House of Pain
The Daily Reckoning – Weekend Edition
January 13-14, 2007
Baltimore, Maryland
by Kate "Short Fuse" Incontrera
VIEWS FROM THE FUSE: HOUSE OF PAIN
At the Daily Reckoning, one of the things that we drill into our dear readers’ heads, day in, and day out is this: If you want the real story, you have to dig a little deeper than what you are hearing on the nightly news or from government reports.
And this week, the housing market data proved that point beautifully.
The financial press was abuzz, flying high on data released by the National Association of Realtors (NAR) and the government’s Office of Federal Housing Enterprise Oversight (OFHEO) and other various agencies that report on these kinds of things.
From the NAR: Third quarter median sales prices show just a modest downturn, only 1.2 percent, compared with a year earlier.
OFHEO shows that the home price index actually showed a gain for the same 12-month period.
And here’s what really had the housing bulls salivating: On December 27, the Commerce Department reported that sales of new one-family homes rose 3.4 percent in November from October.
Why then, are so many people involved in the housing market in pain?
Les Christie, writing for CNNMoney.com echoes our sentiment, saying "an Indiana man writes to say he can’t sell his house even asking for less than he paid – four years ago."
"A reader from northeastern Connecticut moved to Maine and can’t find a buyer for his previous house even though all he’s looking for is to sell for what he owes."
And the reports are much of the same all over the country. People can’t sell. Prices are still too high to buy in most the country. Loan defaults. Foreclosures. And so on.
"Over the last five years, a home was seen as an investment," says economist Edward Leamer, "Now it’s just a place to live."
Hmmmm…in our eyes, your home was always just that: a place to live. Unless you die, or move into an RV, you will always need a place to give you shelter.
But that’s neither here nor there. Let’s get back to the question at hand: Why is the overall feeling in the market so off-kilter with the actual data?
Going back to the CNNMoney.com report, one reason is that everyone involved in the housing market got used to operating in a bubble. "Most agents and many sellers haven’t seen a normal market," says Janet Branton, vice president of business specialties for NAR.
Okay, fair enough. But there has to be more to this disconnect…
"The market is weaker than the data say," asserts Mark Zandi, chief economist of Moody’s/Economy.com.
A NY Times article sheds some light on WHY:
"New home sales are tallied by the Census Bureau, based on a sampling of contracts signed by home buyers. Running at a pace of more than one million a year for the last four years, new home sales have been a significant contributor to the housing boom – and to the economy.
"But here’s the rub: If a contract to buy a home, signed in November, is cancelled in December, the Census Bureau does not subtract the failed transaction from the number of sales, or add the house back to its inventory total. In the last year, as the housing has cooled, the volume of cancellations has risen to epidemic proportions."
WHAT?! We are flabbergasted. Do they mean to say that the government reporting – OUR government reporting – has glitches in it? MAJOR glitches?! We can’t believe it.
In all seriousness though, there are a couple factors in why high-end homebuilders, like Toll Brothers, are reporting that cancellations totaled 37 percent of all contracts signed in the quarter, up from 18 percent in the same quarter of the previous year.
One reason for this phenomenon is that people are coming to the realization that they are going to have to really live in this house. No more flipping in previously "hot" markets, like Florida, at least not the way they could a couple of years ago.
Another big factor that plays in is people who were buying a new home are having major issues selling their already existing property – because buyers are definitely becoming few and far between.
So, in a nutshell, sales in the housing sector are overestimated. Mr. Zandi claims, "Given the rise in cancellation rates, it suggest that between 150,000 and 200,000 home sales are being counted that did not actually occur."
Demand is low, supply is high…and a recovery is not in our cards for the near future.
Chief economist for the Mortgage Bankers Association, Doug Duncan, believes that the slump will take at least until mid-2007 or until the end of the year to work through.
"We have to work off the excess inventory before real estate returns to trend lines," he says.
"The long run up may mean that the recovery takes a little longer."
Like we always say: Generally, the force of a correction is equal and opposite to the trend that precedes it. And the pain it causes is directly proportional to the pleasant deception that went before it.
This fact will be an unwanted discovery for those hooked on housing mania in the United States.
Short Fuse
The Daily Reckoning
— The Daily Reckoning Book of the Week —
The Second Great Depression
by Warren Brussee
From the book:
"The Second Great Depression is a frightening book. It shows how massive consumer debt will trigger the next depression, starting about the year 2007. Most of the logic used to support this premise is based on the government’s own published data.
"The exuberance resulting from the overheated stock market of the 90s caused consumers to stop saving and go into debt. Then, the dramatic drop in mortgage rates enabled people to refinance their homes and go evenfurther into debt. People are no longer living on what they can afford; instead they are living the lifestyle they think they deserve, costs be damned!
"With interest rates increasing, savings rates near zero, and debt at its maximum; many people will be pushed over their debt limit, having homes foreclosed by the banks or going into bankruptcy. Others will heed the warnings and reduce spending, causing a dramatic slowing of the economy.
"Other problems related to the economy, such as balance of payments and deficits, are discussed. But it is consumer debt that will trigger the depression."
To purchase your copy, see here:
THIS WEEK in THE NEWS: This is something new we’ve decided to add to the Weekend Edition – a brief collection of three or four items that caught our eye this past week. Let us know what you think – or feel free to submit interesting tidbits that you come across. Send your ideas to Short Fuse at kincontrera@dailyreckoning.com
*** Gold Prices Rise the Most in Two Months:
On Friday, gold futures for February delivery rose $13, or 2.1 percent, to $626.90 an ounce. This is the biggest gain since November 9.
"Gold as an asset class has re-established itself," said William O’Neill, a partner a commodity-research firm Logic Advisors, who expects gold to average $650 in 2007. "Gold has held well above the $600 level in the face of a strong dollar in recent weeks."
*** Look for a New Approach in Deciphering the Fed
Get ready for inflation targeting, asserts well-known economist Edward Yardeni. The Sun-Times reports, "Yardeni, who follows the Fed closely, notes that the concept of inflation targeting was discussed at the Fed’s October meeting, and probably will come up again later this month. In fact, he points out, the Fed is already targeting inflation rates, having agreed that the members are ‘comfortable’ with an annual inflation rate of between 1 and 2 percent.
"But an actual announcement of ‘inflation targeting’ would put an end to the ‘personality cult’ of Fed management that Bernanke decried in his 1999 book. Says Yardeni: ‘Bernanke wants the Fed to be independent of personalities; he doesn’t have that egotistical need that Greenspan had to run the whole show."
***From "Bicycle Kingdom" to Auto Market
The Chinese auto industry association reported on Thursday that China surged past Japan to become the world’s No. 2 vehicle market after the United States last year, as car purchases by newly affluent drivers jumped 37 percent.
"There’s money here and people want to spend that money on cars," said Michael J. Dunne, vice president for Asia-Pacific for auto research firm J.D. Power and Associates. "The Chinese government has made no secret of its intention to develop a car culture and a car industry. All of the forces are working together."
It’s been said that China could overtake the United States as top car market some time after 2015.
THIS WEEK in THE DAILY RECKONING: Missed an issue of The Daily Reckoning? No worries, we have them all catalogued for you, below…
The Heart’s Dupe, Part I 01/12/07
by Bill Bonner
"There are little lies we tell ourselves, and then there are big, mass illusions that sometimes cloud our rational way of thinking. In part one of his essay, Bill Bonner discusses the phenomenon of public spectacles and the great lies and/or small fibs that are necessary to perpetuate them. Read on…"
One Step Forward, Two Steps Back 01/11/07
by "Extreme" Ian Mathias
"You should feel very honored, dear reader. Our very own "Extreme" Ian has taken a break from writing press releases, fighting crime, and generally making women all over Baltimore swoon; just to bring you: A Layman’s Look at Bush’s New Plan to Balance the Budget. Read on…"
The Ultimate Contrarian Investment for 2007 01/10/07
by Nathan Lewis
"Move over Mogambo – in the battle of ‘who is best prepared for the worst’ Nathan Lewis has you beat…hands down. Read on for some helpful hints on how to be equipped for a worst-case scenario…"
Irreparable Cracks in the Financial System 01/09/07
by Dr. Marc Faber
"While Gloom, Boom and Doom Report’s Marc Faber is impressed by the prospects for today’s global economy, he is simultaneously concerned about the inflated asset markets around the world. Read on…"
Gold-Flavored Cannibalism 01/08/07
by The Mogambo Guru
"This week, The Angriest Guy in Economics meets up with gold, government blood drinkers, and his counterpart – The Mellowest Guy in Economics. No, it’s not a Scooby Doo rerun, it’s The Mogambo…"
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FLOTSAM AND JETSAM: If you live on the East Coast, how many times this week did you hear someone say, "I know it’s global warming, but it’s just so nice out that I don’t care." Here in Baltimore, we’ve heard it quite a bit, and James Howard Kunstler says that that kind of thinking is what’s going to get us in even more trouble…
The Warming
by James Howard Kunstler
Everyone was walking around upstate New York delirious in their shirtsleeves on Saturday as the thermometer soared into the sixties (an all-time record for January here). The resource cornucopians were beside themselves with glee as the price of crude oil nose-dived down to the mid-$50 range, proving what ninnies we Peak Oil alarmists are. The mustard greens we planted last July are still growing in the garden. The cat caught a garter snake. And later that evening those fluffy things in the headlights were moths, not snowflakes.
It was hard not to enjoy the end of the world. But despite all the high spirits and the roller-bladers and the kids hoisting their Ben-and-Jerry’s cones, one was provoked to wonder about all the deer ticks out there enjoying an extra breeding cycle, not to mention the deer themselves, fattening up on prematurely swelling buds, and the pine bark beetles we’ve been hearing about up the road in the Adirondacks.
And for the really farsighted, there is the contemplation of what summer might be like. After all, if it is 67 in January, might it be 107 in July? And maybe that won’t be so groovy. The electric grid is much more stressed out when all the air-conditioners are humming across the land. I’m not looking forward to Lyme disease, West Nile virus, or maybe even Dengue fever, either.
While it seems morally upright to inveigh against global warming Al Gore style, personally I don’t believe there is anything we will do about it, or can do about now. The feedback loops are in motion. Something ominous is underway far greater than our measly powers can correct. Even if we started it with about two hundred years of our fossil fuel fires, there is no evidence that can just stop burning coal, oil, and methane gas on the grand scale, or that the warming would stop if we did.
The response of our political leaders is laughable. The most "progressive" among them will demand rapid conversion of the U.S. automobile fleet to hybrid engines. I am confident that this would do absolutely nothing to put the brakes on global warming.
As usual, I am much more interested in how events are likely to turn out than in how we wish them to turn out. My guess is that the weird weather we are getting will increasingly affect crop yields. With populations growing, and weather anomalies increasing, grain surpluses worldwide are now at their lowest point in decades. All the major grain-growing regions have suffered either significant drought (US, Australia, Ukraine, China, Argentina) or flooding (East Africa, India) in recent years.
The poorer, "undeveloped" nations are feeling the pain first, as usual, and this pain is translating into political breakdown, violence, starvation, and genocide. At the same time, these poorer places are leaving the oil age behind. They have dropped out of the bidding as oil made its move above the $50-a-barrel mark. In these countries, there will no longer be fuel for electric generators or motor transport, and the primary manifestation of all that will be a breakdown of public health. Between the political death squads and the hospitals with no running water, tremendous forces for attrition are underway.
Oil priced beyond the means of Third Worlders means more for America, for the moment, and indeed the public here is glorying in still-affordable gasoline. Judging by the evidence in the supermarket aisles, there have been no noticeable Cheez Doodle shortages. There are certain Third World countries, however, that also happen to be major oil producers. Nigeria, for instance. It is already a very chaotic state. The oil there is extracted mainly by multinational corporations who pay substantial royalties and licensing fees to the Nigerian government. The people of Nigeria mostly do without.
Increasingly, they are tapping into pipelines illegally and siphoning off oil. Meanwhile, a quasi Civil War has provoked assaults and kidnappings against the oil infrastructure and foreign workers. Sooner or later, Nigeria will become too chaotic and its oil supply will go off-line, so to speak, perhaps permanently. When that happens, the happy motorists in Atlanta and the San Fernando Valley may start to notice that something is happening.
Global warming will not get our attention this winter. It’s too pleasurable here in the northeast United States, where so many decisions are made. The new Democratic congress may blather about it, but there will be no policies or protocols, just as there will be none about the other "elephant in the room" – overpopulation. There’s not a damn thing we’re going to do about it. You can deplore it, but then what?
Of course, I maintain that there is a broad range of actions we could take in the United States that would constitute an intelligent response to this Long Emergency of climate change and oil depletion. The most important thing we could do at the moment is to stop debating about all the different "innovative" ways to run our cars, and come to grips with the fact that we have to leave the happy motoring era behind us, period. I don’t see Nancy Pelosi taking the lead on this one. She’ll just bring a new kindergarten veneer to the same old politics of denial. The mid-winter cherry blossoms will only make the denial seem more festive.
[Editor’s Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.
His latest nonfiction book, "The Long Emergency," describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.
You can purchase your own copy here:
You can get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog – at his Web site:
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