Another change in scale

Now that Riverside County has necessitated the opening up of the minus 20 percent to minus 30 percent range in the chart below, it's hard to imagine that any further changes in scale will be needed. But, then again, you never know.
From year-ago levels, the median home price in Riverside County plunged 20.1 percent, outpacing the decline in next-door neighbor San Bernardino County at minus 19.3 percent. Price declines of this magnitude were unthinkable just a couple years ago.

DataQuick reported the latest on Southern California real estate sales the other day and, while this is normally a very slow time of the year, the January sales total for the entire SoCal area dipped below 10,000 for the first time in 20 years. Overall, sales were down 24.6 percent from last month and down 44.9 percent from January of last year.
Marshall "almost all if not all of those gains are here to stay" Prentice, President of DataQuick, had these comments:

We don't know how much of this downturn is driven by market fundamentals, and how much is due to turmoil in the lending industry. The market has been sending mixed signals since August, and it's virtually impossible to see trends and make predictions. Our sense is that quite a bit of activity is on hold, we just don't know how long it can be kept on hold.

Well, maybe it would be more accurate to say, "it's impossible to see good trends" because lower sales volume and lower sales prices are clear to see.

It's been quite a fall from grace for all Southern California counties - the $520,000 median price in Orange County remains the only area still above the half-million dollar mark, but that seems likely to change in the months ahead.
This spring and summer should be quite interesting as motivated sellers, bank owned properties, and short sales compete for a dwindling number of buyers.

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Enough energy to copy and paste

The blog post from Tuesday in which a "moratorium on home price declines" was suggested appeared at Seeking Alpha yesterday. The comments were hilarious and I have just enough energy to copy and paste them here.

MarketBoy
08:34 AM
Wed Feb 13th
What an idiot. As if you can force anyone to pay a set price based on valuations 3 years ago. Markets control price, not the government. Let the market go - and punish these yahoos that thought we would always have 30% appreciation per year.

The markets are just starting to realize that not everyone is responsible enough to own a home, or at least make payments on those homes.

Here is another great plan - lets never sell our cars for less than our purchase price. Or how about my PC? Or my toothbrush?!! Yeah, I should be able to force someone to pay "peak value" for my toothbrush. No losers anywhere...... puuleeease!! Wake up buddy. Get out of your textbook and welcome to the real world.

ike
08:48 AM
Wed Feb 13th
i agree - you're an idiot. what about the affordability for first time buyers - the loans were based on false prices to begin with- by mandating that those false prices are now the real prices is absurd - while you are at it why not make into law that my 3 year old sneakers are worth $1000, i'll invite you to the yard sale

"Magazine-Cover-Indicator" Indicator....
09:37 AM
Wed Feb 13th
LOL....your satire article put a smile on my face

"Magazine-Cover-Indicator" Indicator....
09:39 AM
Wed Feb 13th
heh heh....you forgot -- we also could nationalize the Banks

SwT
10:18 AM
Wed Feb 13th
I'm seriously hoping that this article is an excercise in writing satire, and is Iacono's attempt at a "Modest Proposal".

If he's serious, I propose we push for the same price-cap resell mandates on cars. I'd love to get back what I put into my very used American made sedan. Oh but wait, I forgot, this is a 'free economy', sellers price at what buyers can absorb, based on affordability and supply and demand. My bad.

tradeking13
11:06 AM
Wed Feb 13th
Awesome idea! We should do the same for the stock market, too! Then, I can sell my shares of JDSU for $900!

John S
11:54 AM
Wed Feb 13th
Surely your not serious? Haven't we gone to war to stop these communist ideas?

User 121302
01:18 PM
Wed Feb 13th
Good sarcasm! I would also add that we need to get all the illegal immigrants back that fled this country. We need them to buy more homes to bring the prices back up. Also, when these illegal immigrants are hired by the builders again, the illegal immigrants will spend money and prop up our economy again. This is one way to get taxes from the illegal immigrants, ie., we get property tax revenue. This will make the county supervisors smile with glee.

Also, I like the idea of freezing prices on homes because the builders aren't making enough money. Selling a house for a million bucks that is built with cheap illegal immigrant labor doesn't have enough profit for the builders.

We also need to keep the prices fixed because the city councilmen and county supervisors still need to tack on extras in order for the developer to proceed, for example, a fire truck here, some public art there, etc. Our buyers don't really care about the extra cost these uncaring politicians tack on to the cost of a house.

yippee eye ah, yippee eye oh, it's a wonderful idea to freeze prices, else they could drop another 20-50%.

One Dusty Cowboy
San Jose, CA

Dave T
01:29 PM
Wed Feb 13th
I am a recent real estate agent in northern California. Your argument here is beyond ridiculous. RE is so over inflated that I can't in good conscience sell property right now. I do believe that this years good deals are next years foreclosures. I hope the value decline down to the 2001 level so that people can purchase a home especially first time buyers, based on what they can realistically afford and not some bogus loan application.

It used to be that it was cheaper to pay a mortgage than it was to rent. Now a mortgage is 2 to 3 times higher, makes no sense. Home prices are 1300% higher than they were in the '70's and incomes have not risen 1300%. Prices have to come down!!

Malkiel
05:51 PM
Wed Feb 13th
Not good when your audience can't tell your satire from your real stuff--best not to try it on audiences with no sense of humor (that is, readers of financial publications).

As for your modest proposal, great, but the downside is we can all expect to live and die in the houses we currently own because nobody in the future will ever be able to move for lack of a buyer...

John C
09:29 PM
Wed Feb 13th
The fact that some didn't get the joke is especially disheartening in an election year. I commend the writer for using satire to point out the limit of what government can do and how emotional we can get when it comes to property (most peoples' largest investment by far). Hopefully those who "took the bait" will reflect on how much of their election choices will be made based on taking the candidates election promises at face value.

NOT Shirley either
09:55 AM
Thu Feb 14th
Of course he's serious.
And DON'T call him Shirley!

If I had a little more energy I'd transcribe the opening remarks of Sen. Jack Reed (Dem. - Rhode Island) at today's Senate Banking Committee hearing - they were even more hilarious.

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Retail sales surprisingly not that bad

Once again the American consumer said, "I'm not dead yet!" as the important January retail sales report came in above expectations with a 0.3 percent gain.
Auto sales were stronger than expected, rising 0.7 percent, but the biggest gains came in gasoline station sales which rose 2.0 percent in January and were up 23.0 percent from a year ago. After factoring in rising prices for most goods, there has been little real growth in retail sales in recent months or over the last year, but that's better than outright declines.

For more, see the Census Bureau report or these reports at MarketWatch and Bloomberg.

ooo

--- Light Posting Ahead ---

I've got a worsening case of the flu, so don't expect to see too much new here until after that situation changes. It will be mostly Andy Griffith and the History Channel and maybe some HBO for the rest of the day, perhaps the rest of the week.

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This isn't helping their credibility

This was in the local paper the other day. Ads like this do little to help the credibility of a profession that is increasing being called into question:
Of course, to a large extent in recent years, those in the business of selling real estate were just doing what they've been doing for a very long time - selling real estate.

But, when you see ads like this you have to wonder about the future of a profession where the chief economist for the national organization, David Lereah, was a laughing stock all the way up until his disgraceful exit, shortly after it became clear that everything he'd been saying for the last few years was wrong.

If prices continue to go down in 2008 and 2009 will they run follow-up ads like this?

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What they need is a moratorium on price declines

The latest foreclosure moratorium plan, announced earlier today, is all well and good for delaying the inevitable - a major repricing of anything and everything that has to do with real estate and mortgages now that everyone has regained their senses - but it does little to get at the heart of the current problem.

Paraphrasing Countrywide CEO Angelo Mozilo, if banks and the government really want to fix the current mess, they should get at the heart of the problem - price declines, not foreclosures.

As the Orange One pointed out some time ago (see Angelo Mozilo is a moron), as long as home prices continue to go down, foreclosures will continue to rise.

The obvious solution? Stop home prices from declining. By decree.

You see, real estate ownership is not a winning bet anymore and if there's one thing that Americans can't stand, its a loser, especially when money is involved. Not winning might be an acceptable outcome, but losing is not. That's why people are walking away from their losing bet before the foreclosure notice ever hits the front door.

And there's no reason to place a time limit on the price moratorium either. Or, for that matter, to use current valuations. The national economy would be a lot better off if everyone could continue to believe that they'll always be at least as rich as they were a couple years ago.

If the banks and the government really wanted an effective plan to combat the mortgage and real estate meltdown, they should establish a peak value for each and every piece of residential real estate in the land, based on comparable homes sold in 2005, 2006, or 2007 (whichever is highest), and then decree that no property can be sold for less than its peak value.

If home prices go up, that's fine, everyone will be a little richer. But, home prices will never be allowed to go down again.

Mortage backed securities will regain their value, bond insurers will become solvent again, rating agency models will function again, and, most importantly, homeowners across the land will be wealthy beyond their wildest imagination once again, secure in the knowledge that it will always be that way.

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Goldilocks math

Watching CNBC is not something that is done around here very often, but occasionally a few minutes of Power Lunch or Closing Bell will be tuned in just to see how things are going. Similarly, Andy Griffith reruns are favored over Kudlow, Cramer, and Fast Money since, even when skipping all the commercials, it's hard not to come away from these programs without feeling manipulated in one way or another.

Such was the case yesterday on Larry Kudlow's show when the discussion turned to the "near or already here" recession that the show's host has come to grudgingly accept as the reality on the ground.

"Recessions aren't such a bad thing", quipped Larry, "They've happened ten times in the postwar era and look what we have to show for it." A graphic was then shown (recreated below) and guests with opposing viewpoints were prodded to come around to the host's unwavering view that now is a good time to buy stocks.

Now, even with engineering math skills honed over years and years of school and work in private industry, yours truly still sometimes has a hard time with percentage gains, but that 86,677% number just looked freakishly large.

All the other figures seemed to make sense - over a 60 year period you get a lot of compounding, so a 3.4 percent GDP growth coming out to 634% over 60 years sounds reasonable.

In fact, to verify a proper understanding of how percentage gains are calculated you can go to the Wikipedia entry for Percentage and find out more than you ever wanted to know on the subject.

Here, the key passage as it applies to those big 60-year percent gains is:

Although percentages are usually used to express numbers between zero and one, any dimensionless proportionality can be expressed as a percentage. For instance, 111% is 1.11 and −0.35% is −0.0035.

So, the 634% increase in GDP would mean [insert] an incease of [/insert] 6.34 times the GDP in 1947 and the 87,667% gain in the S&P500 would mean [insert] an incease of [/insert] 876.67 times the stock market value at that same time.

That seems pretty simple, but those two numbers - 6.34 and 877 - seem to be way out of whack. Stocks went up at 138 times the rate of real economic growth?

It's easy enough to look up GDP, for example at Measuring Worth you'll find that real GDP in 1947 was $1574.5 billion, which, when multiplied by 6.34 yields $9,982 billion. Add the gain to the original value and you get somewhere close to the $10.1 trillion in the CNBC graphic.

But what about that S&P500 claim, the big number that Larry beat his guests over the head with in a never ending effort to encourage his American viewing audience to keep buying stocks?

What was the value of the S&P500 in 1947? Well, that's a hard question to answer because, according to this source, the S&P500 didn't exist until ten years later.

1957 -- The "416" becomes the Standard & Poor's 500 Composite Stock Price Index. Thanks to technological advancements, computers are introduced and permit the "500" to be calculated and disseminated at one-minute intervals throughout the trading day. In order to create a lengthy historical time series, the new "500" is linked to the 90 Stock Composite Price Index-daily S&P 500 Index prices become available back to 1928. The original "233" and "90" stock indices have evolved into the modern "500". The "500" now consists of 425 Industrials, 60 Utilities and 15 Rails, and has a base period of 1941-43=10.

Oh well, how about using the Dow Jones Industrial Average instead?

Finding the value of the Dow in 1947 is pretty easy - just go to Dow Jones and you can get these really cool charts, one for each decade.
So, it looks like it averaged about 180 during 1947, right around the time of the Marshall Plan and just prior to the invention of the tranisistor (these charts really are very good - I remember splicing them together and hanging them up on a wall sometime in the early 1990s).

So what would the Dow be today after a gain of 87,677% from 1947?

180 + 180 * 876.77 = 158,000

Oops! Now, that's real Goldilocks math!

The percent increase that they were probably going for was 8,767%.

What's an order of magnitude between friends?

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$45,000 per month for 490,000 home loan files

This tidbit($) appeared in the Wall Street Journal today. It's probably not the last time that the subject of hard copies for home loans will come up in bankruptcy proceedings - so many loan docs and so few warehouses.

Mortgage Firm Offers Files To Sworn Owners of Loans
A WALL STREET JOURNAL NEWS ROUNDUP
February 11, 2008; Page C7

American Home Mortgage Investment Corp. is offering to hand over hard copies of 490,000 home-loan files to Wall Street investors who are prepared to provide a sworn declaration they own the mortgages.

The Melville, N.Y., mortgage lender, which is liquidating its assets in bankruptcy proceeding, made the offer to counter opposition from former backers who said American Home's plan to destroy the files endangered their rights to enforce the loans.

American Home says it wants to get rid of the loan files because it costs $45,000 a month to warehouse them. If a judge approves the company's proposal, requesters would have to pay a fee per file.

The mortgages at issue may have been bought and sold many times since they were first issued by American Home sometime after September 2005. American Home isn't sure who owns the loans recorded in the files it is storing.

How much room can a half million home loan files take up anyway?

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A survey of commodity funds

For anyone thinking about adding some commodities to their investment portfolio in 2008, there is a growing selection from which to choose. Here are the top performers:

Links: DCR, DBA, JJC, JJG, SLV

Please don't ask me about that MacroMarkets Oil Down fund - I have no idea what's going on with it. It came out as number one, so it's in the top spot. Numbers two and five above, however, I like a lot.

Mutual funds, exchange traded funds, and exchange traded notes based on a commodity indexes are shown below. All of the remaining tables are ordered oldest first, newest last.

Links: PCRCX, DBC, GSG, GSP, DJP, RJI, GCC

The Dow Jones AIG Commodity Index, the basis for both the Pimco PCRCX fund and the iPath DJP ETF, has been the top performing commodity index so far in 2008, though it is not clear how the Pimco fund has outperformed its index by such a wide margin. Bill Gross must be up to something.

Energy funds are shown below. Again, don't ask me about the Macromarkets products. I don't think I want to know how they work.

Links: USO, DCR, UCR, DBE, DBO, UNG, RJN, JJE, GAZ, OIL, USL

Note how the "early bird gets the worm" above with the Victoria Bay USO oil ETF and the streetTRACKS GLD gold ETF below.

The streetTRACKS gold ETF beat the iShares IAU gold ETF to market by only a month or so back in late-2004/early-2005, yet GLD has 11 times the net assets and more than 33 times the trading volume.

Links: GLD, IAU, SLV, DBP, DGL, DBS, DBB, RJZ JJC, JJM, JJN

Of course in the metals, copper and silver are the stories so far in 2008. Copper?? Isn't Dr. Copper supposed to be predicting the future of the global economy? Apparently Dr. Copper doesn't read the financial papers, otherwise he (or she) would be be predicting a recession by lowering his price.

Well, actually, agricultural products are the real story so far in 2008 as shown below. All these funds are up double-digits so far except the livestock ETF. Hmmm...

Links: DBA, RJA, JJA, JJG, COW

Azuki beans? Yes, they are in Jim Rogers' commodity index along with both bean oil and bean meal.

If anyone knows of any other offerings, please send me mail. I think the above list is complete save for the very old Oppenheimer fund (QRAAX) that has some ridiculously high loads.

Full Disclosure: Long PCRCX, DBE, DBA, GLD, SLV

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Economists make lousy money managers

Clearly, with the recent announcement that the G7 has approved IMF gold sales to help balance the IMF's lopsided budget, only one of two possibilities exist when it comes to the price of gold and economists.

1. There really is a coordinated plan to suppress the price of gold
2. Economists are the dumbest money managers in the world

Of course, it could be some combination of the two. This report from Reuters provides all the latest details:

The Group of Seven rich nations on Saturday approved the sale of gold by the International Monetary Fund from April as part of a broad reform of its budget, Italian Economy Minister Tommaso Padoa-Schioppa said.

"There was an acceptance among the G7 that resources should be raised by selling gold," Padoa-Schioppa, who is also the head of the IMF's steering committee (IMFC), told reporters after a meeting of G7 finance ministers in Tokyo.

He said the agreement would be finalised in April and would complement spending cuts being drawn up by the IMF under its new managing director, Dominique Strauss-Kahn.

"The current gold price means a flow of income can be ensured," Padoa-Schioppa said.

Morgan Stanley analyst Stephen Jen said the Fund held 103.4 million ounces of gold worth some $92 billion at current market prices. That was up from $23 billion just five years ago.

"The IMF is rich, if it wants to be," he wrote in a recent note to clients, issued before the G7's approval of the gold sales. "This is arguably a good time to consider selling some of these gold holdings and investing the proceeds in financial securities with positive yields."

No, the IMF is already rich - it would make itself a lot less rich with the sale of gold.

Only a bunch of economists would look at an asset that has gained about 20 percent per year for the last six years and figure, "It pays no dividend and therefore provides no income, we must sell this and purchase bonds that will pay four percent."

Uh... Did they ever think about selling a little of the metal this year to square the books and then maybe doing the same thing next year and maybe again the year after?

In case they haven't noticed, hard assets are about the only thing that is going up in value these days (i.e,. hard assets being the stuff you have to dig out of the ground, as opposed to financial products that are created with a computer keystroke and are now causing all sorts of problems in the global financial system) .

Better yet, maybe the IMF should just heed the call heard around the world over the last year and dissolve their organization - sovereign wealth funds seem to be performing IMF functions much better than the IMF ever did.

Economists!

Since the U.S. Congress has to approve IMF gold sales, this is by no means a "slam-dunk" as a well organized Western lobby has thwarted similar plans in the past, but, then again, you never know.

Desperate times call for desperate measures and "desperate" is a word that seems to be increasingly applicable to the global system of money and credit that just doesn't seem to want to heal itself.

The soaring price of gold is drawing more and more attention to this inescapable fact.

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Krugman says "TMGM" - close enough

A number of you have alerted me to another "Greenspan mess" sighting, this one from a conscientious liberal who comes oh-so-close to exactly duplicating the name of the blog that you are currently reading.

Thanks to all of you. Paul Krugman writes in the New York Times:

You see, it’s gradually becoming clear that the second half of the 1990s was in many respects just a lucky period for the U.S. economy — and that our luck has now run out.

Import prices were falling in the 90s, partly because of a surplus of oil, partly because third-world exporters were flooding the world with cheap goods, partly because the dollar was strong.
...
I remember describing it at the time as “1979 upside down”: the bad things that happened in the late 70s, with soaring oil prices and lagging productivity, were running in reverse. Now it seems to be all over.

Bill Clinton got some credit for all this — but the big, undeserved beneficiary was Alan Greenspan, who looked like a genius when he was mostly just in the right place at the right time.

Now Ben Bernanke is having to try and clean up the mess Greenspan made — and do it in a much less favorable environment.

Yes, it's all becoming very clear now.

ooo

This week's cartoon from The Economist:

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