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Economy

Investors As Wild Card

August 22, 2005 | 7:54 am |

cardhouse

Investors are the wild card of the current housing boom [Note: Subscription]. The NAR released a report last spring that said 23% of all homes purchased in 2004 were for investment and an additional 13% were vacation homes. Presumably, ratio of investors to owner occupancy will be even greater in 2005.

Here lies the problem for investors…

The rental market has taken a large hit over the past 4 years as lower mortgage rates have converted would-be renters into buyers. The free flow of capital stimulated rental development up until the past year, when it switched to condo development as prices rose rapidly. Now the increase in investor activity may drive down rents [Note: Subscription], placing more pressure for investors to sell quickly and not hold out for a higher price.

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To Muslims, Alternatives to riba

August 21, 2005 | 1:06 pm |

mosque

With a growing Muslin population in the US and interest in housing, an age-old dilemma come to the forefront. Purchasing a home with a mortgage is not religiously acceptable. This is because interest is seen as effortless profit.

Without mortgage, the purchase of a home for cash for many Muslims is not possible. In recent years, banks have come up with different solutions that are compliant under Islamic Law.

Avoiding riba or interest payments [Note: Subscription] has made home ownership difficult. One solution has been the lease-to-own model. Another way has been to form a housing coop.


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Lies, Damn Lies, And Government Statistics: Part II

August 21, 2005 | 12:07 pm | |

Go to the prequel of this post Lies, Damn Lies, And Government Statistics: Part I

And here is another post of the same topic concerning PPI Well, Maybe The Inflation Threat Is Not That Bad After All?

…After I finished my post on this topic last Friday, I came across yet another significant statistic that we should be uncomfortable with. Daniel Gross wrote an excellent article on productivity stats that suggests that the stats have even confounded Greenspan.

productivity
Source: New York Times


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Going Dutch

August 21, 2005 | 11:21 am | |

bubble

In today’s New York Times article, Professor Robert Shiller “>voices his concern about a real estate bubble. Professor Schiller is well-known for predicting the last stock market correction and possibly influencing Fed Chairman Greenspan’s use of the phrase irrational exuberance, the name of Professor Shiller’s subsequent book.

According to the article, origins of a housing bubble began with the Dutch about 400 years ago. Recently, a Dutch economist, Piet M. A. Eichholtz, a professor of Maastricht University, used Mr. Schiller’s method for converting actual sales into an index and found that the housing market saw a series of booms and busts. They found that in the long run, there was no long term trend and that prices match gains in personal income.

Mr. Shiller has a Norwegian housing index and a US Index that shows a similar pattern and is concerned that the recent run-up shows we are in a bubble.

shillerindex
Source: New York Times


To his critics, he says that housing charts generally go back to the 1970’s and stock market charts go back almost a century.


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What If?

August 21, 2005 | 12:21 am | |

You know what I am referring to…

Businessweek Online did a series of interviews with economists to see if a housing bubble exists.

While housing experts have described the current situation as either a bubble or at worst case, a boom,when a bubble bursts, the price drop tends to be gradual.

Reportedly more than 50% of the employment gains over the past five years have been related to the housing industry. So it appears to be clear, that a market correction in housing would do a lot of harm to the economy.

A study by National City Bank saw that in 1 in 5 metropolitan areas, housing outpaced income, making them more vulnerable. Fannie Mae is also concerned but says that the middle of the country is less of a concern than the coasts. Location seems to matter.

Americans are more vested in real estate than the stock market. According to the Federal Reserve, the appraised value of housing accounted for 145% of GDP while stocks and mutual funds accounted for 82%.

The Economist Magazine charted housing prices for Britain, UK and Australia. Both Australia and the UK saw far more appreciation than the US, more than double. Now price changes there have fallen below the US pace. The chart makes appreciation in the US look relatively tame.



Lies, Damn Lies, And Government Statistics: Part I

August 19, 2005 | 10:27 pm | |

Well, maybe thats a little harsh. Is it just me or is economic data released each month alternating between panic and calm? A lot of information is being thrown at us and its got me worried.

Over the past several months, the economy has seemingly see-sawed between improvement and decline. A lot of it has to do with revising previously released stats by the Department of Labor.

The factors that are used to seasonally adjust the data are updated annually. Also, seasonally adjusted data that have been published earlier are subject to revision for up to 5 years after their original release.

The first thing I want to (really) understand is seasonal adjustments. I am very wary of their use because the methodologies used by the Bureau of Labor Standards seem complicated and not fully explained. There does not seem to be a standard technique or a way of verifiying their validity.

Now we have concerns over the auto maker data which is important since it is a significant component of core inflation. Prices of cars in June rose 1.5% after a 1% fall in May despite aggressive discounting by automakers [Note: Paid Subscription].



As quoted in the Wall Street Journal…

But the advance in auto prices appears to be inconsistent with the aggressive discounting by auto makers over the past few months.

Another stat bash involves petroleum data [Note: Subscription] which is one of the major factors of CPI.

As quoted in the MarketWatch…

The oil market has always been volatile, but there’s one constant that reliably drives prices one way or another: the weekly reports on U.S. petroleum supplies.

With many home-buying consumers on economic pins and needles and a blind faith in government statistics, there should be concern that we are all getting more accurate information.

Go to sequel to this post Lies, Damn Lies, And Government Statistics: Part II


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The Wealth Effect: Stocks vs. Housing

August 19, 2005 | 8:12 am | |

With the discussion today comparing stocks versus real estate, its worth taking another look at a research paper from a few years ago: Comparing wealth effects: the stock market versus the housing market [Note: PDF] written by professors Case, Quigley & Shiller. In their abstract they state:

We find a statistically significant and rather large effect of housing wealth upon household consumption.

The wealth effect is defined as:

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

The impact on consumer spending is more than double when tied to the value of their home rather than their stock portfolio. This has broad implications for the economy and is likely of significant concern to the Federal Reserve in their recent policy of reigning in the threat of inflation.

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For Keeping the Rain Out, Housing Beats Stocks

August 19, 2005 | 7:36 am |

The article in the NY Times today “In the Long Run, Sleep at Home and Invest in the Stock Market” compared the stock market and real estate as an investment vehicle. The volatility of stocks over the past decade has faciliated a change in the perception of housing as an investment. With significant price appreciation over the past several years, that argument has been made even stronger.

As a pure investment, housing lags behind stocks in a long term window. However, homeowners generally calculate their return on investment off of the change in sales price or from their leveraged initial investment.

But when calculating the returns of both, which is tricky to compare, this quantification of the “use and enjoyment” of the asset makes real estate in this context, a better overall investment.

The use of the asset as a home, is where the return in housing exceeds the stock market. One way to figure the value for the use and enjoyment of the house is to estimate its rent. This quantifies the actual occupancy but falls short since it doesn’t quantify intangibles of pride of ownership, the flexibility to customize the home to your personal needs or style, etc. Therefore, the rental factor likely understates the value of using the home, suggesting that the returns on housing would be even higher.


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Home, Sweet, Condo?

August 18, 2005 | 10:20 pm | |

According to this article from the Real Estate Journal [Note: Subscription], condo prices exceeded single family home prices for the first time ever in early 2005.

Condo Facts
* Condos leapt to prominence after the 1961 Housing Act enabled the FHA to insure mortgages on the units.
* 970,000 condos were sold nationwide in 2004
* 1 out of 7 existing home sales are condos
* national median condo sales price is $223,500
* national median home sales price is $218,600

Why are the overall condo prices higher than houses?

With the resurgence of urban areas and a decline in “nuclear” families (40% in 1970 to 24% in 2000), condos have increased in demand.



Areas of Concern
Now there is concern that the change is more than demographics, that condo prices are rising too fast [Note: WSJ Subscription] as a result of speculators and investors favoring them over housing.

With great investor concentration in condos, could infer that the single family housing market has the potential to be less volatile in a market down turn.

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Well, Maybe The Inflation Threat Is Not That Bad After All?

August 18, 2005 | 2:32 pm | |

Yesterday, the Bureau of Labor Statistics released the CPI figures for July and while core inflation was relatively flat, energy and housing saw large gains. The concern was that oil was threatening to fan the flames of inflation. The PPI Report

A day later that concern seemed a bit exagerated as…economists expressed little concern [Note: Subscription] that the higher prices producers are paying signal broad inflation.

Economists also pointed to Tuesday’s consumer-price report, which showed a modest 0.5% advance in July, with the core rate increasing a benign 0.1%.

In addition, the producer-price index for intermediate goods rose 1%, largely because of energy-cost pressures, and the core intermediate index fell 0.1%, the third consecutive monthly decline.

What is the Producer Price Index? In other words, CPI measure price changes to the buyer while PPI measures price changes to the seller.

Rising oil prices appear to be slowing economic growth and placing investor concerns of inflation at ease for now.

Economic stats seem to be more volatile than ever. For example, core cpi would have been even lower had it not been for the rise in auto prices, yet this does not correlate with recent record auto sales due to aggressive discounting. Economists have long complained about the reliability of auto sales and later revisions. Accounting for about one-sixth of US jobs, so the impact of these stats affects the reliability of the overall numbers significantly.

What does all this mean? Many believe the Fed has at least 3 more increases in it before the end of the year. This doesn’t seem to mean that mortgage rates are bound to increase.

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What Else is New? Existing-Home Sales Hit Records, But…

August 17, 2005 | 8:40 am | |

The recurring theme across the US is an increase in the number of sales and sales prices. NAR’s existing home sale report saw a record pace in the number of sales. West Virginia drew top honors with the largest gain in sales activity over the past year.

In addition to volume, housing prices have been rising nationwide. Condos seem to be leading the way in Massachusetts [Note: Subscription].

Around the country housing prices and exist-home sales are setting records or near record levels but the rate of appreciation seems to be easing across the country.

Regional articles: Wisconsin
Minneapolis
California
Southern California
Wisconsin
Upstate New York


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Bond Market Likes Core Inflation Stats

August 17, 2005 | 7:49 am |

The US Labor Department released their CPI report which indicated that U.S. CPI was up 0.5% in July, largely on energy costs. CPI (Inflation) is up 3.2% over the past year, as compared to 2.5% over the prior year. Still historically low but a cause for concern. Housing accounts for 40% of overall CPI.

CPI7-05

It is interesting to note that the previous [table from the BLS.gov site] the year over year change in CPI was actually much higher in February through March.

bankrate8-05

Core inflation, which excludes food and energy costs however, was virtually flat at 0.1%. With core inflation rates so low, the bond market now seems to view rising energy costs as predictive of softer future spending, and less of a red flag for inflation.

This may influence long-term mortgage rates to stay at low levels since bond investors still don’t appear to be overly concerned about inflation at this point. Mortgage rates have actually trended down since the end of the first week of August.

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