Tag Archives: Ben Bernanke

Housing Bust Is Over! Not So Fast.

The housing experts, Ben Bernanke, the Obama administration, and the Wall Street Journal all want us to believe that the housing market has turned—at last.

 

The next thing out of his mouth will be Quantitative Easing, Round 3.

Headlines like this are in the news this week: “The U.S. finally has moved beyond attention-grabbing predictions from housing “experts” that housing is bottoming. The numbers are now convincing.”

And this: “Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. “We finally saw some rising home prices,” S&P’s David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.”

Housing starts rose 6.9 percent to a 760,000 annual pace after a revised 711,000 rate in May that was faster than initially estimated, the Commerce Department reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 745,000 rate. Which means they were off by 2%. I don’t think this grounds for celebration.

Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months’ worth despite all the foreclosed homes that lenders own. The fraction of homes for sale that are vacant is at its lowest level since 2006. Which means nothing since the 2006 number was normal, and banks have been holding on to property that they have foreclosed in order to not flood the market and drive up inventory.

In other words, these numbers are completely manipulated by the banking industry in an attempt to normalize the markets.

“Even with the overall economy slowing,” Wells Fargo Securities economists said, cautiously, in a note to clients, “the budding recovery in the housing market appears to be gradually gaining momentum.”

Housing is still far from healthy despite the Federal Reserve’s efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac‘s latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. And, by the way, try qualifying for a mortgage these days. Ha!

Americans‘ equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak, in 2006. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction very slightly.

Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. “A little tail wind is a lot better than a headwind,” says economist Chip Case, the “Case” in Case-Shiller.

 

From here on, housing is unlikely to be the leading drag on the U.S. economy. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. “Manufacturing had led growth and construction had lagged,” JPMorgan Chase economists said last week. “Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life.”

Unfortunately, as we see fewer jobs, all of the new construction will result in a huge inventory of new homes and further bloat an already bloated market.

The biggest threat is that large shadow inventory of unsold homes, homes which owners won’t put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. Another threat is the holdback that the banks have been managing around homes already in foreclosure, so as to not flood the market. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get even worse. 

Don’t believe what you read, folks. The housing bust is far from over.

 

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Go Ask Alice.

Is it only me, or does the whole global financial crisis seem like we have fallen down a rabbit hole and are sliding through a curious hall with lots of locked doors in many sizes?

According to Bernanke’s testimony to Congress last Thursday, the Federal Reserve “stands ready to act to protect the financial system and the economy in the event that stresses from the European crisis escalate.”, yet he failed to describe what acts they may take.

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said in testimony prepared for delivery to the Joint Economic Committee of Congress. Monitored closely?

“Action is needed to stabilize euro-area banks, calm market fears about sovereign finances, set in place a workable fiscal framework and lay the foundation for long-term growth,” Bernanke added, but failed to mention how anyone might go about doing that.

The Fed chief’s testimony was largely in line with expectations. Central-bank watchers did not expect Bernanke to show his hand about what the Fed might do at its next policy meeting. Ah, we wait for the next “policy” meeting. Apparently, as long as Bernanke never actually discusses policy, and only what the Fed is ready to do, then the markets will stay relaxed and avoid panic. Sort of like finding Alice’s “DRINK ME” bottle.

“Based on these comments, we do not believe the FOMC has made up its mind about the need for further stimulus,” said Michael Gapen, a senior U.S. economist at Barclays Capital. Yes, they’re still thinking, I guess.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said Bernanke only promised to act “if the sky falls.” That will be really great timing. God forbid we should act to actually prevent anything. I mean, are you KIDDING me?

Financial-market stress due to Europe and concerns about the loss of momentum in the U.S. economy has raised expectations that the Fed would do more to stimulate the economy. Last week, several key Fed officials said they were open to more easing if warranted. Nice. They’re open to it.

In his discussion of the domestic economy, Bernanke stuck to his April forecast that growth will continue at a moderate pace. He said the recovery had been bolstered by consumer spending, as consumers had more money to spend given the drop in gasoline prices. OK, average consumer drives 80 miles a week. Average car gets 22 mpg. Average price of gas is now $2.95. Average price was $3.45. Savings of $8/month. And, THIS is the “more money” consumers now have to spend?

Business caution continued to restrain the economy, he noted. That is Fed code for: austerity at the corporate level (not spending and no credit) is KILLING this country.

Bernanke suggested some of the apparent slowing in economic data, including last Friday’s weak jobs number, might be due to unusually warm weather this past winter, which may have brought forward some activity. Ah yes, it must be the weather. Couldn’t be because corporations are squeezing unprecedented productivity out of workers who are now doing two jobs instead of one? And, these are captive workers who have no other jobs to go to.

Bernanke also again called on Congress to set in place a sustainable fiscal policy. He said the severe fiscal tightening that will occur at the beginning of next year unless Congress acts — the so-called ‘fiscal cliff’ — would pose “a significant threat to the recovery” if allowed to occur. And …. ????

And then, he ate two more of those funny mushrooms that have been circulating through Washington this week, and wandered back down to the Eccles building to search for that “mad” tea party and the March Hare. I guess.


U.S. Growth Quickens in Q4, but 2012 Looks Awful.

The U.S. economy grew at its fastest pace in 1-1/2 years in the fourth quarter, but a strong rebuilding of stocks by businesses and weak spending on capital goods hinted at slower growth in early 2012.

U.S. gross domestic product expanded at a 2.8 percent annual rate, the Commerce Department said on Friday, a sharp acceleration from the 1.8 percent clip of the prior three months and the quickest pace since the second quarter of 2010.

It was, however, a touch below economists’ expectations for a 3.0 percent rate.

“The economy ended 2011 on a fairly positive note, but the composition of growth in the last quarter is not favorable for growth early this year,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Sweet made the comments before the report was released. For the whole of 2011, the economy grew 1.7 percent after expanding 3 percent the prior year.

Growth in the fourth quarter got a temporary boost from the rebuilding of business inventories, which was the fastest since the third quarter of 2010, after they declined in the third-quarter for the first time since late 2009.

Inventories increased $56.0 billion, adding 1.94 percentage points to GDP growth. In other words, excluding inventories, the economy grew at a tepid 0.8 percent rate, a sharp step-down from the prior period’s 3.2 percent pace. So, take out the inventory re-build and what do we have? Less than 1% GDP growth in 4Q.

The robust stock accumulation suggests the recovery will lose a step in early 2012.

Also pointing to slower growth, business spending on capital goods was the slowest since 2009, a sign the debt crisis in Europe was starting to take its toll.

Expectations of soft growth led the Federal Reserve on Wednesday to say it expected to keep interest rates at rock bottom levels at least through late 2014.

Fed Chairman Ben Bernanke said the central bank, which forecast growth this year in a 2.2 percent to 2.7 percent range, was mulling further asset purchases to speed up the recovery.

The Fed warned the economy still faced big risks, a suggestion the euro zone debt crisis could still hit hard.

#43: Greece

“The Fed is attempting to shield the economy from a potentially more severe recession in Europe,” said Sweet. “Even though the economy improved last quarter there are a number of headwinds and a lot of uncertainty surrounding Europe, emerging markets and also U.S. fiscal policy.”

Treasury Secretary Timothy Geithner told the World Economic Forum in Davos the U.S. economy still faced big challenges.

“We’re still repairing the damage done by the financial crisis. On top of that we face a more challenging world. We have a lot of challenges ahead in the United States,” Geithner said.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, stepped to a 2 percent rate from the third-quarter’s 1.7 percent pace – mostly driven by pent-up demand for motor vehicles. Take that out and you have a unsustainable 1% growth rate.

The Japanese earthquake and tsunami had disrupted supplies early in the year, leaving showrooms bereft of popular models.

Spending was also lifted by moderate inflation.

A price index for personal spending rose at a 0.7 percent rate in the fourth-quarter, the slowest increase in 1-1/2 years, after rising at a 2.3 percent pace in the July-September period.

A core inflation measure, which strips out food and energy costs, increased at a 1.1 percent rate after rising 2.1 percent in the third quarter.

The increase last quarter was the smallest in a year and put this measure well below the Fed’s 2 percent target. We need to become realists, not optimists. These prediction shortfalls are not healthy to the collective zeitgeist.

SLUGGISH INCOME GROWTH

Sluggish income growth amid an 8.5 percent unemployment rate, which has prompted households to tap savings and credit cards to fund their purchases, is expected to weigh on consumers as the new year unfolds.

The saving rate came in at a 3.7 percent rate in the fourth quarter, slowing from the prior period’s 3.9 percent pace.

“Though the unemployment rate has improved, the jobs market remains a major challenge. Part of the decline in the unemployment rate is due to the fact that … people have stopped looking for work,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.

“The high level of people out of the workforce and underemployed people show there isn’t really much income generation to contribute to a better spending pattern.”

About 23.7 million Americans are either out of work or underemployed.

The shrinking labor force suggests the economy’s long-term growth potential has slipped below 2.5 percent.

A sustained growth pace of at least 3 percent would likely be needed to make noticeable headway in absorbing the unemployed and those who have given up the search for work.

Business spending grew at a sluggish 1.7 percent rate, pulling back sharply from the third-quarter’s 15.7 percent pace. WOW. 15.7% down to 1.7% – doesn’t that scare anyone?

Though exports held up despite slowing global demand, an increase in imports left a trade gap that sliced off 0.11 percentage point from GDP growth.

Despite an anticipated slowdown in growth this year, analysts do not believe the economy will fall into recession. Really???

“The United States has enough momentum to offset the losses coming from Europe,” said Laurenti. Come-on, Man.

Unseasonably mild winter weather helped home construction post its fastest growth pace since the second quarter of 2010, with much of the increase going to meet rising demand for rental apartments.

Spending on nonresidential structures fell. Government spending shrank for a fifth consecutive quarter, reflecting a large decline in defense and still weak state and local government outlays. Really uplifting news, eh?