Wednesday, December 29, 2010

Bits bucket

While I'm on vacation, consider the comments section of this post an open discussion forum. Feel free to post any housing news, thoughts, or links you'd like.

Home prices falling anew

S&P/Case-Shiller shows monthly home prices dropping in all twenty cities tracked (including DC):
Home prices took a shockingly steep plunge on a monthly basis, an indication that the housing market could be on the verge of -- if it's not already in -- a double-dip slump.

Prices in 20 key cities fell 1.3% in October from a month earlier, an annualized decline of 15%, according to the S&P/Case-Shiller index released Tuesday. Prices were down 0.8% from 12 months earlier.

Month-over-month prices dropped in all 20 metro areas covered by the index. Six markets reached their lowest levels since the housing bust first began in 2006 and 2007.

Friday, December 24, 2010

Merry Christmas

I'm on vacation for a little over a week. I'll be blogging again in the New Year.

Wednesday, December 22, 2010

Flat home prices expected for 2011

Economists expect home prices to be flat in 2011 after declining about 1% in 2010:
Home prices won’t show any year-over-year appreciation in 2011, according to the latest average of 110 forecasts from economists and housing analysts surveyed by MacroMarkets LLC.

The survey shows that economists expect home prices to fall by 0.17% in 2011 as measured by the S&P/Case-Shiller index of home prices in 20 U.S. cities. The average forecast for 2010 calls for the Case-Shiller index to ultimately show that home prices ended the year down 1.13%.

Overall, economists expect home prices to rise by 7.2% over the five-year period ending in 2014. In May, that forecast called for a 12% rise in prices over the span.

Tuesday, December 21, 2010

The effect of declining home prices on small business borrowing

The Federal Reserve Bank of Cleveland has a new economic commentary on the declining housing bubble's effect on small business borrowing. Here's the conclusion:
Everyone agrees that small business borrowing declined during the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.

While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses.

Of course, not all small businesses have been equally affected by the decline in home prices. While many small business owners use residential real estate to finance businesses, not all do. Those more likely do so to include companies in the real estate and construction industries, those located in the states with the largest increases in home prices during the boom, younger and smaller businesses, companies with lesser financial prospects, and those not planning to borrow from banks. These patterns are also evident in the data sources we examined.

The link between home prices and small business credit poses important challenges for policy makers seeking to improve small business owners’ access to credit. The solution is far more complicated than telling bankers to lend more or reducing the regulatory constraints that may have caused them to cut back on their lending to small companies. Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing. Neither of those alternatives falls into the category of easy and quick solutions.

Wednesday, December 15, 2010

Did cheap credit and easy lending cause the housing bubble? No!

Research by Edward L. Glaeser and Joshua D. Gottlieb of Harvard University, and Joseph Gyourko of the University of Pennsylvania argues that the housing bubble was not primarily caused by cheap credit and easy lending.

Between 1996 and 2006, real housing prices rose by 53 percent according to the Federal Housing Finance Agency price index. One explanation of this boom is that it was caused by easy credit in the form of low real interest rates, high loan-to-value levels and permissive mortgage approvals. We revisit the standard user cost model of housing prices and conclude that the predicted impact of interest rates on prices is much lower once the model is generalized to include mean-reverting interest rates, mobility, prepayment, elastic housing supply, and credit-constrained home buyers. The modest predicted impact of interest rates on prices is in line with empirical estimates, and it suggests that lower real rates can explain only one-fifth of the rise in prices from 1996 to 2006. We also find no convincing evidence that changes in approval rates or loan-to-value levels can explain the bulk of the changes in house prices, but definitive judgments on those mechanisms cannot be made without better corrections for the endogeneity of borrowers’ decisions to apply for mortgages.
Interest rates do influence house prices, but they cannot provide anything close to a complete explanation of the great housing market gyrations between 1996 and 2010. Over the long 1996-2006 boom, they cannot account for more than one-fifth of the rise in house prices. Their biggest predictive influence is during the 2000-2005 period, when long rates fell by almost 200 basis points. That can account for about 45% of the run-up in home values nationally during that half-decade span. However, if one is going to cherry-pick time periods, it also must be noted that falling real rates during the 2006-2008 price bust simply cannot account for the 10% decline in FHFA indexes those years.

There is no convincing evidence from the data that approval rates or down payment requirements can explain most or all of the movement in house prices either. The aggregate data on these variables show no trend increase in approval rates or trend decrease in down payment requirements during the long boom in prices from 1996-2006. However, the number of applications and actual borrowers did trend up over this period (and fall sharply during the bust), which raises the possibility that the nature of the marginal buyer was changing over time. Carefully controlling for that requires better and different data, so our results need not be the final word on these two credit market traits.

This leaves us in the uncomfortable position of claiming that one plausible explanation for the house price boom and bust, the rise and fall of easy credit, cannot account for the majority of the price changes, without being able to offer a compelling alternative hypothesis. The work of Case and Shiller (2003) suggests that home buyers had wildly unrealistic expectations about future price appreciation during the boom. They report that 83 to 95 percent of purchasers in 2003 thought that prices would rise by an average of around 9 percent per year over the next decade. It is easy to imagine that such exuberance played a significant role in fueling the boom.

Yet, even if Case and Shiller are correct, and over-optimism was critical, this merely pushes the puzzle back a step. Why were buyers so overly optimistic about prices? Why did that optimism show up during the early years of the past decade and why did it show up in some markets but not others? Irrational expectations are clearly not exogenous, so what explains them? This seems like a pressing topic for future research.

Moreover, since we do not understand the process that creates and sustains irrational beliefs, we cannot be confident that a different interest rate policy wouldn’t have stopped the bubble at some earlier stage. It is certainly conceivable that a sharp rise in interest rates in 2004 would have let the air out of the bubble. But this is mere speculation that only highlights the need for further research focusing on the interplay between bubbles, beliefs and credit market conditions.
This is essentially what I've been arguing from the beginning: The bubble was primarily the fault of home buyers who saw real estate as a way to get rich quick. Some fundamental factor in the late 1990s caused the initial rise in home prices, but then psychology (greed) took over and home buyers were willing to pay any price for a home because "real estate is the best investment you can make" and "home prices never go down." (If something is the best investment you can make and the price will never go down, then the price you pay doesn't matter.)

Unlike most people (including politicians and journalists who dare not blame the voters/viewers), I remember the home owners during the bubble who insisted I should buy a home because real estate is such a great investment. I remember them telling me how much their home had gone up in value. I remember them telling me I was throwing money out the window by renting. I remember being kicked out of my home because of a (failed) condo conversion by real estate investors chasing the rising prices. This is the psychology that causes bubbles! Since the collapse of the bubble, however, home buyers cannot be blamed. THEY WERE DECEIVED! THEY WERE CHEATED! Instead, they look for a scapegoat (greedy bankers) to blame for their own greedy decisions. This paper essentially says the banksters ain't to blame.

As for the initial fundamental cause of the rise in home prices, I've been going with the Bernanke explanation of a global savings glut, but this paper seems to throw a monkey wrench into that one.

Friday, December 10, 2010

Four more years of housing stagnation expected

RealtyTrac and Trulia expect continuing housing market stagnation:
The housing market will remain depressed, with record high foreclosure levels, rising mortgage rates and a glut of distressed properties dampening the market for years to come, industry experts predicted on Tuesday.

"We don't see a full market recovery until 2014," said Rick Sharga of RealtyTrac, a foreclosure marketplace and tracking service. He said that he expected more than 3 million homeowners to receive foreclosure notices in 2010, with more than 1 million homes being seized by banks before the end of the year.

Both of those numbers are records and expected to go even higher, as $300 billion in adjustable rate loans reset and foreclosures that had been held up by the robo-signing scandal work through the process. That should make the first quarter of 2011 even uglier than the fourth quarter of 2010, he said. ...

Mortgage rates will start to rise in 2011, further dampening demand and limiting affordability, said Pete Flint, chief executive of, a real estate search and research website. "Nationally, prices will decline between 5 percent and 7 percent, with most of the decline occurring in the first half of next year," he said.

Wednesday, December 08, 2010

CNBC housing debate

In the video, Susan Wachter is misleading. Price-to-rent ratios are out of line, not just by 1890 levels, but also by 1970-1999 levels—basically all of the pre-bubble period. From 2007-2008, prices were falling rapidly until the Federal government stepped in to prop them up.

Hat tip to an anonymous Bubble Meter commenter.

Tuesday, December 07, 2010

Tea Party leader: Renters should have no right to vote

Judson Phillips, the president of Tea Party Nation, on renters' right to vote:
The Founding Fathers originally said they put certain restrictions on who got the right to vote. It wasn’t you were just a citizen and you automatically got to vote. Some of the restrictions, you know, you obviously would not think about today. But one of them was you had to be a property owner. And that makes a lot of sense, because if you’re a property owner you actually have a vested stake in the community. If you’re not a property owner, you know, I’m sorry but property owners have a little bit more of a vested stake in the community than non-property owners do.
And many libertarians think the Tea Party is a pro-liberty movement?! It's not. It's an anti-libertarian, social conservative movement.

Thursday, December 02, 2010

House hunters afraid to buy

From CNNMoney:
Despite some of the best home-buying conditions in years— affordable prices, low interest rates and lots of choices — fear of buying has infected the market.

It has paralyzed house hunters, making them unable to pull the trigger even on attractive deals. Some are worried about making the payments, while others are convinced they'll save even more if they wait.

It's perfectly natural that they should feel that way in the wake of the housing bust, said Lawrence Yun, the chief economist for the National Association of Realtors. "It's like when the stock market is crashing," he said. "People are waiting to see if deals will get better."

In fact, home sales are down by about 25% from last year, which means a lot of people are sitting on the sidelines. And real estate agents are having to get used to the fear of buying trend.
Despite what the real estate cheerleading in the article would leave you to believe, there's still a housing bubble. In much of the U.S., homes are still overvalued. There's good reason not to buy.

One reason mortgage interest rates are so low is because inflation is abnormally low, so real mortgage rates aren't as low as they appear. In fact, we currently have the lowest level of core inflation on record. Here's a graph:

Wednesday, December 01, 2010

Q3 2010 U.S. home prices fell 1.5% year-over-year

According to S&P/Case-Shiller, U.S. house prices fell 1.5% in the third quarter of 2010 compared to a year earlier:
Data through September 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. In September, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down; and only the two composites and five MSAs showed year-over-year gains. While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market.

The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 1.5% decline in the third quarter of 2010 over the third quarter of 2009. In September, the 10-City and 20-City Composites recorded annual returns of +1.6% and +0.6%, respectively. These two indices are reported at a monthly frequency and September was the fourth consecutive month where the annual growth rates moderated from their prior month’s pace, confirming a clear deceleration in home price returns.

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.

Friday, October 29, 2010

African Americans hardest hit by collasping housing bubble

From CNN:
The foreclosure crisis has hit blacks harder than any other group in America and it will be tough for them to regain their footing in the housing market.

Blacks' homeownership rate has plummeted nearly 6 percent to 46.2 percent since its peak in 2004. That's more than twice that of any other racial or ethnic group, as well as the nation's rate as a whole, which fell only 2.3 percent, according to U.S. Census data.

Also, among recent borrowers, nearly 8 percent of blacks have lost their homes to foreclosure, compared to 4.5 percent of whites, according to the Center for Responsible Lending. Latinos, who have also been pummeled by the mortgage meltdown, came in a close second behind blacks in foreclosure losses.

The consequences are devastating. Fewer blacks own their home now than any other racial or ethnic group and that makes it even more difficult for them to achieve financial security and attain wealth.
I'll remind everyone that the attitude of the Federal Reserve during the growing housing bubble was that it was best to just let bubbles grow unimpeded and then mop up the mess afterward. That hasn't worked out too well.

Thursday, October 28, 2010

September 2010 new home sales third lowest on record

New home sales are still scraping bottom:
New home sales edged higher in September, according to government figures reported Wednesday, but the recovery from the all-time lows reached earlier this year remained slow.

Sales of newly built single-family homes rose to an annual rate of 307,000 units in September from 288,000 units the month before, the Commerce Department said. ...

But the modest increase does not give "too much cause for hope," according to Celia Chen, a senior director at Moody's Analytics.

"Sales did rise which is good, but the pace is still very weak," Chen said. "It's still close to a record low. It just doesn't seem that demand is really firming."

The August sales were the third-lowest level since the Commerce Department started tracking new home sales in 1963, trailing only the 282,000 rate reported in May, and 285,000 in July.

Thursday, October 21, 2010

Will foreclosed homeowners get their homes back?

Regarding the recent foreclosure scandal CNN Money says, "Forget it. You're not getting your house back."
Is this the break that millions of people have been hoping for?

Evidence continues to mount that major banks flouted their own foreclosure procedures — and possibly the law — when repossessing homes from owners who fell behind on payments.

And that begs the question: Can owners who were wrongfully evicted take their home back? ...

Experts say that very few homeowners will ever get their houses back. The possible exception: The handful of people who were wrongfully swept up by the mortgage tsunami, despite the fact that they were current on their payments.

But getting a judge to unwind a foreclosure is tough.

"The law imposes a very heavy burden on those seeking to attack final court judgments," says Robert Lawless, a professor at the University of Illinois College of Law.

If a court does rule a foreclosure invalid, either because the lender didn't have the paperwork in order or because the mortgage was not actually in default, a home's title will revert to the original owner, even if the property has since been purchased by a third party. ...

But one thing is clear: If the original homeowner doesn't have the cash to catch up on the mortgage, the lender will restart the foreclosure process and, with the paperwork in order this time, repossess the house.

Tuesday, October 19, 2010

Illinois Tool Works CEO predicts weak 2011 for housing industry

The Illinois Tool Works CEO, whose company makes equipment for housing construction, predicts no housing industry improvement until 2012:
The U.S. housing industry will continue to struggle through 2011 and likely won’t improve significantly until 2012, Illinois Tool Works Inc. Chairman and Chief Executive David Speer predicts.

High rates of mortgage of foreclosures and falling housing prices will continue to provide headwinds for sales of new and existing homes, Mr. Speer says. Moreover, persistently high levels of unemployment will dampen consumers’ interest in residential real estate.

“The consumer is still facing tremendous challenges, certainly in the housing market,” Mr. Speer says.

Mr. Speer’s Glenview, Ill., company operates more than 800 separate manufacturing businesses covering a variety of industrial sectors, including construction, automotive, packaging and food service. About 20% of ITW’s $13.9 billion in sales last year came from products used in real estate construction and remodeling work.

Friday, October 15, 2010

America's outdated land title system

Economist Arnold Kling gives his thoughts on the growing foreclosure scandal:
If [George] Washington were to visit the county office where property records are maintained, he might feel right at home. Often, documents have the same legal format as in the 18th century, and they are maintained in pretty much the same manner.

On the other hand, if Washington were to visit a 21st-century financial firm that deals in mortgage securities, he would be thoroughly bewildered. There he would find computers maintaining records in electronic format that are far more complex than anything that existed in his day. ...

What has emerged in recent weeks as "the foreclosure scandal" represents the collision of this 21st-century computerized, global financial system with an 18th-century legal process for obtaining ownership rights to buildings and land. Indeed, the United States has one of the most backward land-title systems in the industrial world.

If we wanted, we could apply modern technology to the land-title process. We could base property boundaries on satellite photography rather than on surveyor's sketches. We could use precise coordinates for latitude and longitude instead of references to topographical features. We could maintain records in digital format, where they could be accessed on the Internet. ...

Doing so would provide a number of benefits. For instance, we could make property ownership sufficiently secure that we could do away with the wasteful, expensive service known as title insurance. ...

A modern titling system also would reduce the cost to mortgage lenders of complying with the process of recording a title. ...

When foreclosing on a property, the lender must, like any other seller, establish clear rights to the property before selling it. It is in that step — where the lender must produce the proper paperwork to comply with legal standards using antiquated recording methods — that many banks apparently took shortcuts, forged signatures or used documents that were only re-creations of the originals.

Wednesday, October 13, 2010

The former head of Ginnie Mae discusses the recent foreclosure freezes

He also predicts "further declines in the housing prices in this country."

From the CNBC interview:
Although the foreclosure freeze is stabilizing the housing market for the time being, it will trigger further housing price declines two to four quarters out, Joseph Murin, former president of the Government National Mortgage Association [Ginnie Mae] told CNBC on Monday.

"What it will cause is a more eroding of confidence in the American people," he said. "And when the American people aren't confident, they're not going to respond, which means the housing market is going to remain sluggish."

Foreclosure stalling is necessary for institutions to reassess whether they are processing correctly, Murin went on to say.

"There's no fraud involved in this," he said. "It's process inadequacy that's causing the problem. Behind the scenes, we're dealing with technology and experience that's probably a decade old. It's not kept up with the huge push [in mortgage debt]."

Tuesday, October 12, 2010

Off topic

Microsoft just issued it's biggest ever security fix today. If you're a Windows user, make sure Automatic Updates is turned on or do an update yourself.

If you're a Mac or Linux user, you're already secure.

The Google Price Index

For those of you who refuse to trust the U.S. government's economic statistics:
Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.

The mix of goods sold over the internet is different to the mix of goods sold in the wider economy.

The work by Google’s chief economist, Hal Varian, highlights how economic data can be gathered far more rapidly using online sources. The official Consumer Price Index data are collected by hand from shops, and only published monthly with a time lag of several weeks.

At the National Association of Business Economists conference in Denver, Colorado, Mr Varian said that the GPI was a work in progress and Google had not yet decided whether to publish it.

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.
Of course, Google is a big corporation and we know from the Democrats that big corporations can't be trusted. Perhaps we shouldn't trust anyone.

Friday, October 08, 2010

Job market: Mixed results for September 2010

The unemployment rate, at 9.6%, remained unchanged in September. Although it is below its late 2009 peak, it has spent almost all of 2010 (except April) in a range of 9.5-9.7%.

Payrolls continued to get worse in September. Ironically, businesses are actually increasing workers. It is governments that are losing workers. John Maynard Keynes must be rolling over in his grave.

On the bright side, aggregate weekly hours worked is increasing. This suggests that underemployment is declining.

Also on the bright side, the mean duration of unemployment has continued to decline after reaching its all-time peak in June 2010.

Monday, September 27, 2010

The dismal state of the new home market

New building permits are near an all-time low:

New housing starts are near an all-time low:

And new home sales are at rock bottom:

The gray portions of the graphs indicate recessions. As you'll notice, a recovery in new home construction has been an essential part of almost all economic recoveries. ...But we're not getting that this time.

Friday, September 24, 2010

New home sales: Worst August on record

New homes in August sold at the second-slowest monthly pace since 1963. Only May of this year was lower. No August on record was lower than August 2010. Fewer homes sold in August than during any month of the 2007-2009 recession. Historically, home building has been an essential part of economic recoveries.
Sales of new homes had their second-worst month on record in August, signaling that the housing market will remain a drag on the economy.

Last month's new home sales were unchanged from a month earlier at a seasonally adjusted annual sales pace of 288,000, the Commerce Department said Friday. Sales were down by 29 percent from the same month a year earlier.

Normally the building industry powers economic recoveries. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

But housing has been at the center of this downturn and it shows no signs of recovering quickly.

The only time new home sales were slower was in May, when the sales pace was 282,000. That's the worst pace on records dating back to 1963. July's results had been the worst on record, but were adjusted upward.

High unemployment, tight credit and uncertainty about home prices have kept people from buying homes. Government tax credits boosted the market earlier in the year, but those expired in April.

The median sales price in August was $204,700. That was down 1.2 percent from a year earlier and the lowest since December 2003.

Thursday, September 23, 2010

Existing home sales down 19% YoY

Existing home sales for August were up 7.6% month-over-month, but down 19% year-over-year:
Existing home sales bounced back in August after plunging nearly 30% in the previous month.

Sales of previously-owned homes rose 7.6% to a seasonally adjusted annual rate of 4.13 million units last month, the National Association of Realtors reported Thursday. That's up from 3.84 million in July, but down 19% from a year ago. ...

"I would call August's number less toxic — it wasn't pretty but it wasn't the ugliest," said Mark Tepper, managing partner of Strategic Wealth Partners. "We're still down 21.5% from June and sales dropped significantly in July, so the hurdle was just so low that you almost had to beat it." ...

After steadily rising in previous months, the inventory of homes on the market edged down 0.6% in August to 3.98 million units.

But that's enough supply to last 11.6 months. To hit a balance between supply and demand, inventory should only last 4.5 to 6 months, said Tepper.

Such swollen inventory levels will continue to pressure home prices, he cautioned.

The median price of homes sold in August was $178,600, down 1.9% from the previous month and up a slight 0.8% from a year ago, the report showed. About a third of homes sold during the month were in foreclosure. ...

What does this mean for home-buyers and sellers?

"If you're a homebuyer, sell now if you can," said Tepper. "If you're looking to buy, wait a while."

That's because prices are likely to sink another 10% to 25% in the next 18 to 24 months as the economic recovery remains sluggish, said Tepper.

"This whole housing mess is a disaster that's going to last a while," he said.

Tuesday, September 21, 2010

The recession is officially over

The National Bureau of Economic Research is the arbiter of official recession start and end dates. They have determined that June 2009 was the end date for the most recent recession:
The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.
To reiterate: The recession being over doesn't mean the economy is healthy again. It just means that economic output is no longer receding, thus the word "recession". We've still got high unemployment and economic activity is well below its potential. This graph shows the economy started to grow again in Q2, 2009:

Monday, September 20, 2010

Why haven't banks dumped REO's onto the market yet?

The Wall Street Journal examines the expected flood of foreclosures that hasn't (yet) occurred:
For more than a year, housing analysts and investors—some with piles of cash waiting to pounce on distressed markets—have puzzled over a question: Where is the expected flood of bank-owned foreclosures, or REOs?

The number of properties in the foreclosure or delinquency pipeline has grown to record highs, yet volumes of bank-owned properties have fallen steadily over the past year.

What’s happening?
  • Some delinquent loans have “cured,” either naturally or through loan modifications. Even unsuccessful loan modifications have stretched out the amount of time that it takes to move a loan through the foreclosure process.
  • Banks are getting better about approving short sales, where a home is sold for less than the amount owed, even though the process is still far from seamless.
  • And even when a foreclosure happens, more investors are buying the properties from banks at courthouse auctions, which means that the property won’t show up as REO, even though it could ultimately hit the market.
So can we expect more foreclosures to move onto the market? Eventually, yes. ...

But Ivy Zelman, chief executive of Zelman & Associates, notes that “it’s not going to be a flood” ...

A more likely outcome is that foreclosures stay at elevated levels over a longer timeframe. That could stave off another crash in home prices, but it could lead to several years of no home-price appreciation.

Tuesday, September 14, 2010

New record for bank repossessions

CNBC reports that bank repossessions of homes hit a new record in August:
The nation's banks repossessed a record number of homes in August, according to industry sources. RealtyTrac, an online foreclosure sale site, will release its monthly numbers on Thursday, but sources there confirm the number of repossessions will come in just shy of 100,000 for the month.

That is the highest since the site began tracking in 2005. July's repossession number was the second highest on record. The last highest was 93,777 in May of 2010. ...

Yesterday J.P. Morgan Chase cited the "shadow inventory" of foreclosed properties as one of their primary reasons for pushing back their expectations for a housing recovery as far as 2014. No question, a growing supply of repossessed properties will put further downward pressure on home prices, especially given the current 12.5 month supply of existing homes already for sale.

Monday, September 13, 2010

Half of homebuyer tax credit recipients owe money back to gov't

Apparently, half of the first-time homebuyer tax credit recipients are required to pay the money back, but the IRS isn't sure who they are:
Nearly half of all Americans who claimed the first-time homebuyer tax credit on their 2009 tax returns will have to repay the government.

According to a report from the Inspector General for Tax Administration, released to the public Thursday, about 950,000 of the nearly 1.8 million Americans who claimed the tax credit on their 2009 tax returns will have to return the money.

The confusion comes because homebuyers were eligible for two different credits, depending on when their homes were purchased.

Those who bought properties during 2008 were to deduct, dollar for dollar, up to 10% of the home's purchase price or $7,500, whichever was less. The catch: The money was a no-interest loan that had to be repaid within 15 years.

Had they waited to buy until 2009, they could have gotten a much sweeter deal. Congress extended the credit and made it a refund rather than a loan.

Now, the IRS is developing a strategy for separating the 2009 taxpayers who are required to repay the credit from those who are not.

A review by the Inspector General earlier this year found that the IRS could not easily distinguish between home purchases made in 2008 and 2009. That heightened concerns that some claims could be erroneous or even fraudulent, that buyers could, for example, claim their purchase came later than it actually occurred.
Even some people who purchased in 2009 or 2010 will have to repay:
Some who claimed the credit for homes purchased in 2009 and 2010 will also be required to repay it. For instance, repayment is required if the home is sold within 36 months of the date of purchase by the taxpayer claiming the credit, provided there is a gain on the sale.

Friday, September 03, 2010

Cash for Clunkers hurt poor and unemployed drivers

One year later, Cash for Clunkers was still a dumb, economically harmful idea:
IN THE market for a used car? Good luck finding a bargain: The price of “pre-owned’’ vehicles has climbed considerably over the past year. ...

No great insight was needed to realize that Cash for Clunkers would work a hardship on people unable to afford a new car. “All this program did for them,’’ I wrote last August, “was guarantee that used cars will become more expensive. Poorer drivers will be penalized to subsidize new cars for wealthier drivers.’’ ...

When all is said and done, Cash for Clunkers was a deplorable exercise in budgetary wastefulness, asset destruction, environmental irrelevance, and economic idiocy.
The reason Cash for Clunkers pushed up used car prices is because it required that perfectly functional used cars be destroyed, thus decreasing the supply of used cars available to poorer drivers.

Thursday, September 02, 2010

Aid for homeowners may be doing more economic harm than good

Fortune Magazine questions the usefulness of government programs to aid struggling homeowners:
It's easy to see the need for such programs. Theoretically, they keep people in their homes and bring some stability to fragile housing market. But the plethora of programs announced since the housing crisis started have largely been failures, suggesting that any effort to fight foreclosures and boost home sales is going to be a futile one. ...

Not even record low mortgages rates have boosted home sales or enticed a debt-weary public. Of course, this doesn't seem much of a shocker. Experts say home prices — which have fallen by more than 30% since 2006 — are still inflated by 15% to 20% in many areas.

So why try to prop up prices any longer with federal programs? ...

Evidence is mounting that government interference in the housing market might be doing the broader economy more harm than good, at least for the long-term. ...

The few who are buying homes now might likely be overpaying for them. And many latching onto their properties are being convinced it's okay to continue trying to pay off a home they can barely afford — echoes of the homeownership encouragement that led us into the bubble in the first place. ...

Paving the way for a true market correction would not be easy to endure — letting home prices free-fall is a scary thought. But is a gradual decline that could prolong real economic recovery really any easier to stomach?

Tuesday, August 31, 2010

Banks helping more troubled homeowners than Obama

That's the claim made by CNNMoney:
Remember how everyone complained that banks weren't doing enough to help troubled borrowers?

Well ...

Banks have realized that foreclosing on home after home after home may not be in anyone's best interest — least of all their own. So they've ramped up the number of loan modifications they're handing out to their delinquent clients.

Banks are doing nearly twice as many modifications under their own foreclosure prevention initiatives than under the Obama administration's signature Home Affordable Modification Program, known as HAMP.

But before homeowners rejoice, they should take a close look at the terms of their bank modification offers, consumer advocates say. Many may not be as good as HAMP, which lowers monthly payments to 31% of pre-tax income.

Monday, August 30, 2010

Homeownership fetish harmful

Washington Post columnist Robert J. Samuelson writes:
The relentless promotion of homeownership as the embodiment of the American dream has outlived its usefulness.

Historically, the pursuit of homeownership dates to the Great Depression of the 1930s, notes historian A. Scott Henderson of Furman University. In some ways, it's a great success story. In 1940, 44 percent of households owned a home; by 1985, the rate was 64 percent. The size and quality of homes have increased dramatically. Owning a home contributes to neighborhood stability and encourages property improvement.

Unfortunately, we let a sensible goal become a foolish fetish. Not everyone can become a homeowner. Some are too young and footloose; some are too old and dependent; some are too poor or irresponsible. Some don't want a home. ...

Tax breaks for homeowners ... exceeded $120 billion in 2009, reports the Congressional Budget Office. These benefits go heavily to higher-income borrowers, who are encouraged to buy bigger and more expensive homes that generate larger tax savings. This is both unfair and unnecessary. By contrast, government subsidies for lower-income renters are skimpier...

The single-minded promotion of homeownership failed and, paradoxically, undermined the American dream. It contributed to the housing "bubble" and favors housing investment over new industries and technologies.

Wednesday, August 25, 2010

New home sales hit all-time low

New home sales in July hit the lowest number ever recorded:
New home sales unexpectedly fell in July to the lowest level on record as the housing market continued to suffer from the end of the homebuyer tax credit boost.

New home sales dropped 12.4% to a seasonally adjusted annual rate of 276,000 last month, down from a downwardly revised 315,000 in June, the Commerce Department reported Wednesday. Sales year-over-year fell 32.4%.

Commerce started tracking new home sales in 1963.

Tuesday, August 24, 2010

Existing home sales continue their death spiral

More evidence that the housing bubble will keep deflating when government doesn't prop it up:
Existing home sales fell sharply in July, declining for a third straight month, as the effects of the expired homebuyer tax credit continued to add turbulence to the housing market.

The National Association of Realtors reported that existing home sales sank 27.2% last month to a seasonally adjusted annual rate of 3.83 million units, down from the downwardly revised rate of 5.26 million in June. Sales year-over-year were down 25.2%.

Analysts surveyed by were looking for resales in July to fall to an annual rate of 4.72 million units.

The sales pace of all homes — single-family homes, townhomes, condominiums and co-ops — is at the lowest since NAR began tracking the figure in 1999. Sales of single-family homes, which account for a bulk of the transactions, are at the lowest level since May 1995.

Economist Andy Harless asks "What housing bubble?"

It's 2010. Economic events have proven us bubbleheads right. Yet, we still have professional economists arguing there was no housing bubble.

Monday, August 23, 2010

Housing no longer a wealth builder

From The New York Times, via CNBC:
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
The end of housing as a wealth builder is especially true in areas where the bubble has not fully corrected, like Washington, D.C., New York City, and Boston. Nominal prices there will likely remain flat for a long time.

5 economic 'new normals'

Fortune Magazine lists five "'new normals' that really will stick":
  1. Long-term unemployment
  2. Renting over owning
  3. Saving over spending
  4. Staycations over vacations
  5. Higher taxes for 'the rich'
I just got back from violating #4.

Thursday, August 12, 2010

Bits bucket

I'm on summer vacation. I'll be back in about ten days. In the meantime, consider this a bits bucket post. Leave any housing news or thoughts in the comments.

Wednesday, August 11, 2010

Decline of the "ownership society"

The percentage of Americans owning their own home continues to decline:
FOR YEARS, government policy has aimed at driving up the owner-occupied share of residential housing, on the theory that everyone should have a shot at putting down roots and building up wealth. But judging by the latest numbers, that dream is fading. The national homeownership rate fell from 67.2 percent in the first quarter of 2010 to 66.9 percent in the second quarter, according to the Census Bureau. To put it another way, the recession and its accompanying wave of foreclosures have wiped out the past decade's worth of increases in homeownership. And there's more trouble ahead. According to an estimate from J.P. Morgan analysts, for every house already on the market in the United States, there is another one in or near foreclosure. Some industry forecasts suggest that, by 2012, homeownership rates could retreat to levels last seen in 1960.

Monday, August 09, 2010

Fun with trendlines

In the comments from a few days ago, JAC asks:
One question for you. You mention that Shiller's "own graph" suggest home prices are still overvalued. When I look at the graph and then "add a trend line" to "home prices", then home prices are indeed below the trend line now, which suggests they are undervalued, no?
My response to JAC was:
Are you including the bubble period in your trend? If you've got a 110-year period of relatively flat prices (adjusted for inflation), followed by a huge and temporary bubble, of course the trendline will be upward sloping. The bubble distorts the trendline's slope.

With my graphs I measure the pre-bubble trend only, to avoid any distortion. And surprise, surprise! It gives me a slope that closely matches the change in rental prices.
Here is Professor Robert Shiller's graph of housing prices (adjusted for inflation) since 1890. On it, I have drawn two trendlines. Eyeballing the two trendlines, which looks to you like a better measure of normal housing prices, the black trendline or the red trendline?

The black trendline measures housing prices for the entire 1890-2010 period, with 1950 being the midpoint. Notice it has two periods that add significant slope to the line. To the left of the midpoint, there is a roughly 25-year dip in prices from the end of World War I to the end of World War II. To the far right of the midpoint, there is a 10-year housing bubble.

The red trendline only measures housing prices for the post-World War II part of the 20th century, i.e. 1945-1999. I'm guessing that most people will see what they want to see, but to my eyes the red trendline is a better measure of normal. It goes straight through the the graph of the 1890-1917 period, even though that's not data used to draw the red trendline.

Now look at this graph, below. The dark blue line graphs housing prices since 1983. The magenta line graphs owner-equivalent rents since 1983. The two straight black lines are trendlines for housing prices and rents, respectively. It should be obvious which trendline is measuring which data set.

Theoretically, housing prices and rents should rise at roughly the same rate. After all, rent is the revenue that housing generates. Yet, in the graph, the house price trendline is significantly steeper than the rent trendline, because the housing bubble distorts the house price trend.

Now look at this graph below. In this graph, the rent trendline has been removed (although the graph of owner-equivalent rent remains). As a replacement for the rent trendline, I have added a trendline for pre-bubble (1983-1999) house prices. Notice that although the pre-bubble trendline is slightly flatter than the graph of rents, its slope is still much closer to the rent line than the original house price trendline. To me, this verifies that a trendline of pre-bubble housing prices is a better measure of normal than a trendline of all housing prices.

Ultimately, however, the change in rents is a better measure of the long-term house price trend than any trendline you can draw.

Wednesday, August 04, 2010

House prices vs. rents

Nominal home prices vs. nominal rents:

After yesterday's blog post, in which MacroMarkets LLC suggests national home prices are actually undervalued, I decided to post another home price graph on my website. This one compares home prices to owner-equivalent rent inflation (i.e. nominal home prices vs. the nominal amount they could rent for). Like my original housing graph, the price vs. rent graph suggests national home prices are still overvalued.

Also, despite the fact that Robert Shiller is chief economist at MacroMarkets LLC, his own graph available in a spreadsheet at suggests that home prices are still overvalued compared to their historic inflation-adjusted norm.

The owner-equivalent rent index is available at by entering series id CUUR0000SEHC.

Tuesday, August 03, 2010

Are U.S. home prices undervalued?

MacroMarkets LLC has an online tool to compare actual home prices to their pre-bubble trend. In disagreement with my own graph comparing actual home prices to their pre-bubble trend, MacroMarkets suggests that home prices are slightly undervalued nationally.

Although the country as a whole is slightly undervalued according to MacroMarkets—with some cities such as Atlanta, Cleveland, Detroit, and Minneapolis substantially undervalued—two sections of the country are still overvalued: Southern California and the DC-to-Boston megalopolis.

The chief economist for MacroMarkets LLC is Robert Shiller.

Update: In the comments, Boston Bubble makes some good points:
I actually think your graph is better, given that you adjust for inflation before determining the trend whereas MacroMarkets only calculates a trend based on nominal growth. Inflation has varied dramatically over the years and that will necessarily distort any trend calculation based on nominal prices. I see that the MacroMarkets chart doesn't go back far enough to hit the Great Inflation of the 1960s - 1980s, so maybe it's not as big of a deal as it could have been, but that's another reason that I would trust your trend line more, because it goes back further.
I think it makes much more sense to measure the trend after adjusting for inflation. Most of Robert Shiller's research on housing prices looks at prices adjusted for inflation. However, as far as I can tell, the MacroMarkets "Gap Gauge" does not.

Also, my trendline measures the trend from 1970-1999, while MacroMarkets uses a trend period of 1987-1999. Thus, they are only using a 13-year period to tell you what prices should have been over the following decade. I use a three-decade period to tell you what the prices should have been over the following decade.

To MacroMarkets' credit, they use a very slightly upward curving trendline, while the trendline I use is perfectly straight. I originally tried to use a slightly upward curving trendline, but the result Microsoft Excel gave me was nonsensical. I also have a graph (not online) that compares home prices to rents. The rent line looks very similar to my perfectly straight trendline.

Saturday, July 31, 2010

Real GDP grows 2.4% in Q2

This graph shows actual real GDP vs. potential real GDP:

U.S. real gross domestic product increased at a 2.4% annual rate in the second quarter.
The U.S. economy continued to grow during the second quarter, the government reported Friday. But the pace slowed more than economists were expecting, raising concern about growth — or even another recession — in the months ahead.

Gross domestic product, the broadest measure of the nation's economic activity, rose at a 2.4% annual rate during the three months ended June 30, the Commerce Department said.

The sluggish pace was down from the upwardly revised 3.7% growth rate in the first quarter, and missed economists' forecast for a 2.5% increase.

Still, the figure marked the fourth straight quarter of growth and gave credence to some economists' views that the recession that began in December 2007 likely ended at some point in mid-2009. ...

Most troubling to economists — particularly in the months ahead — was a slowdown in consumer spending, which accounts for 70% of economic activity.
The GDP numbers given in the article are actually for real GDP, not nominal GDP. From the BEA:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent. ...

The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, exports, personal consumption expenditures, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending. ...

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 0.9 percent in the second quarter, compared with an increase of 1.6 percent in the first. ...

Real disposable personal income increased 4.4 percent, compared with an increase of 1.7 percent.
A side note: I have trouble getting from the definition of "sputter" that exists in the dictionary to the way the word is frequently used by headline writers.

Wednesday, July 28, 2010

More Americans are chosing to rent

The U.S. home ownership rate continues to fall:
The number of Americans who own homes fell in the second quarter of the year to the lowest level since 1999, said a government survey released Tuesday.

The Census Bureau said the home ownership rate fell to 66.9% in the second quarter of 2010, down half a percentage point from the previous year. The home ownership rate was 67.1% in the first quarter of the year.
And renting is becoming more popular:
With homeowner markets stressed, it appears renting has become more appealing than owning. Between 2004 and 2009, the number of renter households rose nearly 10% or by 3.4 million, according to a 2010 study of the Joint Center for Housing Studies of Harvard University. The rise was most dramatic in the Midwest, where growth of renter households swung upwards by 15.4% between 2004 to 2009. The South added the biggest number of renter households with a 1.2 million increase from 2004 to 2009, the study states.

All that has made Capitol Hill rethink its definition of the American Dream. As recently as the Clinton and George W. Bush administrations, the mantra of homeownership was almost synonymous to civic duty, but top policymakers now say that homeownership isn't necessarily good for everyone.

In May, U.S. Housing and Urban Development Secretary Shaun Donovan testified before a House committee that the financial crisis proved the need for a better balance between ownership and rental housing. And HUD senior official Raphael Bostic last week told the Washington Post: "In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go," Bostic said. "You're not going to hear us say that." ...

"The government shouldn't blindly encourage homeownership," says Joe Gyourko, real estate finance professor at University of Pennsylvania's Wharton School. "If the government does anything the government should encourage people to make the right decision."

Home prices up in May

The S&P/Case-Shiller index was up in May:
Home prices rose slightly in May compared with a month earlier, appearing to have stablized at the lower levels that followed the end of the residential real estate bubble, according to the S&P/Case-Shiller Home Price Index of 20 major housing markets released Tuesday.

Prices were up 1.3% from April, and 4.6% from 12 months earlier.

The price rise might have reflected one of the last gasps of the government's incentive program, which paid tax refunds of as much as $8,000 to homebuyers if they signed a sales contract before May 1.

"It does look like the market was boosted by the tax credit," said Robert Dye, senior economist for PNC Financial Services. "It seems to have pulled some of the demand forward."