24-Jun-10 News -- May new home sales plunge

[John]

24-Jun-10 News -- May new home sales plunge to lowest level on record

** 24-Jun-10 News -- May new home sales plunge to lowest level on record
** http://www.generationaldynamics.com/cgi ... 24#e100624



Contents:
"May new home sales plunge to lowest level on record"
"Home sales have MUCH farther to fall"
"Here's something to cheer you up"
"Additional links"
PKK may have taken advantage of Gaza flotilla incident
Fed issues negative market report
Chimp colonies go to war with each other to gain territory
Status of relief wells in Gulf oil spill
China's younger officials demand older officials retirement
Pacific countries are patrolling the South China Sea in submarines
Landon Donovan with World Cup soccer game for America against Algeria
World Cup defeats for France and Algeria stir accusations of racism
Thailand's PM reneges on his promise to compromise with protestors

[vincecate]

Here's another angle. We keep hearing that the housing bubble began in 2003, and was caused by low interest rates set by Alan Greenspan's Fed. Well, the Fed funding rate is now close to zero, and mortgage rates are the lowest since 1953. If low interest rates cause a housing bubble, then how come there's no real estate bubble today?

There is a flaw in that logic.

Some people claim that the Tulip Mania of 1637 was triggered/caused by the Dutch changing futures contracts into options contracts as described in Wikipedia:

http://en.wikipedia.org/wiki/Tulip_Mania#Legal_changes

If the new law was still in effect the next year and there was not a new Tulip Mania would you claim that disprove this theory?

Making the same bubble a second time is nearly impossible, even using the same bubble stimulus. Low interest rates, home interest being tax deductible, and having housing profits be tax free can get people to bid up housing prices while no one remembers a time that housing prices went down (even Bernanke who studied the depression). However, the same stimulus does not work when everyone can remember a time when prices went down.

This is a very generational dynamics sort of change in thinking. It is sort of like how after a crisis war you don't get a second crisis war even given the same type of problems.

See Bernanke (expert on The Depression when house prices went down) say there has never been a time housing prices went down on a national basis:
http://www.youtube.com/watch?v=INmqvibv4UU

[OLD1953]

I have to wonder if the housing starts should be graphed as a flat line average or an adjusted average normalized for population. Logic would say we'll average more housing starts if the house buying age group of the population is larger and fewer if that population is smaller.

[The Grey Badger]

Don't forget the Recession-Era custom of unemployed Millie children moving in with their parents, and Xer or Boomer children moving back in with or taking in *their* parents in order to look after them. In some cases the parents have both the kids and the elders living with them. I rather think this will continue as long as the kids can't get work and the elders start to fail.

[John]

There's no flaw in the logic.

If low interest rates caused the real estate bubble in 2003, then even
lower interest rates would have to cause a new real estate bubble
today.

If you're saying that there are other factors today that make the low
interest rates irrelevant, so that low interest rates are not causing
a new real estate bubble, then that's fine.

But it also means that low interest rates were almost certainly
irrelevant in 2003, and other factors caused the real estate bubble at
that time.

You can't say that A causes B just because A occur at roughly the same
time. (In fact, in this case B occurred before A, so A could not
possibly have caused B.)

John

[at99sy]

There's no flaw in the logic.

If you're saying that there are other factors today that make the low
interest rates irrelevant, so that low interest rates are not causing
a new real estate bubble, then that's fine.

But it also means that low interest rates were almost certainly
irrelevant in 2003, and other factors caused the real estate bubble at
that time.

John

I think the major factors that are missing right now are:
1) Potential for quick and substantial profits (flipping)
2) Easy financing.
3) Willingness to commit risk to achieve #1.
4) Full and confident employment.
5) Confidence that #1,2,3,4 will continue unabated.

just my observations.

[Guest]

"In order to maintain the same average, housing prices have to be below average for roughly the same period of time, 13 years, and by roughly the same amount."

You mean new home sales, not housing prices. That's what is on the graph.

[JR]

The horizontal blue line is the long-term average number of new home sales. (This should actually be a gently rising curve, but to compensate I've made it a straight line a bit higher than the actual average.)

Yes, it should be a gently rising curve.

I have to wonder if the housing starts should be graphed as a flat line average or an adjusted average normalized for population.

It should be per capita or similar, but isn't. As a result, the graph overstates the necessary correction.

You mean new home sales, not housing prices. That's what is on the graph.

Good point.

[jldavid47]

"If low interest rates cause a housing bubble, then how come there's no real estate bubble today?"

This is an excellent question. There is no real estate bubble today because credit is not as readily available (nor as highly demanded) as it was in 2003, or even 1995. The level of liquidity coupled with social attitudes toward debt and a bullish/bearish herd mentality determine credit availability. Credit availability is not determined by the level of interest rates. Liquidity is lower today than it was 5 years ago, but so is the demand for credit. This is just history repeating itself. A buoyant social mood begets large masses of people who think taking on large amounts of debt (because, of course, they think they will always be able to service it) and also begets loose standards from lenders (after all, the collateral will only go up in value, right?). As the liquidity-driven credit bubble bursts, borrowers realize that they may not be able to service unlimited debt and lenders realize that collateral can go down as well as up. Thus, you can have the same supply/demand equilibrium for credit (interest rates) yet have a completely different environment for the underlying collateral (real estate in this case). Interest rates are not the driver. They are just an indication of the supply/demand balance. In fact, if low interest rates drove bubbles or even growth, why has Japan been, effectively, in recession for 20 years?

Bob Prechter outline this kind of argument beautifully in "Conquer the Crash" - highly recommended reading for anyone who wants to understand the nature of bubbles and crashes.

[mannfm11]

John, believe it or not, I was one of the first to bring up when the housing bubble started. I can probably find the post in my archives, back from 2007. I was using that long term chart on Calculated Risk to bring up that housing starts and new home sales were not down in 2007, but at historically high levels. The arguments I got back were there is more population today. But, there has been few times in history of the US that there was more demand for new SFR units than the late 1970's to early 1980's when the huge boomer generation was coming of age and lifestyles in general were changing. Household formation has slowed significantly since then.

I filed away a lot of data out of those charts and other material I dug up out of government websites. I know that the 1977 high of 819K units sold for new homes stood as a record until 1997 and the only year close was the 817K in 1978. Those were wild speculative years, as I was in the residential business during those summers. You could list a house and sell it in 10 days or less. In fact, if you had a customer, you had to drive the neighborhoods to watch for signs or the homes would be gone. Prices were marked up ever few weeks.

The other record that stood was the roughly 4 million existing home sales. I can understand this figure would grow because there are more units today than in the late 1970's, but all the same those bubble years stood for roughly 20 years. Existing sales fell to 2 million in the high interest recession of 1981 and generally fluctuated between 3 and 4 million annually. What is left out of the news is we still are in a bubble, as existing sales never dropped to 4 million, much less below that figure, even though new home sales collapsed. We are about to see bloodshed in housing like few have imagined and save going back to government guaranteed subprime where a pulse gets you qualified, regardless of credit or income, they won't stop it. The only other choice would be to make risky loans to speculators, moving the excess on the market forward, as has already been done.

Going back to where I started, I have been widely read as a poster and much of what I have posted has been copied and pasted around the net for close to 10 years. On Prudent Bear, I usually had an audience and some guy kept debating me about what was going to be the bottom in home sales. I looked at that 401K bottom in 1981 and figured that would be a bottom, but that we wouldn't be out of the bubble until they fell below 800K minimum. It was easy to see when the bubble started, because the old record stood until 1997. 1996, 1997 is the marking of all the bubbles, stocks and housing. There was still enough of a counterbalance in interest rates to stop housing though. Much of the source of both bubbles was the decline in long term rates that came with the start of the 1990's. I spent the entire decade of the 1980's around or in the residential business, mostly as a mortgage guy. The DFW market collapsed in the mid to late 1980's and we had a wave of foreclosures roughly equal to any we have had this time so far. Rates fell from 11% in 1990 to around 7% in 1993. The entire world refinanced or moved up during that time and that created a massive amount of money on the equity in houses and raised consumer spending power. It also made homes more affordable. Much of the 1975 to 1984 trend had been restored by 1997. Mortgage rates were still over 7% for most of the late 1990's and the move down in 2001 moved affordability to a new high. The rest was history, as the trend followers moved from stock to real estate and the high cash balances chased the returns. Unlike stocks, you could get high leverage on real estate and the subprime stuff allowed for the purchase of new homes, not for rental or holding, but for flipping. Thus one didn't need any real money, nor did they ever really need to close a loan if they could assign the contract to another.

The reason interest rates don't have the same effect is we really aren't at a new low. You might have forgotten about the pay option ARM's and other things. But the real reason is the very chart you posted shows an excess fupply of about 7 million homes sold over the 10 years between 1997 and 2007. The curve is no longer being shifted against tight supply, but against loose supply. The same happened in DFW when the town was overbuilt in 1983-1984 and never recovered for the rest of the decade. There are more problems, as the demand was created with financing no longer available and the trend has been broken. To boot, the move in/move up chain has also been broken as the years of lost appreciation have removed the automatic downpayment from the old house for the new on. Also, real estate was the collateral for all the good cash that was added to the system. This collateral is gone and won't come back any time soon. This is why Bernanke is pushing on a string. Also, Bernanke is confusing liquidity with solvency. We are about to see a depression from hell and they better get busy finding a way to settle all the bad debt out there or we might see the end of the modern world. Bernanke and Obama should have taken the time they bought to figure out a haircut/bankruptcy plan. More debt isn't going to fix this as it has gone from being inflationary to adding to the future deflation.