home-selling season winding down, sales by nondistressed sellers are likely to fall in coming months...

Adding to the pressure on prices, the end is in sight (or already here) for some popular housing subsidies. An $8,000 federal tax credit for first-time home buyers is due to sunset in December. A $10,000 California tax credit for buyers of newly constructed houses expired last month.

Another concern is that the housing woes appear to be spreading well beyond the questionable borrowers who were at the center of the first stage of the financial crisis. ... Prime fixed-rate mortgages now account for about a third of foreclosure starts, according to the Mortgage Bankers Association. ...

The pace of foreclosures could soon accelerate as mortgage servicers catch up on foreclosures they have delayed while grappling with new mortgage modification guidelines.

Here's a self-serving, tax-dollar wasting idea I wouldn't complain too much about, because it would increase the housing supply, thus pushing equilibrium prices down further:

[Toll Brothers CEO Robert] Toll argued that a four-month program that offered people $15,000 vouchers for new home construction could "put twice as many people to work, twice as fast as what's being done with the auto industry."

New mortgage crisis coming?

WSJ: Commercial real estate could knock out the recovering economy:

Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.

Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. ... The $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.

The CMBS sector is suffering two kinds of pain.... In the era of looser credit, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.

The other kind of hurt is coming from the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. ...

CMBS, of course, aren't the only kind of commercial-real-estate debt suffering higher defaults. Banks hold $1.7 trillion of commercial mortgages and construction loans, and delinquencies on this debt already have played a role in the increase in bank failures this year. But banks' losses from commercial mortgages have the potential to mount sharply, and the high foreclosure rate in the CMBS market could play a role in this. ...

Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market.

More Robert Shiller!

Here's an excellent article by Robert Shiller, but not about housing.

Note: Prof. Shiller plugs his book, Animal Spirits, which also happens to be on Harvard professor Greg Mankiw's econ reading list.