Dissecting New Home Sales Data

The housing data that is reported in the Mainstream Media is rarely accompanied by the appropriate disclaimers. "The Big Picture" makes the point in an insightful way.

Dissecting New Home Sales Data

Change of Format

I've thoroughly enjoyed running this blog since October 2005. I have posted many relevant articles that I thought would be helpful in understanding the current economy and market conditions. I haven't had as much time to post lately but there are many articles that I felt would be helpful for readers of this blog. For that reason, I have decided to use this blog as a link to the articles and blogs that I read consistently.

Going forward, you will mostly find links to articles from other sites that show both the bullish and bearish opinions, so that you can form your own opinions on the prospects for the global economy. Today's first installments are as follows:

California Foreclosure Activity Jumps Again

Inflation in the U.K.

Dimes, Bulldozers, & Volatility

In the future, Bullish Articles will be coloured in Green, Bearish Articles will be coloured in Red, and Neutral Articles will be coloured in Blue.

I hope that you enjoy the articles and visit the site on a consistent basis.

Thank you.

"True" Inflation

The best measure of inflation is always the "Man on the Street". He/She doesn't need a bogus report to gauge whether prices are going up or not. This massive disconnect between reported CPI and real inflation will not end well. Politicians are too detached from reality to sense the impact of these bogus COLA adjustments. It is already too late to fix the problem so we wait for the fallout.

Tim Iacono's excellent article discusses the proposed new "chained-CPI".

Two Views of "True" Inflation

Yesterday's testimony and Q&A session with Fed Chairman Ben Bernanke before the Senate Budget Committee had a couple of interesting moments to go along with much of the same sort of prattle that was the norm during Alan Greenspan's tenure.

The Chairman of the Federal Reserve telling Congress to reign in the budget deficit and fix entitlements seems like it's been playing on a continuous loop for the last ten years.

One thing that was different this time was that Chairman Kent Conrad (D-North Dakota) made a point early on about distinguishing between the budget deficit and the increase in debt. It seems that the great strides made recently in cutting the budget deficit in half, down to $248 billion, were all a bit of a ruse since the total increase in debt over the same period was $546 billion.
Congressional hearings have a whole different feel now that the Democrats hold the gavels. For the last ten years the first 20 minutes of a session such as this would have been consumed by eight or ten elected officials heaping praise on Alan Greenspan for the fine work he was doing.

Now, all they seem to want from Ben Bernanke is help in solving the massive long-term financial problems facing the government and its citizens.

Alan Greenspan had it pretty good.

"True" Inflation

By far the best part of the Q&A session had to do with measuring inflation.

In an insight to how the current Fed Chairman views the world of money and prices, he spoke about what he called "true" inflation, or, as Merriam-Webster might put it, the measure of inflation that is "in accordance with the actual state of affairs" or "conformable to an essential reality".

Sen. Wayne Allard (R-Colorado): The Bureau of Labor Statistics has recently introduced a new price index, it's called the "chained CPI". I wonder if you'd elaborate on that - they're claiming that it's more accurate than the current CPI. I would like to hear your feelings on that new measurement.

Ben Bernanke: Yes I think it is somewhat more accurate. The existing CPI, the one we're all familar with, takes a fixed basket of goods and values the change in the cost of that basket from month to month and from year to year. The problem with that is that it doesn't take into account that as prices change, people will change the goods and services that they choose - if oranges become more expensive, I might eat more apples.

The chain weighted CPI allows, to some extent, for adjustments that people make to go from higher price goods to lower price goods, and therefore is probably a better measure of the true cost of living increase than the standard CPI.

Allard: Do you think that the procedure that we're using now at the CBO and the OMB, that those projections overstate inflation?

Bernanke: Well, presumably the projections they're making are in terms of what they think the standard CPI inflation will be. At the Federal Reserve we've done numerous studies of these indices and we do think that the standard CPI does overstate "true" inflation, if we could measure "true" inflation, by some amount between a half and one percentage point.

Allard: Do you think we could go to those agencies and change CPI to get a better result?

Bernanke: Well, the operational question that we might ask is whether we should use the chained CPI or some other measure to index entitlement benefits or index the tax code. In congress, if your objective is to tie benefits payments and the tax code to what I would call "true" inflation, you would have a more accurate measure of "true" inflation by using the chained CPI or some alternative measure.

So, given last year's overall inflation of 2.6 percent, "true" inflation - the measure of price increases that are "in accordance with the actual state of affairs" or "conformable to an essential reality" - would be just below two percent.

An Alternative Essential Reality

The definition of "true" inflation for Ben Bernanke stands in stark contrast and will comes as a great surprise to Jim in Washington who wrote in response to Tuesday's post, Seniors in Debt. Jim has granted permission to share some of his thoughts:

I am a disabled veteran, I am no where near being elderly at 49, yet I am on a fixed income just as the retirees are. My veteran disability check is $2,314 per month, and that is not (income) taxable, I also get full medical and dental with no cost to me.

When this payment began in February 2005 I was able to get by relatively comfortably, I would not say it was middle class because I could not afford to buy a home (my first prerequisite for entrance to the middle class is enough money to AFFORD a home which eats no more than 33% of gross income for PITI), I was in California and that was simply not even close to enough income to buy even the cheapest house on the market. So, not middle class but close for one doomed to rent the for next 30 years.

Twenty four months later I can tell you that prices have so far outstripped these puny COLA raises the congress has granted that I am now actually considering going homeless, at least for the four months of the year when weather is warmer.

The new improved "chained CPI" may capture this substitution effect.

This year was a classical example, the congress initially announced a 4.1% COLA for retirees and veteran's , but the GOP on the hill said that was too much and they got their way in one of their last acts before getting curbed by the democrats in the elections. They trimmed the COLA to just 3.3%, that was in a year when my landlord raised rents from $700 to $800, some 15% for the renewal on the lease. Rents are up even more since. Food is getting to be a problem, and I have had to resort to the food bank more than once.
...
My living standard has not just noticeably dropped it has plummeted. I am scrambling to pay off my only credit card with a balance of some $2,500 because I cannot afford the interest and fees. Mind you I am one of the LUCKY ones, my income is far higher than most on social security or other disabled veterans even. It seems every month I have to find something else to cut out, and every month I find prices spiking all around me, a haircut went up from $12 to $15, a car wash at the automatic place went from $5 to $6.
...
This is the reality for fixed income people, the federal government is blaming retirees and disabled people for their budget problems, Bernanke said it today, if they do not CUT entitlements the USA will be bankrupt.

This is a gross violation of the social contract by which the USA was able to build a thriving middle class in the first place, and I am not alone when I say that the middle class is the goose that laid the golden eggs that the rich so enjoy. Their greed is so boundless that they do not care if old folks die or veterans live out of dumpsters.

They WILL care however when these millions come and haul them into the town square for a lynching. So, they will hire some of the poor to be in their private armies and we will have taken the last steps to feudalism again.

Economists really do need to occasionally pull their noses away from reports and computer screens full of statistics and get out more.

Apparently, "truth" is all a matter of perspective.

U.S. housing bubble has the potential to blow up real good

The Globe and Mail's Harry Koza doesn't buy the "soft landing" argument for real estate in the U.S. He discusses many important points regarding the potential severity of a U.S. housing market correction:

I don't subscribe to the theory that because of a couple of benign recent U.S. housing statistics, there's going to be the fabled "soft landing" and now is a good time to buy a house. I mean in the United States, of course, since Canada so far has neither the myriad variants of exotic mortgages that our American cousins are so fond of (though there are ominous signs of some pushing of the traditionally staid mortgage envelope up here), nor the perverse incentives of interest deductibility. (If you're frugal and pay off your mortgage principal faster, your income taxes go up, so why not extract your equity instead and buy a TV the size of a Cineplex screen?)

No, I'm in the camp that thinks we're only seeing the first leg down in what BMO Harris's chief strategist Don Coxe refers to as a Triple Waterfall Event (see http://www.donaldcoxe.com/triple_b.html). The portents of that parlous occurrence are not to be found in the official stats, but rather, on the margins of the housing market.

Official statistics are so massaged and seasonally adjusted and weighted-averaged and smoothed that I often find them hard to believe. It seems like only yesterday (Dec. 12, 2005, actually) that the National Association of Realtors was predicting that the U.S. national median house price would rise about 6.1 per cent in 2006. After all, gushed NAR, over a full year, the national median price "has never declined since good record keeping began in 1968."

After the recent "good" news about the U.S. housing market, the median price was still down about 2 per cent for the first 11 months of 2006. That makes that NAR forecast fairly embarrassing, but the market has discounted the actual small drop as a mere healthy correction, hardly the harbinger of an incipient downward cascade in house prices -- or at least, not yet.

Still, out on the margins, where the positive feedback mechanisms that inflated the bubble were born, out where the interest-only and 120-per-cent loan-to-value mortgages, the negative amortizers with "teaser" rates and the option ARMs (adjustable-rate mortgages) live. This is "subprime" country. "Prime" loans are ones where the odds favour eventual repayment. With subprime loans, that's not necessarily the case.

From 1994 through 2003, subprime mortgage lending grew at an annual rate of 25 per cent, up tenfold in nine years. In 2005 and the first three-quarters of 2006, lenders made $900-billion (U.S.) in subprime loans. As of September, 2006, 80 per cent of all subprime mortgages were "Option ARMs." ARMs usually have features like "minimum payment options" (the principal you owe gets bigger over time), or "interest-only" payments (you never pay it off and had better hope house prices only ever go up). One out of every three home buyers in the first eight months of 2006 got some kind of pay-option mortgage -- that's up from one in five in 2005 and only eight out of a thousand in 2003.

Usually ARMs are referred to as 2/28, meaning payments are low for the first two years, and then increase by 40 or 50 per cent for the next 28 years. There is at least $1-trillion worth of option ARMs (41 per cent of the total outstanding) whose payments will increase in 2007, though I've seen estimates as high as $2-trillion.

Adding spice to the mix is that a staggering 45 per cent of these subprime loans required "low documentation," real estate parlance for don't ask, don't tell. ("You want a half-million-dollar loan to buy a house, have no down payment, and you haven't worked in five years? Okay, we didn't hear that last part. You're approved."). Fully 38 per cent of all subprime mortgages in 2006 were for 100 per cent of the price of the house.

In the third quarter of 2006, 12.5 per cent of all subprime loans were already delinquent on their payments after nine months. In the past month or so, seven subprime lenders have gone belly up. Perhaps a level of documentation greater than "low" would have been more appropriate?

Lenders don't want to keep these high-risk loans on their books, so it is not surprising that the majority of these mortgages are securitized, packaged and sold to investors. Naturally, there are all kinds of sophisticated hedges, derivatives and other methods for offloading this risk onto the credulous (see Harry's First Law of Capital Markets, "Make the Stupid Pay"), but none of them, as Don Coxe might say, have ever tried to shoot the rapids of a Triple Waterfall.

This is scary because, according to a recent study by the Center for Responsible Lending (a U.S. non-profit), one out of every five subprime mortgage loans made in the past two years will go into foreclosure. That would mean 1.1 million houses getting repossessed by banks, vaporizing $74.6-billion in homeowners' equity.

The banks will sell the repossessed properties as quickly as possible, driving house prices lower, triggering more foreclosures, putting more excess properties on the market, driving prices lower and, well, you get the idea -- a negative feedback loop, the mirror image of the one that built the bubble.

Now, I'm not saying this is going to happen -- only that it could, and while bubbles are lots of fun when they are inflating at exponential growth rates, let's hope we don't have to find out just how ugly this one can be when it is deflating exponentially.

Harry Koza is senior Canadian markets analyst at Thomson Financial and a columnist for GlobeinvestorGOLD.com.

World's Assets Hit Record Value Of $140 Trillion

After that picture, words are almost redundant, but anyway, here's a quick Ubiq-cerpt:™

"The world's financial system is overflowing with stocks, bonds and other financial assets -- $140 trillion worth, to be precise.

The figure was released in a study by McKinsey & Co. that maps financial assets around the globe and seeks to track the flows of these assets as they move from one region to another, putting hard numbers on the oceans of capital washing up around the globe.

At $140 trillion in 2005, the value of the world's financial assets hit a new peak and was more than three times as large as the total output of goods and services produced across the planet that year.

The study, released today, paints a picture of a world in which investors and the banks that manage their money are spreading their bets more broadly. Flows of investment across borders hit $6 trillion in 2005, McKinsey said, above levels reached at the height of the 1990s stock-market bubble and more than double the figure in 2002.

At the epicenter of these financial flows is the U.S., which takes in about 85% of the flows from countries that are net exporters of capital -- places like Japan, China and the Middle East. "It's a pretty striking thing," says Diana Farrell, director of the McKinsey Global Institute, an in-house think tank that produced the report. "Of all the savings that citizens world-wide are willing to put outside their countries, the U.S. gets 85% of it."