Soft Landing?

Housing industry insiders are talking in California. “Leslie Appleton-Young is at a loss for words. The chief economist of the California Assn. of Realtors has stopped using the term ’soft landing’ to describe the state’s real estate market, saying she no longer feels comfortable with that mild label.”

“‘Maybe we need something new. That’s all I’m prepared to say,’ Appleton-Young said Thursday.”

“The Realtors association last month lowered its 2006 sales prediction. That was when Appleton-Young first told the San Diego Union-Tribune that she didn’t feel comfortable any longer using ’soft landing.’ ‘I’m sorry I ever made that comment,’ she said Thursday.”

“For real estate optimists, the phrase ’soft landing’ conveyed the soothing notion that the run-up in values over the last few years would be permanent.”

“The state Department of Real Estate recently reported that (there is) one agent for every 55 adults in the state. Appleton-Young had no qualms about predicting a hard landing here: ‘We’re expecting a fairly significant shakeout.’”

“D.R. Horton CEO Donald Tomnitz was telling analysts that the home builder’s sales in June ‘absolutely fell off the Richter scale.’ Horton, the nation’s largest builder of residential housing, has numerous projects in California.”

The Union Tribune. “In the latest signs of a softening local housing market, Del Mar-based Brookfield Homes reported a steep drop in revenue from home building yesterday while the nation’s largest home builder said business in San Diego has been particularly weak.”

“Both Brookfield and Texas-based D.R. Horton said they are experiencing an increase in cancellations across the country – where buyers who have entered a contract to purchase a home decide to walk away.”

“‘I know every time we’ve gone into a downturn in the home building industry, they’ve always been longer and deeper than we’ve all imagined,’ D.R. Horton CEO Tomnitz said. ‘So we’re preparing for the worst, and we think this one will be longer and deeper than just the last six months.’”

“DR Horton said that in the past 60 days it had cut the number of lots it has under contract in San Diego County and elsewhere earmarked for future development. The company didn’t say exactly how much deposit money it lost in San Diego County. But companywide, the home builder wrote off $57.2 million in the quarter for deposits on land that it now isn’t going to buy.”

“‘San Diego is our weakest market in California,’ Tomnitz told analysts. ‘California continues to be a challenging market for us. There continues to be a small percentage of affordability out there.’”

“‘We are experiencing the impact of the long-anticipated slowdown in housing markets, particularly in the San Diego and Washington, D.C., areas,’ said Ian Cockwell, Brookfield’s CEO.”

Economic Fundamentals

Volcker Weighs in on Bernanke!

When legendary Fed chief Volcker says that Bernanke has a tougher job than he did when inflation was 13%, that's a pretty scary scenario.

Volcker Says Bernanke Faces Tougher Task Than When He Ran Fed
July 14 (Bloomberg) -- Paul Volcker, who took over the Federal Reserve a generation ago at a time of soaring prices and stagnant growth, said the current central bank chief, Ben S. Bernanke, faces an even tougher challenge.

``It was easier for me,'' Volcker, 78, said in an interview to be broadcast this weekend on ``Political Capital With Al Hunt,'' a Bloomberg television program. ``While the economic situation was much worse, it was easier to act because it was clear what the enemy was.''

Volcker, appointed by President Jimmy Carter in 1979, is credited with defeating inflation, which was 13 percent when he took the Fed's helm. Volcker raised the benchmark interest rate to a record, helping send the economy into recession.

He was succeeded by Alan Greenspan, who kept inflation in check and presided over the longest economic expansion on record. Before he left in January after almost two decades in the job, Greenspan set the Fed on a path of rate increases that Bernanke has continued. Rates have been nudged higher at every meeting of policy makers since June 2004, while core inflation over the last three months was the fastest since 1995.

The U.S. economy will slow from 5.6 percent growth in the first quarter to a pace of 2.8 percent in the second half of this year, according to the median forecast in a Bloomberg News survey of economists.

Consumer prices rose at an annual pace of 4.2 percent in May, up from 3.5 percent a month earlier. Excluding food and energy, prices rose 2.4 percent, compared with 2.3 percent in April.

``I worry about people getting too relaxed'' on inflation Volcker said. ``I don't think it's out of hand today, but it is obviously creeping up.''

Skeptical About Targets

Volcker was skeptical that inflation targeting, a device for anchoring inflation expectations embraced by Bernanke, would be helpful.

``That's a little too precise for me,'' he said. ``The inflation rate is bound to go up and down a little bit and it should go up and down a little bit. But I would like to see stability as the target.''

He suggested that Bernanke, who has championed better communication through transparency at the central bank, may be communicating too much.

``It's kind of ironic,'' said Volcker. ``Mr. Bernanke seems to be criticized for a little too much transparency.''

`Skating Along'

While he said the global economy is doing well, Volcker voiced concern that the good times can't last.

``We are skating along quite nicely,'' said Volcker, though ``the ice is not as thick as I would like it to be.''

The U.S. current-account deficit exceeded $208 billion in the first quarter. The figure, which includes trade as well as transfer payments and investment income, declined from $223 billion the previous quarter. It was still the second-largest on record and requires the U.S. to attract $2.3 billion in foreign capital each day fund the gap.

``We are consuming too much and investing too little,'' said Volcker, who also indicated that higher taxes may be needed to narrow the budget deficit.

This week the Bush administration cut its estimate of this year's budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals. Budget analysts say the shortfall will widen again as the aging U.S. population begins to stretch entitlement programs like Social Security and Medicare.

``Revenues have gotten too low'' relative to what the government wants to spend, Volcker said.

Because of U.S. dependence on foreign capital to fund trade and budget gaps, ``it is critical that we maintain confidence in our currency,'' said Volcker.

Caution on China

Some economists suggest the solution is a weaker dollar and stronger currencies for U.S. trade partners, especially China. Yet Volcker cautioned about pushing China to revalue its currency, which it has tightly controlled since abandoning a decade-old peg to the dollar a year ago.

China ``will move and should move when they find it in their interest,'' Volcker said. ``Pushing them to do things they don't want to do I'm not sure couldn't backfire in the end.''

Volcker led an investigation last year of a United Nations program that allowed former Iraqi dictator Saddam Hussein to sell oil to buy food and medicine. It found the program lacking in competence and accountability.

Volcker said this week that the probe's findings haven't resulted in much change yet at the UN.

``If they don't respond to what we found, the difficulties, including some corruption within the UN and outside the UN -- lots of it outside the UN -- and if that doesn't provoke some response, I don't know what will be the global response.''

He said the findings show the UN isn't up to running a similar program for North Korea to help resolve the standoff over the country's alleged use of nuclear technology for weapons.

US 'could be going bankrupt'

The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank.

A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.

Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors," he asked.

According to his central analysis, "the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''.

The budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP.

Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy.

"Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."

Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.

The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.

Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."

The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.

Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."

Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said.

"This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."

Federal Reserve Policy Destroys the Value of Your Savings

Congressman Ron Paul is at it again. With next week's appearance by current Fed Chairman Ben Bernanke before the Senate Banking Committee and House Financial Services Committed, it seems Congressman Paul wanted to let the new guy know exactly what's been on his mind lately regarding the nations money and how little it buys these days.

July 10, 2006

For years officials at the Federal Reserve Bank, including Chairman Bernanke himself, have assured us that inflation is under control and not a problem-- even as the price of housing, energy, medical care, school tuition, gold, and other commodities skyrockets.

The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even many mainstream economists now admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. Everyone knows the cost of purchasing a home has increased dramatically in the last ten years; in many regions housing prices have more than doubled in just five years. So price inflation certainly is alive and well when to comes to the largest purchase most Americans make.

When the Federal Reserve increases the supply of dollars in circulation, both paper and electronic, prices must rise eventually. What other result it possible? The supply of dollars has risen much faster than the supply of goods and services being chased by those dollars. Fed policy makers have more than doubled the money supply in less than ten years. While Treasury printing presses can print unlimited dollars, there are natural limits to economic growth. This flood of newly minted US currency can only increase consumer prices in the long term.

Mr. Bernanke has stated quite candidly that he will use government printing presses to stimulate the economy as necessary. He is famous for joking that he would endorse dropping money from helicopters if needed to prevent an economic slowdown. This is nothing short of an express policy to destroy our money by inflation. Every new dollar erodes the value of existing dollars based on simple supply and demand. Does anyone really believe the Treasury can make us rich simply by printing more money?

The coming dollar crisis is not likely to be “fixed” by politicians who are unwilling to make hard choices, admit mistakes, and spend less money. Demographic trends will place even greater demands on Congress to maintain benefits for millions of older Americans who are dependent on the federal government.

Faced with uncomfortable financial realities, Congress will seek to avoid the day of reckoning by the most expedient means available-- and the Federal Reserve undoubtedly will accommodate Washington by printing more dollars to pay the bills. The Fed is the enabler for the spending addicts in Congress, who would rather spend new fiat money than face the political consequences of raising taxes or borrowing more abroad.

The irony is that many of the Fed’s biggest cheerleaders are the same supposed capitalists who denounced centralized economic planning when practiced by the former Soviet Union. Large banks and Wall Street firms love the Fed’s easy money policy, because they profit at the front end from the resulting loan boom and artificially high equity prices. It’s the little guy who loses when the inflated dollars finally trickle down to him and erode his buying power. Someday Americans will understand that Federal Reserve bankers have no magic ability-- and certainly no legal or moral right-- to decide how much money should exist and what the cost of borrowing money should be.

Eye-Popping Prices for Calgary Housing

Eye-popping prices for Calgary housing
Average cost of typical 2-storey home rockets 54.6%

Toronto resales lag at 4.4% in moderating market
Jul. 6, 2006. 01:00 AM
TONY WONG
BUSINESS REPORTER

If you're suffering from sticker shock on housing-price increases in Toronto, think Calgary.

The average price of a standard two-storey resale home rocketed an unprecedented 54.6 per cent to $397,867 in the second quarter of 2006, compared with a year earlier, according to a quarterly report Royal LePage Real Estate Services released yesterday.

"Since we started doing this report in the '70s, we've never seen this kind of price appreciation in one year, ever," Phil Soper, president and chief executive of Royal LePage, said in an interview.

Alberta's oil-rich economy has meant severe housing shortages and major price increases in the western provinces.

"The Alberta housing market is truly reacting to the fact it is by far the best-performing economy in Canada," Century 21 Canada president Don Lawby said in an interview.

Edmonton was in second place with a 39 per cent increase, while Vancouver, which is looking forward to the 2010 Winter Olympics, saw a 20 per cent increase.

In the east, things were much less frenzied as real estate agents reported fewer bidding wars, and even price reductions on some listings.

"We're moving to a more transitional summer market in Toronto, so you'll see volume dropping off from a great market to a good market, and certainly nothing like Alberta," Lawby said.

House prices in Toronto increased by a solid but not spectacular 4.4 per cent in the second quarter of 2006, compared to the same time last year, as the market continued to moderate, according to the LePage report. The average price of a standard two-storey home — the most sought-after type of property — rose to $474,766.

The two-storey home in the survey also has three bedrooms, a detached garage and full basement but no recreation room and totals 1,500 square feet.

Meanwhile, a detached bungalow averaged $373,504, up 5.5 per cent. Condominiums showed the most appreciation, rising 6.7 per cent to $256,178.

"We saw the market move from a seller's market to a more balanced market at the end of the fourth quarter of last year, so buyers should be able to get a better shake," Soper said.

Royal LePage is forecasting that the average price increase for all types of property in Toronto should be in the 5.6 per cent range by the end of the year.

Century 21 is slightly more optimistic in its Toronto forecast, which predicts price increases in the 6 to 7 per cent range.

Still, both forecasts are well below the national pace forecast by Lepage, which expects increases of 9.2 per cent by the end of 2006.

However, neither real estate firm is expecting sales in the Toronto area to break last year's record.

"We can't have record-breaking sales every year. But I've been wrong before," said Lawby, noting that most analysts thought the market would have wound down in 2005, compared with the year before. Sales continued to defy expectations by going up as interest rates remained affordable and job numbers were stronger than expected.

Of the 23 Toronto neighbourhoods surveyed by LePage, Riverdale showed the highest year-over-year appreciation. A shortage of listings meant the standard two-storey home hit $350,000, up 14.8 per cent.

Richmond Hill and Markham also had strong growth, with prices for a standard two-storey up 13.3 per cent and 11.7 per cent respectively.

Meanwhile, areas such as the Beach district and Cabbagetown, which have posted stellar appreciation, took a breather. In Cabbagetown, the two-storey was up only 1.9 per cent; in the Beach, down 0.7 per cent.

Perspective

This post has nothing to do with the markets. It is simply a "step back and reflect on the enormity of it all" moment.

Click each photo to enlarge.