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Beige Book Says Goldilocks Is Still Not That Hot

March 16, 2006 | 12:01 am | |

In the Fed’s ‘Beige Book’ Finds Continued Economic Growth [WSJ] article, Economic activity “continued to expand” in most of the U.S. Federal Reserve’s 12 regional districts in January and February and employment strengthened, but labor costs and retail prices remained under control, the Federal Reserve said Wednesday.

The Fed said that business contacts “generally reported ongoing input cost pressures,” with energy prices “mentioned frequently.” However, those pressures didn’t appear to spill over into consumer prices, with the Fed stating that “prices at the retail level increased at only a moderate rate.”

Here’s the Federal Reserve summary [FRB]

The Fed’s rate-setting Federal Open Market Committee is due to meet March 27-28, with analysts expecting new Fed Chairman Ben Bernanke to oversee a quarter-point interest rate rise to 4.75 percent. Job creation and other economic data in recent weeks have been strong and many economists expect rate hikes this month and again in May to keep inflation risks under control [Reuters].

In other words, they painted a picture that the optimal Goldilocks Economy: Not Too Hot, Not Too Cold still seems to be in place. Since the next FOMC meeting at the end of this month may be one of the last two rate increases, which could take pressure off of the housing market by stabilizing mortgage rates. Its still a Catch-22 however, because the expected rate increases will keep inflation in check but inflict more damage on the housing market, which has the potential for more significant economic damage as a result.

It sure seems like the Fed goes two rate increases when it comes to housing. Obviously, thats not their sole focus but in this situation, it would appear to be more important than ever.

Both long term and short term rates have upticked lately tempering volume and has cause a reduction in the number of sales and tempered or caused a decline in housing prices in many markets.

_Of interest_
What is the Beige Book and why is it Beige? Economically Speaking, Its Beige [Matrix]

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An Overload Of Housing Stats And Still No Clarity

March 2, 2006 | 12:01 am | |

There has been a barrage of data released over the past two days and all seem to point in the same direction…down. However, its seems like a see-saw rather than a cohesive trend. Granted, the real estate related economic news is definitely not positive, but there is an awful lot of creedence placed on national statistics that is applied local markets as gospel. For example, if you own a stock, and the Dow Jones Industrial Average goes down that day, you may feel down even though the behavior of the DJIA may have no correlation to your own stock. National statistics are released monthly for the most part and it takes 3-5 months of consistent patterns before a trend becomes recognized by the masses. There’s enough of a dataset for monthly stats, but does a month to month change tell us much?

Here’s my issue with this barrage of information:

- national housing statistics do not necessarily apply to a local market.
- no methodologies disclosed for seasonal adjustments.
- refinance data included in the OFHEO sales stats.
- housing sales data converted to rental data in inflation calcs.
- most indicators are adjusted 1-2 times after the initial release.

Here’s the barrage of monthly economic data from the past few days (it occurs about this time every month):

  • New-Home Sales Falter [] Sales of new single-family homes in the U.S. fell 5% in January, and the amount of unsold inventory rose to the highest level in nearly 10 years, the Commerce Department said Monday.

  • Number of Unsold Homes Hits Record High [Washington Post] _The backlog of unsold new homes reached a record level last month, as sales slipped despite the warmest January in more than 100 years.

  • Existing-Home Sales Fall Again; Consumer Confidence Wanes [WSJ] …a closely watched gauge of consumer confidence declined last month, driven lower by a drop in expectations for the economy over the next six months.

  • Like a Lion [WSJ] The Commerce Department will likely report today that in January, for the fourth month in a row, Americans increased spending at a faster pace than their incomes rose.

  • Sales of Existing Homes Near 2-Year Low; Consumer Confidence Ebbs [NYT] Sales of existing homes dropped to their lowest level in nearly two years in January, and the number of unsold homes on the market rose, a trade group reported yesterday. Also yesterday, a survey showed a surprising dip in consumer expectations, and the Commerce Department revised upward measures of economic growth and inflation in the fourth quarter. Taken together, the figures suggested that the economy, while strong today, may be poised for a slowdown in the second half of the year, especially if the Federal Reserve continues increasing short-term interest rates to keep inflation in check, analysts said.

  • Inflation eats up most income gains [MW] Real disposable incomes — after inflation and after taxes — increased 0.1% in January, the weakest gain since August. Real disposable incomes are up 2.2% in the past 12 months. Real consumer spending — adjusted for inflation — increased 0.4% in January, the weakest growth since October.

  • Home loan applications fall despite rate drop [USAToday] The Mortgage Bankers Association’s seasonally adjusted purchase mortgage index — considered a timely gauge on U.S. home sales — decreased 1.9% to 400.8 for the week ended Feb. 24 from the previous week’s 408.7.


And The Survey Said… Its Not How Much You Have, Its How Much You Can Borrow

February 24, 2006 | 12:03 am | |

In the Wall Street Journal today, they report the findings of the Federal Reserve in the article Typical U.S. Family’s Net Worth Edged Up Only 1.5% in ’01-’04 [WSJ].

Source: WSJ

Download the report [pdf]

A booming housing market boosted the typical American family’s wealth between 2001 and 2004, but stagnant stock prices and rising debt offset many of those gains.

The report, the most comprehensive survey of household wealth, also found a widening of the gap between households at the top and the bottom of the economic ladder. “While the typical American household basically ran in place, less affluent households actually lost ground,” said Stephen Brobeck, executive director of the Consumer Federation of America.

The net worth of the typical family in the richest 10% rose to $831,600, a 6.5% increase from 2001, adjusted for inflation. In contrast, the net worth of the typical family in the bottom 25% fell 1.5% to $13,300.

In CNN’s Fed wealth survey: How do you stack up? – Feb. 23, 2006 Americans’ net worth grew between 2001 and 2004, but not nearly as strongly as it did between 1998 and 2001, according to the Federal Reserve’s triennial Survey of Consumer Finances released Thursday.

All stats in the current study were based on the period 2001 to 2004

  • Net worth – up 1.5% versus 10.3% from 1998 to 2001. The increase in homeownership caused the current gains but much was offset by the increase in debt.

  • Income – wages fell 6.2% after adjusting for inflation.

  • Assets – increased 10.3%

  • Debt – increased 33.9%

In other words, the sharp rise in housing prices has done little to increase the net worth of individuals because the gains have been largely offset by the increase in debt. With incomes falling over this period, real estate price gains would be expected to be tempered. Going forward, this would be expected to limit further significant appreciation in the near term.

FOMC Sees Mortgage Rates Effect On Housing As A Conundrum-22

February 22, 2006 | 12:01 am | |

In Greg Ip’s article Fed Minutes Indicate Inflation Still a Worry for Some Officials [WSJ] he indicates that The Federal Reserve sees that the risk for future inflation could rise over the next few months influenced primarily by energy costs but that this effect was not considered to be long term and seem to have 1-2 more increases to go.

View the minutes [FOMC]

Bernanke did not attend this meeting but his testimony was consistent, except for housing where the FOMC seemed to have more concern about housing than he does.

The minutes showed a higher level of concern about the housing market than Mr. Bernanke indicated at his testimony last week. “In some areas, home price appreciation reportedly had slowed noticeably, highlighting the risks to aggregate demand of a pullback in the housing sector,” the minutes said. Some officials thought the effects of an end to rising house prices were “potentially sizable,” and could be compounded by rising debt-service costs as variable-rate mortgages are reset at higher rates.

The issue of housing and its significant impact on the overall economy is a Catch-22 since rising short term rates cool off the economy, and is largely being done through the housing market as a conduit. At the same time, if inflation is not kept in check, long term rates will rise, also cooling off the economy through the housing market.

Its a Conundrum-22 if you ask me.


Not Enough Political Capital Left For A Mortgage Deduction

February 20, 2006 | 12:01 am | |

In this CNN article Bush: ‘Don’t worry about mortgage deduction’

Answering a question from a home builder during a question-and-answer forum in Florida, Bush said, “I don’t think you have to worry about the mortgage deduction not being a part of the income-tax law.” In November, a tax reform panel appointed by the president submitted a report that recommended putting limits on the mortgage interest tax break in two ways:

  • Lowering the mortgage-interest cap, which is the amount of a loan on which homeowners would receive a tax break for interest paid. The panel suggested lowering the cap from $1 million to the average regional home price, in the range of $227,000 to $412,000.

  • Converting the mortgage interest deduction to a tax credit equal to 15 percent of interest paid on mortgages up to the cap.

Bush seemed to settle concerns that the mortgage rate tax deduction, the bedrock of the housing market, would be introduced. The removal of the deduction idea had come up initially as a way to quickly offset lost revenue from the Alternative Minimum Tax that was going to be phased out.

I still have a problem with the contradiction coming from the government regarding this issue. Housing has always been a centerpiece of economic stability and servcies relating to homeownership has been a key driver of the economy. Homeownership has reached an all time high of 69.2% of Americans [WSJ]. Seemingly everyone has bought into that ideal.

With a weakening housing market, the loss of the mortgage deduction at this point could become a flash point causing far more damage than would have occured if the market was still in the middle of a housing boom. It has been said that the loss of the deduction could drop housing price levels 10% to 15% overnight. With all the problems Bush has had in the polls in recent months, he seems to have decided its a fight not worth pursuing.

Plus he would lose his deduction for his ranch [Google].

A Leaky Roof But Housing Market Remains At Watershed

February 17, 2006 | 12:01 am | | Public |

In Howard Gold’s Fighting The Tape column Is It Crunch Time for Housing? [Barron’s], he suggests that this spring determines how the residential housing market, which is one of the key contributors to the economic recovery, will behave over the next several years.

The points he makes are:

Inventory is up [WSJ]
Toll Brothers reports a 29% drop in orders

Mark Zandi of writes: I don’t think nationwide you’ll see a bust,” says Mark Zandi, chief economist of Moody’s But we might in certain markets, he adds — the usual suspects like Miami, Las Vegas and Phoenix.

(and we can’t omit moi)

This is a watershed moment,” says Jonathan Miller, president and chief executive officer of Miller Samuel, a large New York real-estate appraisal firm. “If we’re going to see trouble, it’s going to be over the next 12 to 18 months.

What I mean by this is the following: Bernanke indicated today that the economy is very strong and so is housing. It has been speculated that he has at least two more rate increases in store for us until he takes a breather. That will further weaken the housing market as things continue to get more expensive for the ARM mortgage customers who largely financed the housing boom.

It’s a three- to five-year cycle on the downside,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. Rosen calls himself a real-estate bear who endorses the doom-and-gloom scenario of Yale University professor Robert Shiller.

We’ve already passed stage one, characterized by “a falloff in new sales and orders,” says Rosen, and are just entering stage two, in which unsold inventories build up.

Inventory and mortgage rates are the key concerns.

In Nicholas Yulico’s article Housing Starts Explode [], January new housing starts increased 12.8% above December. Initial reactions from optomists said that this was evidence that the housing market was back. Actually, the surge was due to unusually warm weather for December which enabled builders to build. This will compound inventory problems since inventory was already rising without help from new construction.

(In the Barron’s piece, I close out with moi)

“The boom is over,” declares Jonathan Miller. That perception no doubt has begun to trickle down to prospective buyers and sellers

Its a bit dramatic but its taken about 6 months for many in the real estate market to come to terms with this.

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Bernanke Comments While Greenspan Gets Paid

February 16, 2006 | 12:01 am | |

Bernanke’s first presentation before Congress as Fed Chair indicated that interest rates may need to go higher.

Text of Bernanke’s testimony before House panel [MarketWatch]

The WSJ provided some analysis of his remarks before congress today Bernanke Sticks to Fed Line, But Offers Some New Hints [WSJ].

Some cooling of the housing market is to be expected and would not be inconsistent with continued solid growth of overall economic activity. However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely. Slower growth in home equity, in turn, might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated. To some extent, sizable increases in household wealth, as well as low interest rates, have contributed in recent years to the low level of personal saving. … Over the next few years, saving relative to income is likely to rise somewhat from its recent low level.

For a good post on his speech, go to econobrowser

Bernanke basically indicated that he will continue to be an inflation hawk and may have to reign in a strengthening economy. He will watch over housing carefully, but it sounds like a few more rate increases are in store for us, which will likely mean slightly higher mortgage rates. There had been some speculation that the fed was done with its poloicy of measured growth. If the economy is indeed growing and getting stronger, then the Fed will raise rates to stem inflation, housing values may be impacted by rising mortgage rates and consumer spending could slow sharply, perhaps forcing the Fed to drop rates at a later date.

In Bernanke takes the stage [Chicago Tribune], the reporter indicated that “Bernanke wound up defending Greenspan] for recent speeches the former Fed chief has made on economics in Tokyo and New York for a speaking fee reported to be as high as $125,000. In one instance, Greenspan’s reported remarks showing concern over the housing market had a brief impact on financial markets.”

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Potty Talk Becomes Toilet-Side Technology

February 13, 2006 | 12:01 am | |

The article The Type-A Bathroom [WSJ] the sanctity of the bathroom has been compromised by a new trend in construction that caters to workaholics.

This trend is not just appearing in “smart homes.”

The humble bathroom, long a place of refuge and solitude, is playing quiet host to more workplace transactions. Bathroom business has gone way beyond tapping out furtive emails on a BlackBerry. Lately, more hard-driving homeowners have converted their loos into virtual satellite workspaces, with retractable desks or waterproof touch-screen monitors. Manufacturer Acquinox of New York says sales of its steam shower/whirlpool units — a hands-free phone is standard in each — nearly tripled last year to 14,800 modules. Wisconsin-based Seura, meanwhile, reports rising sales of its vanity mirrors, which feature LCD screens in the glass. The mirrors, starting at $2,400, let users check their tie-knot, then flip a switch to watch the embedded TV.

Many Type-A bathrooms are showing up in high-end “smart homes,” which feature computer systems that let homeowners control music, temperature and lights from wall-mounted touch pads. Now, builders and interior designers say, more owners also want toilet-side technology.

When I read the WSJ article, the authors casually mentioned the phrase toilet-side technology. I was not familiar with it and I had to look it up.

I went to one of my favorite vocabulary resources (goodness knows I need it) Word-spy and looked up toilet-side.

Relating to something positioned beside or within reach of a toilet.

They used the WSJ article as an example of its correct use, proving yet again that the WSJ is a leading-edge publication. 😉

Rhymes With Pillow: Takes A Breather

February 9, 2006 | 12:30 am | |

At a party recently, I had the chance to meet Richard Barton, the founder of Zillow and he mentioned he was starting up a real estate site. He was a nice, very low key guy who happen to be one of the founders of, which turned the travel industry on its ear. His new site, Zillow got everyone’s attention and no one knew what it was – until yesterday. Inman spent a lot of effort peaking our curiousity and I got a lot of calls from people in the industry asking what the heck it does.

Wednesday was launch day. I read four articles this morning about the site and got excited to check it out for myself when I got into work. The NY Observer article was especially good. In fact I read it on my Treo as I commuted in to work.

As far as the media coverage goes, I find it interesting that technical tools like this are often painted as spelling the end of full service brokerage services. I find this point hard to accept. I think that tools like Zillow and others are a natural evolution of technology and special services like this offer something that full service brokers cannot provide and really aren’t in business to provide. I think its kind of like the iPod. Apple builds them but third parties build all the add-on accessories.

The result of these tools is a more efficient market because of the additional flow of information. Its also raises the bar for full service brokers to have staff that are more fully informed about the market. There is opportunity to interpret information. Over this next year or so, the number of transactions is likely to drop and many brokers who have relied on being order takers will now have to actually market. Those that always marketed in boom times, should have nothing to worry about.

Since the Zillow involves valuation, and I am an appraiser, I was especially curious because its such a daunting effort to automate valuation on such a large scale. In fact, for the most part, the lending industry has been trying to do this for the past 5 years with limited success (If you base success on accuracy rather than simply pushing paper for the files to keep the regulators happy). A few months ago, a national lender told me that out of the 10 major automated valuation services (AVM’s), 8 were totally unreliable, 1 was marginal and 1 was pretty good. This lays the groundwork for my initial skepticism about Zillow, but I am open minded. I think it will evolve and will have more strength in certain markets than others depending on the data they are fed.

Well, apparently, the public relations juggernaut the emerged over the past few weeks with the build up, overwhelmed the site early in the day and as of 11:51pm tonight they are still of the air. I found their ZillowBlog which explained the problem and put a human spin on it. They should definitely link the blog to their home page to keep a dialog of their technical progress.

For those who were lucky enough to get access, the reviews were pretty good but basically mixed (after all this is a beta and there is a lot more data for them to tap into.) Of course the “red light theory” seems to apply here. Users will likely only remember the valuations that were not accurate and not those that were.

I anxiously await my turn. I am sure this is going to be fun. More to come.

_As seen from their web site_

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Townhouse Gets All Geothermal

February 6, 2006 | 12:02 am | |

In Troy McMullen’s House of the Week column Geothermal New York [WSJ], he presents a $7.8M Manhattan townhouse listing with an unusual heating system, especially on an island made largely of rock.


An unusual geothermal energy system provides heating, cooling and hot water. Pipes extend about 1,400 feet into the earth, where the temperature is always about 52 degrees, according to architect Alexander Gorlin, who writes about the home in his book “Creating the New American Townhouse.” The pipes transfer energy to the house, where two-layer-thick concrete exterior walls, filled with thermal materials, trap the energy and distribute it, Mr. Gorlin says. (All floors also have radiant heating systems.)

I suspose installation of this sort of system would be especially difficult in Manhattan with its labrynth of underground subways, water pipes, wiring, sewers and of course…rock.

Good Deeds Bring Hard Decisions For The Boy Scouts

February 2, 2006 | 12:01 am | |
Source: WSJ

The housing boom has forced many organizations with valuable real estate assets, to consider what was once unthinkable. In a page one story in the WSJ Boy Scouts Weigh Merits of Unloading Hot Real Estate: Thinning Ranks, High Prices Tempt Them to Sell Camps, But Locals Put Up a Fight

Fights like this are playing out across the country, as scouting groups face lean coffers and declining membership. Many councils, especially those in hot real-estate markets, are debating whether to cash in on skyrocketing property values. As a result, struggles — over camp land and all it symbolizes to local residents — have erupted in such states as Michigan, Texas, Arizona and Washington. Mere rumors of a possible sale often spur action by community members. Some try to buy the camps themselves or align themselves with nonprofit organizations to bolster their chances in a bidding war. Others file lawsuits or wage zoning battles.

Boy Scout and Cub Scout participation was about 6.5 million in 1972, but totals about 4.2 million today, excluding new programs. That decline has caused some councils to merge, sometimes creating organizations with multiple camps and not enough money to maintain them. Each Boy Scout council is a corporation, beholden to the policies of the national organization, based in Irving, Texas, but they raise their own funds, manage their finances and make decisions about property and programs.

Organizations like the Boy Scouts, with thinning ranks, are being forced to consider selling off land that, in the case of Bradenton, Florida, is ripe for development. Speaking as an Eagle Scout, once very active in the organization, and knowing how much land is owned by various Boy Scout Councils, it won’t be an easy road as pragmatists go up against those with strong emotional ties to the properties.

Once Measured, Greenspan Says Goodbye With Number 14: Bernanke Starts Today

February 1, 2006 | 12:02 am | |

Source: WSJ

The housing market has greatly benefited from the Greenspan era, especially over the past decade. The Federal Open Market Committee strategy began to finally crimp growth in the housing market this past summer after 12 months of rate increases. The recent change in the housing market was effected by rising short term rates designed to reign in the inflation threat, before which low rates previously had provided an historic level of affordability to purchasers and triggered one of the most significant housing booms of all time.

Over the last several months, long term rates have remained largely stagnant, even falling, but short term rates have continued to rise.

Of great concern to the housing sector is the actions of the incoming Fed Chair Bernanke since Greenspan seemed in favor of asset appreciation, both in stocks and housing, while at the same time, was inflation-averse.

Mortgage rates have driven this housing boom and will determine the eventual outcome.

The FOMC raised the federal funds rate for the 14th time in a row by 25 basis points to 4.5%. Most economists think there is at least one more increase left before FOMC takes a breather. However, Bernanke, may have some wiggle room and forgo or skip a rate increase at the next meeting.

The removal of the word “measured” has been seen as a sign that the Fed is nearing the end of this 18 month strategy. The WSJ does an amazing job dissecting the FOMC letters after each meeting [WSJ]

One thing I will miss about Greenspan is the intense analysis of his vocabulary. Just think about what the WSJ has done here. It has dissected a one page letter to generate clues about future rate moves. This is insane, but necessary.

Bernanke is in favor of more openness with the target rate goals of the Fed. This will likely only work if he does not burn up the credibility that Greenspan has amassed over the past 18 years. How his moves impact the housing market and its importance to the economy, will largely determine his success.

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