Posted by Jonathan J. Miller -Monday, October 31, 2005, 10:09 PM
The National Association of Realtors released a survey that said that public opinion about Realtors set a record high for the third year in a row [RISMedia].
Those surveyed were asked about the effectiveness of their Realtors and 59% found them to be effective. The NAR has been touting this as part of their 8 year public awareness campaign.
Being a Realtor can be a tough job. Is it just me or is 59% on the low side? I am not clear why this figure is being touted so much.
Posted by Jonathan J. Miller -Sunday, October 30, 2005, 9:40 PM
In Bill Gross’ PIMCO Monthy Blog “Investment Outlook” PIMCO he comments that:
…because the U.S. economy has evolved into a
highly levered finance-based economy, it stands to
our reason that this modern day version is more
sensitive to changes in interest rates than those of
As an economy, we are more sensitive to changes in interest rates then in prior rate tightening cycles. “By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle.”
In other words, the Fed’s strategy of raising short terms rates to reign in the economy to stem inflation may be coming to an end. If you agree with Bill Gross’ assessment, then upon further reflection its not clear whether this is a good thing for the housing market. It suggests a weaker economy which may help temper mortgage rate increases, which housing may be especially vulnerable to, but it also may mean that a weaker economy will not be able to keep pace with rising housing prices because of weaker employment and other factors. The result? A more tepid housing market characterized by flat or modest appreciation and a coooling off of the rate of new development.
I had to get a Halloween reference into this post.
Posted by Jonathan J. Miller -Sunday, October 30, 2005, 9:00 PM
The US Census Bureau clarifies the difference between new home sales and existing home sales. “New home sales and existing home sales are released each month at about the same time. Many comparisons are made between the two series, but before doing any comparisons, one must be aware of some definition differences that affect the timing of the statistics. “
New Home Sales
“The Census Bureau collects new home sales based upon the following definition: “A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit.” The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction. “
Existing Home Sales
“Existing home sales data are provided by the National Association of RealtorsÂ®. According to them, “the majority of transactions are reported when the sales contract is closed.” Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior. “
Given the difference, the indicated trends in New Home Sales would probably lead Existing Home Sales by 30 to 60 days, the length of time it takes for an existing home sale to close from point of contract.
However, New Home Sales are more volatile from the standpoint that it is a much smaller data set as they represent something like 10% the number of Existing Home Sales.
Posted by Jonathan J. Miller -Sunday, October 30, 2005, 8:14 PM
The spike in gasoline prices occurred before the wrath of hurricanes in late summer. After adjusting for inflation, rising gasoline prices pre-hurricane were still relatively low in historical terms and perhaps thats why inflation had remained low. At that time, bond investors viewed the sharp increase as more likely to provide a drag on the economy rather than stir up inflation concerns.
There has been a lot of speculation that high gasoline prices are stimulating inflation. However, for perspective, gasoline prices today adjusted for inflation are about the same as the 1950’s but real per capita income was less than half as much today [Boston Globe]. In other words, gasoline prices are not high relative to historic norms.
However, that can be a bit simplistic since the economic engine is built around lower price levels than we are currently experiencing. The persistence of high gasoline prices may be one of the primary inflation catalysts as as core inflation (excluding food and energy) is virtually flat. To make matters worse, oil companies are now posting record profits [Marketwatch] which is of particular concern to many since the gasoline prices have risen so much in such a short period of time.
Inflationary pressures are now beginning to influence a modest rise in mortgage rates.
Gregg says oil company profits should be taxed [Boston Globe]
Katrina & Oil Prices: The Perfect Storm [Matrix]
Posted by Jonathan J. Miller -Sunday, October 30, 2005, 7:04 PM
The Fed Chair nominee doesn’t think there is a looming bust in the housing bubble [Washington Post]
“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.”
This is likely to be one of the key topics of the senate hearings for his nomination.
He has maintained the the “cooling” of the housing market won’t hurt the economy. This is an interesting position since housing has been so closely tied to current consumer activity, which accounts for 2/3 of the economy.
If housing markets fall, Bernanke appears to be unwilling to use short term rates as a tool to prop them back up. The overall economy takes precedence over individual homeowners. Of course, with Greenspan, there has recently been a disconnect between mortgage rates and short term rates so it is not clear whether this subtle change in policy will result in any difference in the housing market.
Bernanke sees no housing bubble in U.S. [UPI]
Ben Bernanke has a tough act to follow as Fed chairman [Newsweek]
So long Alan and ‘measured?’[CNN]
What if the Fed Chief Speaks Plainly? [NYT]
Posted by Jonathan J. Miller -Thursday, October 27, 2005, 9:10 AM
Thomas Schelling, professor emeritus at the University of Maryland won a Nobel prize in economics whose work on the relationship between competition and and social welfare was highly regarded [NYT]. He contended that we can learn more about what people value by looking at the rules that result rather than the choices made by each individual. This is contrary to Adam Smith’s theory of the invisible hand that says that self interest promotes the greatest good of all.
Using a hockey example, a player may increase their odds of winning by playing without a helmet because of better visibility but increases their odds of injury. However, if everyone follows suit, then all players increase their odds of injury and the advantage of winning evaporates. This is why helmet rules come into play. Similar comparisons can be made to restrictions on Nascar race cars, labor wage gains, working longer hours for a promotion, etc.
“As in hockey, many of the most important outcomes in life depend on relative position. Because a “good” school is an inescapably relative concept, each family’s quest to provide a better education for its children has much in common with the athlete’s quest for advantage. Families try to buy houses in the best school districts they can afford, yet when all families spend more, the result is merely to bid up the prices of those houses. Half of all children will still attend bottom-half schools.”
In other words, if everyone takes the same action, the bar is simply raised higher making it more difficult for everyone or negating the perceived advantage of the original action.
Webmaster’s Note: The author of this NY Times article is Robert H. Frank , an economics professor at Cornell University and co-author of “Principles of Microeconomics” with Ben S. Bernanke, recently nominated to replace Alan Geenspan as Chairman of the Federal Reserve. This is one of the best articles on economics I have read in a long time.
Posted by Jonathan J. Miller -Tuesday, October 25, 2005, 10:13 PM
The NAR reported that existing home sales were unchanged for September [Marketwatch] at the annual seasonally adjusted rate of 7.28 million homes, the second highest in history. The hurricanes prompted a sharp increase in purchases outside the damaged regions which offset weaker sales levels in other regions.
The median sales price of a US existing home was $212,000, up 13.4% over the prior year. Inventory increased 0.3% to 2.85 million or a 4.7% supply. The NAR interprets inventory as still “relatively lean.” I am a big fan of the charts churned out by Calculated Risk, and once again they have created an excellent graphic – this time covering inventory.
So existing homes sales, which is about 10x the number of new housing starts and therefore more telling of the overall housing market condition, was at a record level but did not see gains. At the same time, rising inventory appears to be gaining momentum. This should temper price appreciation in the coming months.
Existing Homes: Sales Strong, Inventories Rise Seasonally [Calculated Risk]
Sept existing home sales flat [Reuters]
Posted by Jonathan J. Miller -Tuesday, October 25, 2005, 1:43 PM
In the sign of a trend that bigger isn’t always better, Cendant, the travel, hotels and real-estate services company will split into 4 separate companies [NYT]. The Cendant name will no longer exist. The breakup will fall along the lines of their four primary businesses [WSJ]:
*Real Estate: Brands include Corcoran, Century 21, Coldwell Banker
*Travel: Orbitz, Galileo and Cheap Tickets
*Hotels: Ramada, Howard Johnson and Days Inn
*Car-rental: Avis and Budget
While the break up will allow the company to be more nimble and responsive to market dynamics, the pace of aquisition may slow as potential targets are able to look more closely at their suitor. Don’t these sort of things seem to go in cycles?
Remember the strategies of AT&T, ITT, GM and others when conglomerates were the envy of all? The idea was to reduce share volatility by spreading out to different industries to hedge against dips.
The break up will allow each entity to more fully realize their potential, especially real estate, which has posted strong earnings but has been overshadowed by the other seemingly weaker divisions.
Posted by Jonathan J. Miller -Tuesday, October 25, 2005, 8:15 AM
The housing market seems to be out of the controlling grasp of the Fed these days. In a Floyd Norris column this weekend “Unending Housing Boom Tosses Aside Rate Increases and the Old Rules” [NYT] he makes the following observations:
- The current housing boom has survived 11 rate increases by the Fed
- The Fed said housing was now cooling yet 183,000 housing starts occured in September
- The current housing boom has fewer starts than the peak in 1972
- The volume of housing starts does not have the same volatility as it did 20 years ago
Whats different now?
- S&L’s used to have to stop lending when Fed rates went above levels banks could pay on savings
- The Fed is now having trouble slowing the boom as creative financing keep payments affordable
- Builders hear the Fed’s concerns over excess supply but their customers keep buying
- The market has changed, 44% of housing starts were multi-families in 1972 and its now 17%
- Single family development dominates residential construction
Also see The Unending Housing Boom [Big Picture]
Posted by Jonathan J. Miller -Tuesday, October 25, 2005, 7:56 AM
As the Greenspan era comes to a close, I am going to miss the new phrases that would enter our vocabulary from time to time such as “frothy”, “irrational exuberance”, “conundrum”, “speculative excesses, “Greenspan-speak” and others. Most of all I am going to miss the confidence the markets placed in his policies. Replacing him is a tough act to follow although the financial markets appear relatively happy [Marketwatch] with the choice as the Dow and S&P had their biggest increase in 6 months after the announcement [Marketwatch].
Yesterday President Bush nominated Ben S. Bernanke, a former Federal Reserve Board member and Princeton professor who currently chair’s the President’s Council of Economic Advisors to be the next Chairman of the Federal reserve [NYT]. He is considered a “first, among equals” to his peers but his political views are largely unknown [NYT]. He actually penned a story in 2000 on the topic of replacing Greenspan [WSJ].
On a lighter note, there is some hope to fill the vocabulary void that I so enjoyed with Greenspan. He appears to have a sense of humor.
My proposal is that Fed governors should signal their
commitment to public service by wearing Hawaiian
shirts and Bermuda shorts has so far gone unheeded.
“Until he joined the Council of Economic Advisers, Mr. Bernanke had little contact with Mr. Bush [WSJ], and indeed in many ways is the antithesis of the power-suited business executives that Mr. Bush has preferred for top economic policy posts. But he appears to have earned Mr. Bush’s trust. Earlier this year, Mr. Bush gently chided Mr. Bernanke for showing up at an Oval Office meeting wearing a dark suit with tan socks, according to several people familiar with the incident.
A few days later, Mr. Bernanke showed up early for another meeting with Mr. Bush and distributed tan socks to the meeting’s other participants. When Mr. Bush arrived, all, including Vice President Dick Cheney, were wearing tan socks. Mr. Bush laughed.”
One of the more notable differences between Greenspan and Bernanke is how they handle inflation. Bernanke subscribes to the theory of setting a formal “Inflation Target” [WSJ]. which would demonstrate the Fed’s commitment to low inflation. Opponents of the strategy say that it will limit the central bank’s flexibility.
The WSJ has a series of charts that show the economic success of the Greenspan era.
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