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Posts Tagged ‘Alan Greenspan’

[Matrix Zeppelin Series: Readers Write] Thoughts About Trolling For Crazy Prices, Phantom Listings And Causation

August 9, 2006 | 10:11 am | |

August should be a slow month for real estate commentary as people take time off to relax, assuming they are not melting as the sun seems to be crashing to earth. Matrix readers however, have been cranking up their air condtioners and reflecting on housing related economic changes.

Throwing caution to the electric power grid, here’s a few notable comments from the Matrix Zeppelin:

  • When housing prices were going through the roof, the FED kept interest rates low, based on the fact that “inflation,” which uses rents as the basis of housing costs, was low. Greenspan and then Bernanke made the case that the FED should focus on inflation, not asset prices (like the price of owner-occupied housing). How that housing prices are softening, but rents are rising, it appears the measure of inflation is shifting to the former. Bottom line: policy is inflationary. Governments, households, and (if you include pension liabilities) businesses are deep in more debt than they can service. Those debts cannot be paid in today’s dollars. The options are a reduction in the value of the dollar, which is to say inflation, or mass default. The hope appears to be that inflation will bring nominal income up to the level required to support today’s housing prices and credit card debts. The problem: lots of the debt is variable rate. But someone seems willing to lend for 30 years for no more than the return on cash. Amazing.

  • …allowing for inflation and a weakening dollar just to rescue those who got into real estate over their heads. I’m not certain why anyone should feel responsible for their behavior anymore, if the government is just going to come in and clean up their messes for them.

  • I wonder if any meaningful proportion of the residential listings currently on the market are sellers who are not serious and/or are “trolling” for a crazy price. I know several people personally who have their apartments listed but whose selling is strictly optional (meaning, they don’t have to relocate, don’t need a larger space for more kids, etc.), and their pricing reflects their flexibility. They offer what they consider to be a “score” price, meaning if they sold it at that they’d be very happy with their returns. That might be one of several contributing explanations to the reduction in sales volume without a related reduction in prices, a phenomenon you’ve mentioned several times and this article [CNN/Money] reminded me of again.

  • One could hypothesize that there is currently a greater proportion of such listings in the total, due to the widespread perception over the past year that the “bubble” was peaking. That might account for a bit of “phantom” inventory in comparison to previous eras. One could then extrapolate that the inventory growth or level was somewhat exaggerated.

  • The WSJ journal incorrectly states that the boom began in 1991. However, prices in many places were in decline for several years after that. Their chart shows that the decline in sales activity stopped getting worse in 1991, but remained below the long term trend until 1998. I would pick that point as the start of the “boom.” Until then it was merely a weak recovery.

  • Your use of the term “stagflation”, two days in a row make me want to go out and find a used AMC Pacer to buy.

  • I believe between 2002-2004 we were all playing in a market that never really existed. With the correction of compliance over appraisals we are now starting to see who we can start pointing fingers at.

  • Low rates and exotic loans allowed people who could not purchase in the past the chance to buy a home. But eventually, prices (in certain areas) ran much higher than median incomes could afford. And now we have the market slow down and eventual correction. How the correction will play out… I really don’t know. I think many like to point to RISING mortgage rates (and will do so more and more) as the cause of the housing slow down, but I think it was the low rates (and exotic loans) that ACTUALLY caused it.

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[Getting Graphic] Cooling Economy Makes FOMC Stop

August 9, 2006 | 6:38 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).

Click here for full graphic [WSJ].


Inspired by Greenspanspeak, and transitioning to Bernankespeak, the Wall Street Journal continues a well-executed tradition of graphically interpreting what the Fed really means.

The official press release [FOMC]

There have been some inflationary signs recently with rising energy costs, concerns about supply and core inflation has risen as well (inflation without food and energy). However, the fed indicated that these will work themselves out and did not raise rates. The first time the fed has paused after 17 consecutive 25 basis point increases since June 2004.

Basically, their observation on housing was consistent with June but the overall economy has essentially changed. I’d venture to guess that the economy changed because housing kept doing what its been doing over the past 2 months and was the primary catalyst for the economic change. Its interesting because the fed seems to be saying from their position that housing didn’t deteriorate further since they used the exact same language in the statement (see bold).

August Statement

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

June Statement

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

With the state of the nation’s housing, it is sure looking like rate cuts in 2007.

_June Statement Analysis_
FOMC Makes It 17 at 5.25% And Seems to Get It About Housing [Matrix]

_Why this might mean the end of rate increases for a while_
Why a Pause in Rate Cycle Is Apt to Be the End: Caroline Baum [Bloomberg]

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Fed Is Looking Down The Road Now, Not Just Over The Hood

August 7, 2006 | 6:16 am |

Neil Henderson’s article Secret of the Up-or-Holding Rate: Tuesday’s Fed Mystery Theater [WaPo] provided an excellent analysis of how the Fed has changed its communications with investors from short term to long term clues.

In the Greenspan era, everyone seemed to be on the same page about what sort of rate change was going to be made at the next Federal Open Market Committee meeting.

In public appearances, Bernanke gives the goal but not the mechanics.

In mid-July, he outlined the collective goal of the policymaking Federal Open Market Committee: a so-called “soft landing” in which the economy slows down just enough to tame inflation without sliding into recession.

The forecast represents what the policymakers expect to happen if they adjust interest rates just right — without saying specifically how they will do so.

This approach is called “inflation forecast targeting” by Fed economists and academics.

No clues have been provided by FOMC members because they don’t really know going into this meeting what the consensus us. The San Francisco Fed President said in a speech that she would favor a pause [FRBSF] because if inflation starts to respond to the rate cuts, they have overshot the market but thats hardly the consensus.

The Fed Futures index indicates a 60% chance the Fed will pause tomorrow. On Friday 17 of 22 major Treasury bond dealers polled by Reuters were telling their investor clients that the central bank would hold its benchmark short-term rate steady at 5.25% when policymakers gather Tuesday. [LA Times]. If true, this would be the first time since May 2004 that no rate rise occured.

The weak jobs report last week [Barrons] seemed to make the odds much better. For the past six weeks, treasury yields are their lowest in 6 weeks (yields down = bond prices up) as investors have been fighting to buy the bonds. However, the end may be near as the market has been over-speculated and rates may nudge up a little. Even so, the 10-year has dropped from about 5.2% to about 4.9% over this period. In some local markets, dormant as of late, have been showing some signs of stirring even though its summer. Rate fluctuations bring people in and push them out like the tide.

As far as housing is concerned, slightly weaker rates is a mixed blessing since it comes primarily from a weaker job market. You need income to buy a house. Short term Fed trends won’t undo the damage caused by long terms trends but its a start.

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[Getting Graphic] FOMC Makes It 17 at 5.25% And Seems to Get It About Housing

June 30, 2006 | 6:40 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).

Click here for full graphic [WSJ]

The official press release [FOMC]


Inspired by Greenspanspeak, and transitioning to Bernankespeak, the Wall Street Journal continues a well-executed tradition of graphically interpreting what the Fed really means.

Inflation is a concern but they don’t seem as intent on raising rates indefinitely. August is looking pretty definite as far as rate increases go.

The federal funds rate has been raised 17 consecutive times since June 2004 by 25 basis points and is at its highest level in 5 years [WaPo].

As a relief to many, the FOMC specifically recognized that housing does play a significant role:

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

I still contend that the full thrust of the cooling of the housing market is not fully borne out in the stats and we are headed for more economic weakness in 2007. The use of the dreaded “R” word will accelerate. Merrill Lynch economists say there is now a 40% chance of a recession in 2007 [Calculated Risk].

That could mean rate cuts next year but thats only good news to housing if job creation doesn’t deteriorate too much.

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Waking Up At Sunset: NAR Declares Housing Boom Over

June 12, 2006 | 12:01 am |

Former Fed Chairman Greenspan, even while out of office, seems to still speak for the US housing market these days when he announced in a May 18th speech [Matrix] that the the housing boom was over.

Two weeks later, the NAR concured. They acknowledged that the housing boom was over in their press release of June 6th Home Sales Settling Down and Appreciation Slowing [NAR].

When I read the release on June 6th, I was really dissappointed since the NAR should be a leader on housing market issues, not simply provide a politically correct response when they are forced to. There has been endless rhetoric and spin on the data that they have been releasing over the past 6 months and frankly, I didn’t have the energy to comment on it. Now that I have had time to consider it, I am very annoyed. The quotes in the release are in stark contrast to what had been said to date.

The housing boom has ended but sales at historically healthy levels will continue, and price appreciation will return to normal patterns across much of the country, according to the National Association of Realtors®.

David Lereah, NAR’s chief economist, said home sales are settling into a slower pace. “In recent years we were occasionally challenged to find appropriate superlatives to describe surprisingly high home sales,” he said. “Now the housing market has cooled, but 2006 is still expected to be the third strongest on record. In this case, experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability. But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable.”

I think NAR has been worried that any admission of market weakness would indicate that a crash was looming. Hence David Lereah’s classic quip [Matrix]:

Do you think the housing market could ever crash? I’m getting tired of all these doomsayers. We live in houses, and our houses are not going to crash.

Yet it was another missed opportunity to reconnect with the public and does more damage to their credibility. Leadership on this issue would have been a whole lot cheaper than a new ad campaign. The last one focused on how brokers were interconnected with their community and follow a code of ethics.

As the housing market cools and membership drops (probably quite sharply over the next two years) from attrition due to lower sales volume, lets hope that the NAR leadership becomes interconnected with the American public again. They have access to and publish a lot of great data, which should mean they are more on top of whats happening than their press releases seem to show.

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[Getting Graphic] Imput This: Rentals And Sales Trends Are Different

June 9, 2006 | 10:28 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).


Click here for full graphic [NYT]

In 1996, when the imputed rent replaced sales trends in the CPI calculation, the government provided evidence that this would have little impact on CPI. However, in Floyd Norris’ column this week What Happens if Inflation Is Overstated? [NYT], he shows that things have changed considerably since then.

  • Sales have doubled
  • Rents have increased by a third

I commented about this last February in the post At The Core Of Inflation, Housing Sales Are Merely Rentals.

There is the belief that inflation was understated because rentals were weaker than sales during the housing boom and quite possibly the Fed may have been quicker to raise rates to cool off the market. Now with the rental market expected to grow, inflation may be over stated.

Higher interest rates might weaken the economy, but could also help the dollar. Lower rates could hurt the dollar, but also strengthen the economy.

Flexibility may be essential. “If Bernanke commits categorically to a response to core price pressures,” said Robert J. Barbera, chief economist of ITG, “he could find himself raising rates because housing does worse because of the arithmetic of how that plays out in the C.P.I.”

Bernanke may find that making the Fed more transparent, may be easier said than done and Norris concludes that Mr. Bernanke may come to understand why Mr. Greenspan so rarely said anything clearly.

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Its Official: Greenspan Declares Housing Boom Now Over

May 22, 2006 | 12:01 am | |


Greenspan is not the Fed Chairman anymore but whatever he says still carries a lot of weight.

Former Federal Reserve Chairman Alan Greenspan said Thursday that Americans’ consumption could taper off somewhat now that the U.S. housing market’s “extraordinary boom” has ended.

Greenspan, in his first public U.S. speech since retiring in January from a storied tenure leading the Fed, predicted there is no danger of a total collapse of the housing market [SeattlePI].

Greenspan said he doesn’t see home prices falling on a national basis, but instead in certain areas of the country. He warned reduced access of Americans to equity loan extraction would have an economic impact, which has had an “important effect” in stimulating the economy.

His based his comments on the fact that sales volume and mortgage applications are down.


The Federal Reserve Has A Soft Spot For Kids (Future Economists)

April 10, 2006 | 12:01 am | |

A hat tip to Lenderama for alerting me to the Federal Reserve Kids Page [Federal Reserve].

However, I think its misnamed. The narrative is really of equal or greater help to adults since I suspect that most don’t fully understand the role of the Fed in our monetary system other than setting the federal funds rate. If you don’t believe me, take the quiz first before reading the web page.

There is a great book on how the Fed works, published in 1989, called Secrets of the Temple [Amazon] by William Greider. Amazon displays part of the first chapter which is worth a quick read. Although the names have changed, the process is still the same.


Parsing Bernankespeak Into Transparency

March 30, 2006 | 12:44 am | |

Click here for larger version[WSJ]

The WSJ always does a great job parsing the FOMC press release after each meeting. During the Greenspan era, it was a science. With Bernanke at the reigns, he seems to be placing the Fed in the position of being more transparent and he got a unanimous vote in his first meeting.

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FOMC Alienates The One More Time Crowd

March 29, 2006 | 12:02 am | |

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent.


…possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures. Press Release

There were no real surprises today [NYT] so the Greenspan era lives on.

Fed economists have argued that a slowing housing market is likely to dampen overall economic growth. Housing, however, is not sinking yet. Sales of existing homes rose in February, housing starts remain strong and by some measures home prices are still rising.

While it is true that housing is strong in many markets, there are many markets not rising any more. Because the connection between housing and the economy is connected by the consumer, the economy may unravel faster than the Fed can react to.

It looks like at least one more increase is in store for us, perhaps more.


Thursday Heavy And Lite List

March 16, 2006 | 12:06 am |

Here’s a few articles that have been hanging around for a future post but I don’t want their relevance to slip away. With more heavy items than lite items, I hope I am not presenting a pessamistic bias here…because that would be heavy.


Buyers, Sellers Need To Be Realistic [WP]
Donald Trump, Mortgage Broker [BW]
So. Cal Homes Hit New High [Reuters]
Falling Real Estate Commissions [CNN]
Being Bullish and Young Somehow Sounds Like Inexperience [Miami Herald]
Malcom Gladwell and Freakonomics Debate About the Broken Window Theory []


Blondie Rocks About Architecture and Stuff [NYND]
Rick Moranis Comments On The Greenspan Book Deal [NYT]
Being Badgered At A Real Estate Closing [Dave Barry]
McLofts Come To A Neighborhood Near You [Chicago Tribune]


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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