OFHEO Home Prices
Wednesday, September 06, 2006
The most disturbing fact regarding the nation's teetering housing market - where the imbalances between dramatically rising inventory and slowing sales have built such momentum in recent months that prices are now in severe danger of broad declines - is that traditional mortgage rates are still near historic lows.
In recent days, 30-year mortgages could be had for just under six percent - something virtually unheard of for decades, yet commonplace since 2003.
Now everyone is carping about how far prices will fall - not if they will fall - and the impact they will have on the economy. With interest rates for traditional mortgages at multi-generational lows!
How the heck did we get into this situation?
Let's review the Fed's three-pronged mission for conducting monetary policy - maximum employment, stable prices, and moderate long-term interest rates. That would be:
The Federal Reserve is doing its job splendidly - where's the problem?
What kind of upside-down, inside-out world is it that we are living in if people are worried about a housing market where prices are still rising modestly and monetary policy is in near-Utopian condition?
The OFHEO Report
Yesterday's OFHEO (Office of Federal Housing Enterprise Oversight) report of the second quarter Housing Price Index (.pdf), probably the most reliable report available for purposes of judging the direction of prices, showed that while prices have not yet begun broad outright declines, that is likely to occur in the next few quarters given the most recent trend.
It seems that downward price pressure may intensify in 2007 as the toxic mortgages of the last few years wear on their once-proud owners who find that while monetary policy may be ideal, their cash flow and balance sheets are far from it.
Toxic loans have a way of distorting homeowner finances as well as entire economies.
Maybe the Federal Reserve should update its mission statement to include a goal of not subjecting the entire planet to systemic risk by helping out in regulating the mortgage lending industry.
The OFHEO report had a couple of interesting highlights, the most notable being the unprecedented decline in quarterly price changes as indicated in the red highlighted area below. Of course nobody seemed much concerned with the trend prior to the recent reversal. Most people tend to ignore most things when most people are getting rich - something about not looking a gift-horse in the mouth, the beneficial but temporary effects of asset bubbles ... that sort of thing.
The folks at the OFHEO put it thusly:Appreciation for the most recent quarter was 1.17 percent, or an annualized rate of 4.68 percent. The quarterly rate reflects a sharp decline of more than one percentage point from the previous quarter and is the lowest rate of appreciation since the fourth quarter of 1999. The decline in the quarterly rate over the past year is the sharpest since the beginning of OFHEO’s House Price Index (HPI) in 1975.
In fairness, it could be said that housing is coming off of a series of such good years that maybe a national decline in home prices of ten or twenty percent won't do too much harm - if prices rise by 50 or 100 percent over a period of five years, then a decline of some small fraction of that amount might be just what the doctor ordered.
And maybe not.
Maybe that systemic risk thing will come into play - we'll find out soon enough.
Home Improvements
One aspect of the OFHEO report that gets little attention is the effect of home improvements on the home price data. With somewhere around a half trillion dollars of equity being "extracted" each year, and a goodly portion of that amount going into home improvements of some sort, just how much of the price increase could be logically negated by improvements that have been occurring at rates not seen since cave men began drawing pictures on walls?
When your home appreciates $200,000 over a period of a few years, and then you pull out $100,000 or so to put in that custom barbeque, a couple walk-in closets, an extra room for the cat, and a new garage for the RV, boat, and jet skis, there seems to be something left unaccounted for somewhere in the OFHEO data.
As best can be seen by looking at the report, the OFHEO data does not factor home improvements into their calculation - it simply records the change in price for the same home when it is resold or refinanced.
There may well be a whole new set of home improvment guidelines offered in the years ahead if the OFHEO home price trend of the last year continues. It used to be that kitchen and bath upgrades held their value best, while landscaping and spas yielded much less at resale. Next year, homeowners won't know where to spend their home equity for the best return.
But there is little to worry about regarding home prices right now. So far, the OFHEO data is still mostly looking at declining price increases.
Prices are still going up - they are just going up less than they were going up a year or two ago when everyone was still gaga about real estate. Now that many are gagging on real estate, in the form of resetting mortgage payments and stalling appreciation that is increasingly thwarting plans for real estate mogul status, recent trends point to danger ahead.
Can't we just go back to a normal economy? Whether they deflate slowly or just pop, serial asset bubbles are probably not a good way to run an economy.
13 comments:
what's a normal economy?
aven't had anything like that since the 60s.
Don't know about normal. Utopian is where the government is only there to make sure everyone follows the rules and no body regulates the money.
How can the world continue any sort of economic growth at all in the face of resource (primarily energy) production peaks and inevitable declines?
Welcome back, Tim!
Appreciation seems to now be below the rate of inflation, even by the BLS's dubious accounting. That would seem to be a real decline, to me.
We are now sitting on the Austrian Business Cycle inflection point. I imagine the roller coaster gets pretty thrilling from here.
"How can the world continue any sort of economic growth at all in the face of resource (primarily energy) production peaks and inevitable declines?"
1) Why exactly does it need to grow? Seems like it needs to contract for a while back to more sustainable levels.
2) If more energy is needed, looks like significant investment in the sector is in order. Doesn't this tell you where to put your money now?
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1) Why exactly does it need to grow? Seems like it needs to contract for a while back to more sustainable levels.
Because this is a basic design constraint of the modern financial system. It is taken as a given that the world of tomorrow will be inherently more valuable than the world of today. This is why lenders lend, so as to capture some of that growth. The global economy is very much like a physical device; it requires a flow of money to drive it, just like your computer requires a flow of electrons to run. Growth is what causes that flow, and economic growth is directly driven by growth in effective utilization of energy. By effective utilization, I mean that either using more energy or using energy more efficiently can drive growth. There is obviously (well, unless you believe in magic, as many seem to do) an upper cap on both energy production growth and energy efficiency improvement. Exactly quantifying those caps is a difficult matter, but to see that they exist should not be.
2) If more energy is needed, looks like significant investment in the sector is in order. Doesn't this tell you where to put your money now?
Investment can not create energy. Only the consumption of fuel can do that. As it stands today, we can only exploit energy received from the sun (which is a constant, regardless of how much money is invested), and recoverable fuel already accumulated on the planet: oil (which is energy received from the sun in days gone by), and fissionables.
HotU,
i) A cancer also grows. Just because it grows, doesn't mean it's a good thing.
ii) Right. Oil is not just stored energy. It is also a practical energy storage and delivery system. But, supplies are finite and being exhausted. New energy and energy delivery systems need to be developed and built, hence the need for further investment.
Bubbles Burst - surprise.
Next one up - base metals.
An asset is worth the discounted net present value of it's risk adjusted future income stream vis a vis alternative risky alternative investments.
The Fed creates bubbles by lowering interest rates, the discounting mechanism, too low for too long, making the NPV appear far higher than is sustainable.
Housing really was affordable at 3.25 pct but has become not affordable at 6 %+. The bubble that is bursting has been in money (the mess that Greenspan made).
The base metals bubble is related to housing demand, the unilateral trade bubble with Asia, and of course, a crooked, manipulated futures market. It is still gamely inflated. Watch for copper at $1.80 by Christmas (which is still a heck of a good price).
Base metals bubble! What a hoot! How many people do you know are fully invested in metals as compared to, say, housing? Or tech during the Nasdaq bubble? How much investment in new mines has there been in the last quarter century?
Don't be fooled. There will be volatility in metals and energy prices but that is not a bubble.
Base metals might not be a bubble, but the metals market is surely a steep rollercoaster - and we are at the top.
Interim tops and bottoms are pretty hard to pick in the metals markets, especially the tops. Don't see enough enthusiasm and volume to believe we are at a major interim top for metals, imo. Admittedly, the rest of the equity market is looking shaky and metals could get pulled down in a down draft. They would reassert themselves on fundamentals thereafter.
1990s economy would be normal enough to suit me right now.
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