Wednesday, March 30, 2011

S&P/Case-Shiller housing indices keep falling

From the press-release:
Data through January 2011, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show further deceleration in the annual growth rates in 13 of the 20 MSAs and the 10- and 20-City Composites compared to the December 2010 report. The 10-City Composite was down 2.0% and the 20-City Composite fell 3.1% from their January 2010 levels. San Diego and Washington D.C. were the only two markets to record positive year-over-year changes. However, San Diego was up a scant 0.1%, while Washington DC posted a healthier +3.6% annual growth rate. The same 11 cities that had posted recent index level lows in December 2010, posted new lows in January. ...

“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. “With this month’s data, we find the same 11 MSAs posting new recent index lows. The 10-City and 20-City Composites continue to decline month-over-month and have posted monthly declines for six consecutive months now.

“These data confirm what we have seen with recent housing starts and sales reports. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing.

Monday, March 28, 2011

Shadow Stats debunked, part I

As a follow-up to last week's post on the subject, here are U.S. housing prices discounted by the "untrustworthy" U.S. government measure of inflation (the CPI-U-Research Series, to be specific). Note the fairly obvious housing bubble that begins to form in 1998.

I have reproduced Shadow Stats' proprietary annual inflation numbers. Here's what historical housing prices look like when discounted by the Shadow Stats SGS Alternate (1980) measure of inflation:

When housing prices outpace inflation, real (i.e. inflation-adjusted) home prices rise. When inflation outpaces housing prices, real home prices fall. Shadow Stats claims some pretty high inflation numbers, so it's hard for housing prices to keep up—even in good times. That's why we see the long-term decline in real housing prices shown in the second graph.

Now you can believe there was a housing bubble, or you can believe that Shadow Stats is trustworthy, but if you believe both you're delusional.

Update: For more on this topic, see Shadow Stats debunked, part II.

Wednesday, March 23, 2011

The top car makers

The April 2011 issue of Consumer Reports ranks the big car makers based on overall quality. Here's the ranking, from best to worst:
  1. Honda (Japan)
  2. Subaru (Japan)
  3. Toyota (Japan)
  4. Volvo (Sweden)
  5. Ford (USA)
  6. Hyundai (South Korea)
  7. Mazda (Japan)
  8. Nissan (Japan)
  9. Volkswagen (Germany)
  10. Mercedes-Benz (Germany)
  11. BMW (Germany)
  12. General Motors (USA)
  13. Chrysler (USA)
Some interesting observations from the list. First, East Asian (Japanese and Korean) automakers continue to do best as they have for decades. Second, if you want to buy American, buy a Ford. Third, with the exception of Ford and Volvo, American and European cars kinda suck—even the pricey ones.

Tuesday, March 22, 2011

Yes, the minimum wage causes unemployment

Some math from the Political Calculations blog:
In terms of jobs lost, that means that 2,234,383 of the jobs lost in the U.S. economy since 2006 have been jobs that were directly impacted by the series of minimum wage increases that were mandated by the federal government in 2007, 2008 and 2009.

Interestingly, the average number of employed members of the civilian labor force in 2006 was 144,427,000. In 2010, the average number of employed members of the civilian labor force in the U.S. was 5,363,000 less, standing at 139,064,000.

So, in percentage terms of the change in total employment level from 2006 to 2010, jobs affected by the federal minimum wage hikes of 2007, 2008 and 2009 account for 41.8% of the total reduction in jobs seen since 2006.

Monday, March 21, 2011

There never was a housing bubble!

For five years, I have been trying to publicly warn people about the housing bubble. Unfortunately, I was wrong all along. There never was a housing bubble. I apologize for the error.

You might think I'm being sarcastic, but I'm not. You see, the belief in a housing bubble rests on housing prices substantially outpacing inflation. If housing prices don't outpace inflation, there can be no bubble. I foolishly assumed that I could trust the inflation numbers published by the U.S. Bureau of Labor Statistics. I have been informed that doing so is pure ignorance.

I admit was wrong. The army of economists crunching the inflation numbers at the BLS are just tools of a corrupt and wicked government. The true inflation numbers come from a guy with no graduate degree in economics who is chief economist at the Shadow Stats website. He sells the true numbers for $175 per year. You know he's not a snake oil salesman or a con artist because he tells you what you already believe. Con artists would never do that. This guy says the government is under-reporting the real inflation numbers. The real inflation numbers are much higher, and have been for decades.

If the true inflation numbers are much higher, then inflation-adjusted housing prices must therefore be much lower. It's a simple rule: higher inflation = lower inflation-adjusted housing prices = much smaller or non-existent housing bubble.

For example, in 2001 when I first spotted what I thought was a housing bubble (silly me), nominal home prices had increased about 8.5% from the year before. But, according to Shadow Stats, inflation was 9.1%. Real home prices actually fell 0.6% that year! What a fool I was for thinking housing prices were rising too fast. They were actually falling!

If the Shadow Stats inflation numbers are right, then home prices must now be deeply undervalued. I say buy, buy, buy!

Friday, March 18, 2011

Almost 1 in 5 Florida homes are empty

It looks like Florida won't have a housing recovery any time soon:
On Thursday, the Census Bureau revealed that 18% — or 1.6 million — of the Sunshine State's homes are sitting vacant. That's a rise of more than 63% over the past 10 years.

Having this amount of oversupply on the market will keep home prices depressed and slow any recovery.

During the housing boom, Florida was among the hottest real estate markets in the nation. Homes were snapped up by the state's growing population as well as hordes of investors confident that prices would continue to soar.
Meanwhile, the number of real estate licenses issued in Florida fell by 75% since 2005:
In the past six years, real estate licenses issued in Florida have fallen dramatically, from almost 47,000 in 2005 to 11,700 in 2010, according to the Florida Department of Business & Professional Regulation.

Zillow ZHVI vs S&P/Case-Shiller HPI

Here is a comparison of the Zillow Home Value Index vs. the S&P/Case-Shiller National Home Price Index since February 1996. Zillow is blue; Case-Shiller is red.

The S&P/Case-Shiller index is a constant-quality index. Zillow's ZHVI is not. In order to compare apples to apples, I had to convert the ZHVI into a constant-quality index. I did so by graphing the ZHVI value per square foot. This way, the index is not distorted by changing home sizes.

Click the image to see a full-size version.

United States Home Values
In this graph, I think the ZHVI does a better job of showing where prices are headed.

Why the discrepancy between Zillow and Case-Shiller? I think the Case-Shiller index is distorted by foreclosures and potential home sellers keeping their homes off the market. The ZHVI ignores foreclosures. A given home is worth a lower sales price in foreclosure than in a regular sale, because the buyer takes a greater risk in a foreclosure sale and because the seller is a motivated seller. This means a foreclosure sales price is not a good estimate of a home's true value. The ZHVI also estimates home values not sales prices. This way, the index is not distorted by people who would like to sell their home but choose not to because of the declining market.

My U.S. housing bubble graphs use Freddie Mac's CMHPI for the 1970-1974 period, the FHFA HPI for the 1975-1986 period, and the S&P/Case-Shiller national HPI from 1987 to present. I am considering replacing the 1996-present period with the ZHVI. The goal is to use the most accurate data available for any given period.

Note: The numbers on the graph's y-axis are just index values, not dollar values.

Thursday, March 17, 2011

Presidential Job Creation

I ran across this old blog post about presidential job creation by Paul Krugman and I thought it was time for an update. We all know that politicians are the ones who create jobs in America, right? Right?!

Well, here is a graph of job creation under four presidential administrations (with Reagan/Bush counted as one to make the graph easier to read).

Click on the graph to see a full-sized version.

Obama - solid blue
Bush, Jr. - solid red
Clinton - speckled blue
Reagan/Bush - speckled red

It's a good thing Barack Obama is saving jobs, because he sure isn't creating them!

In all seriousness, Americans drastically overestimate the influence presidents have on the economy. However, people who are inclined to view everything through a political lens will mistakenly think this graph has actual meaning.

Wednesday, March 16, 2011

The left has been consistently wrong on foreclosures

The Irvine Housing Blog gets political:
The political left has consistently been wrong on the foreclosure issue. There is a populist issue for the left to embrace: affordability. Instead, they are choosing to pander to distressed homeowners. The robo-signer scandal only gained traction because the political left kept pandering to the false belief that people were wrongly foreclosed upon. ...

Responsible homeowners are not losing their homes. And while we are all shedding tears for unemployed homeowners, what about unemployed renters? ... If we are going to subsidize loan owners with squatting privileges, why don't we do the same for renters? Where is the renter's Bill of Rights (and free handouts)? In my opinion, the political left would be wiser to pander to renters and side with affordability advocates, traditional supporters of the left.
I think the left's pandering to distressed homeowners comes from its innate tendency to view people as victims.

Tuesday, March 15, 2011

The housing bubble and the trade deficit

Many people don't realize that the housing bubble was actually an international phenomenon. Many countries around the world experienced rapidly rising home prices at the same time as the U.S.

The graph below from VoxEU shows the correlation between home price appreciation and current account deficits/surpluses during the bubble. You can think of current account deficits/surpluses as essentially trade deficits/surpluses. Here's the definition from Wikipedia:
The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).
This graph shows that countries with current account deficits tended to have rapid home price appreciation. Countries with current account surpluses tended to have slower home price appreciation.

Why does this matter? Well, the opposite of the current account is the capital account, which is essentially incoming foreign investment. The current account minus the capital account should add up to zero. This graph supports Ben Bernanke's hypothesis that the housing bubble was caused in large part by a global savings glut. Massive savings in China and oil producing countries flowed to the West in the form of financial investment. This financial investment encouraged mortgage lending, which then pushed up real estate prices.

The VoxEU article sums up its analysis as follows:
These results suggest that persistent capital inflows, coupled with securitisation, played a significant role in the housing booms observed in some countries in the run-up to the financial crisis.

Monday, March 14, 2011

Washington, DC metro area home values

Here's a graph of nominal single-family home values from Zillow showing that, despite what you may have heard elsewhere, home values in the Washington, DC metro area are indeed falling again.

Saturday, March 12, 2011

Free housing in London

Been foreclosed? Need a home? I know where you can live for a short while:

Friday, March 11, 2011

Home prices would have to drop another 15%

Comparing home prices with income, real estate is still overvalued:
On a national level, Shiller and other economists compare home price changes with income growth over the years. Before the bust, home prices had been outpacing earnings since the late 1990s.

Just to get that back to a normal ratio — which we last saw in 1998 — home prices would have to drop another 15%, according to Anthony Sanders, a director of Real Estate Entrepreneurship at George Mason University.

"Even after the bubble burst, the ratio of income to home prices is still way too high," he said.
Comparing home prices with rents also says home prices need to fall more.

Thursday, March 10, 2011

Fannie and Freddie borrow from the government to pay the government

Fannie Mae and Freddie Mac owe 10% annual dividends to the government. They don't earn enough to pay those dividends. The solution? Borrow from the government!
For the first time since the financial crisis, Fannie Mae and Freddie Mac are showing glimmers of profitability. But the two mortgage behemoths still ask the Treasury Department every quarter for billions of dollars in cash, most of it going right back out the door to pay dividends to the same U.S. agency.

The requirement that both companies pay a 10% dividend on preferred shares—which the U.S. government receives for its infusions after taking over Fannie and Freddie in 2008—costs them about $15 billion a year at the current rate. In the last two quarters, the firms have paid $7.5 billion in total dividend payments, while receiving injections of $5.7 billion to help keep them in business.

The dividends could force Fannie Mae and Freddie Mac to keep asking the Treasury Department for more money even after the companies get back into the black, helped by lower losses on mortgages and profits from newer loans. U.S. officials have said those payments are an appropriate way to repay taxpayers.
What a great way to "repay taxpayers". Fannie and Freddie really should be shut down. Thoughts?

Regulators pushing for 20% down payments

It looks like regulators want to put a stronger emphasis on 20% down payments. This is a good thing for the financial system.
Banking regulators are pushing for mortgage-lending rules that require homeowners to make minimum 20% down payments on loans classified as lower-risk, according to people familiar with the matter.

The proposal is being floated as a way to rewrite the rules for mortgage lending to prevent a rerun of the housing bubble and financial crisis that resulted from years of easy credit. The Dodd-Frank financial overhaul law enacted last year enabled regulators to define a so-called gold-standard residential mortgage that would be exempt from costly new rules.

At least three agencies—the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—back a proposal to require home buyers to put down at least 20% of the sales price in order to obtain one of these "qualified residential mortgages." One proposal would also require borrowers to maintain a 75% loan-to-value ratio for refinances, and a 70% loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.

Mortgage-finance giants Fannie Mae and Freddie Mac would also be exempt from the rules while they remain in conservatorship, according to these people. The U.S. took over the firms in 2008, and the Obama administration has proposed eventually winding them down.

The behind-the-scenes debate over the proposal could have far-reaching implications for how Americans finance loans, because it addresses how much equity new borrowers should have in their homes.
Having different rules for Fannie and Freddie creates a massive loophole in this proposal. It means banks would be protected during a housing downturn, but taxpayers wouldn't.

Wednesday, March 9, 2011

NATO helicopters slaughtered innocent children in Afghanistan

This is a week old, but it's the first time I read about it in detail:
Nine boys collecting firewood to heat their homes in the eastern Afghanistan mountains were killed by NATO helicopter gunners who mistook them for insurgents, according to a statement on Wednesday by NATO, which apologized for the mistake.

The boys, who were 9 to 15 years old, were attacked on Tuesday in what amounted to one of the war’s worst cases of mistaken killings by foreign-led forces. The victims included two sets of brothers. A 10th boy survived. ...

“As soon as we heard about the attack on the village’s children, all the village men rushed to the mountains to find out what really happened,” said Ashabuddin, a shopkeeper from Manogai, a nearby village, whose nephew Khalid was among those killed.

“Finally we found the dead bodies. Some of the dead bodies were really badly chopped up by the rockets,” he said. “The head of a child was missing. Others were missing limbs. We tried to find the body pieces and put them together.” ...

President Hamid Karzai, who was in London for an official visit, condemned the attack “in the strongest terms possible.” ...

More than 200 people gathered in Nanglam on Wednesday to protest the boys’ deaths, witnesses said. Waving white flags, they shouted “Death, death to America!” and “Death to Obama and his colleagues and associates!”
Shooting innocent children—what a great way to "win the hearts and minds" of the Afghan people.

23% of mortgaged homes are underwater

According to CoreLogic, the number of underwater mortgages is rising again:
More homeowners fell underwater at the end of last year as home prices continued to drop in markets across the country.

CoreLogic reports today that 23.1% of residential properties with a mortgage were underwater, or were worth less than the amount owed, at the end of the fourth quarter. That’s up from 22.5% in the third quarter. That represented a rise from 10.8 million to 11.1 million borrowers underwater from the third to fourth quarters.

The report underscores one of the biggest risks facing the U.S. economy as home prices resume their decline: More homeowners risk being trapped in homes that they can’t easily sell if they want to move for jobs or if they run into trouble making their loan payments. These borrowers will be a drag on the “trade up” part of the housing market, leaving sales more dependent on first-time buyers and investors.

“Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish,” Mark Fleming, chief economist with CoreLogic, said in a statement.

Thursday, March 3, 2011

Economic moats

In this video, Morningstar's Pat Dorsey discusses the an important concept in stock investing: long-term competitive advantages.

Wednesday, March 2, 2011

Warren Buffett's stocks on sale

Warren Buffett—the greatest investor alive—has a simple investing strategy: buy low and hold forever. He prefers companies with long-term competitive advantages. He doesn't time the market. He just buys when the stocks look like a bargain.

A potentially successful investing strategy, then, would be to buy the stocks he owns when they sell near or below his purchase price. As of late February 2011, here are stocks that meet that criteria:

Tuesday, March 1, 2011

The fear over inflation is stupid

Right now we hear lots of worries in the financial press about high inflation. We've heard these worries throughout the financial crisis, which is stupid because inflation barely even exists. This graph shows that inflation is below the Fed's target rate of 2.0-2.5%.

The red line shows core PCE inflation, the measure of inflation tracked by the Fed due to its relatively low volatility. The blue line shows the GDP Deflator, the best measure of inflation affected by monetary policy. Is inflation currently something to worry about? Not by a long shot!