Softening Housing Market Puts Global Economy at Risk
There is no longer any doubt that the housing market has started to slow down.
a) The NAHB Housing Market Index, covering more than 400 home builders, is down significantly.
b) The University of Michigan Survey indicates that the percentage of people saying this is a good time to buy a house has plunged to 57 from 75 in just a few months.
c)The Housing Affordability Composite Index has fallen sharply to its lowest level in 15 years.
d)Traffic this month has undergone its largest decline since 9/11.
e)The NAHB indicated that about 75% of the builders it surveyed saw buyer resistance to current home prices, and that a lot of them were offering concessions to help move inventories of unsold houses.
Although the latest monthly report on housing starts was still strong, the units being built may partly be a result of previous orders, with the remainder going into already burgeoning inventory.
In our view the situation is likely to get worse. The Fed recently offered a proposal for more restrictive lending standards and requested comment from banks. The Fed and other national bank regulators are concerned that interest-only and other types of non-traditional mortgages pose risks to the financial system, and are proposing that the banks tighten lending standards. In a joint statement they said that, “The agencies are concerned that these practices can present unique risks that institutions must appropriately manage…They are also concerned these products and practices are being offered to a wider spectrum of borrowers.” New lending guidelines are likely to become effective early next year and will result in a reduction in the number of new mortgages being issued. In addition the housing market will be adversely affected by Fed tightening and the high level of energy prices.
A slowdown or actual decline in housing prices will have dire effects on the economy. In the absence of vigorous increases in wage and salary income during the current economic expansion, consumers have used the soaring values of houses to maintain their rate of spending and drastically lower their savings rate. The values have been turned into cash through home turnover, mortgage refinancing cash-outs, and home equity loans. A recent Federal Reserve staff study--significantly co-authored by Greenspan himself—estimated that “discretionary extraction of home equity accounts for about four-fifths of the rise in home equity mortgage debt.”. They further estimated that about 1/4 to 1/3 of the so-called mortgage equity withdrawals (MEW) directly financed personal consumption expenditures. Other estimates run as high as 50 or 60%.
The Greenspan study went on to say that if mortgage rates rise and loan affordability drops further, MEW would decline and the subsequent fall in consumer spending would lead to a drop in consumer goods imports as well as the intermediate goods associated with them. He estimated that MEW was about $600 billion in 2004, an amount equal to 7% of GDP, and that the accumulative MEW accounted for the entire decline in the household savings rate since 1995. It is therefore easy to see that a drop in home prices would have highly negative consequences for the global economy as well.
For the last few years the global economy has been held together by a delicate balance in which soaring U.S. home prices supported domestic consumer spending that pulled in imports from abroad resulting in rapidly rising trade deficits for the U.S. and big trade surpluses for the rest of the world, particularly China and Japan. As is by now well known, most of the huge store of dollars accumulated by the nations running the surplus has been constantly recycled into the U.S. largely through the purchase of Treasury securities, resulting in the so-called “conundrum” of unexpectedly low long-term rates. These relatively low long rates were reflected in the low mortgage rates that goosed housing prices and allowed for the positive feedback loop in which both the U.S. and its trade partners benefited.
The real issue that separates the bulls from the bears at this point is this—how long can the positive feedback loop last? The bulls feel that this relationship is so advantageous to both sides that no one will want to see it end, and that the world, therefore, has found a new economic balance that will go on indefinitely. We disagree. The housing boom is clearly ending, and this is the glue that holds the balance together. Without continually rising U.S. home prices consumer spending declines, the savings rate climbs, U.S. imports drop, foreign economies soften and what was a positive feedback loop suddenly reverses and becomes a negative loop.
In other words, without the U.S. housing market to support it, the fragile balance holding the global economy together unravels with disappointing results for the economy, corporate earnings and the stock market. Judging from the tone of his research study, speeches and testimony, Greenspan seems to understand the gravity of the problem, but, in the end, always concludes that the imbalances can be resolved gradually over time. In any event, in another month it will no longer be his problem, and poor Bernanke will be around to absorb the blame. In the meantime we believe that the risks to the stock market are far higher than the complacent majority recognizes.
2005 Comstock Partners, Inc.. Dec 2005
There is no longer any doubt that the housing market has started to slow down.
a) The NAHB Housing Market Index, covering more than 400 home builders, is down significantly.
b) The University of Michigan Survey indicates that the percentage of people saying this is a good time to buy a house has plunged to 57 from 75 in just a few months.
c)The Housing Affordability Composite Index has fallen sharply to its lowest level in 15 years.
d)Traffic this month has undergone its largest decline since 9/11.
e)The NAHB indicated that about 75% of the builders it surveyed saw buyer resistance to current home prices, and that a lot of them were offering concessions to help move inventories of unsold houses.
Although the latest monthly report on housing starts was still strong, the units being built may partly be a result of previous orders, with the remainder going into already burgeoning inventory.
In our view the situation is likely to get worse. The Fed recently offered a proposal for more restrictive lending standards and requested comment from banks. The Fed and other national bank regulators are concerned that interest-only and other types of non-traditional mortgages pose risks to the financial system, and are proposing that the banks tighten lending standards. In a joint statement they said that, “The agencies are concerned that these practices can present unique risks that institutions must appropriately manage…They are also concerned these products and practices are being offered to a wider spectrum of borrowers.” New lending guidelines are likely to become effective early next year and will result in a reduction in the number of new mortgages being issued. In addition the housing market will be adversely affected by Fed tightening and the high level of energy prices.
A slowdown or actual decline in housing prices will have dire effects on the economy. In the absence of vigorous increases in wage and salary income during the current economic expansion, consumers have used the soaring values of houses to maintain their rate of spending and drastically lower their savings rate. The values have been turned into cash through home turnover, mortgage refinancing cash-outs, and home equity loans. A recent Federal Reserve staff study--significantly co-authored by Greenspan himself—estimated that “discretionary extraction of home equity accounts for about four-fifths of the rise in home equity mortgage debt.”. They further estimated that about 1/4 to 1/3 of the so-called mortgage equity withdrawals (MEW) directly financed personal consumption expenditures. Other estimates run as high as 50 or 60%.
The Greenspan study went on to say that if mortgage rates rise and loan affordability drops further, MEW would decline and the subsequent fall in consumer spending would lead to a drop in consumer goods imports as well as the intermediate goods associated with them. He estimated that MEW was about $600 billion in 2004, an amount equal to 7% of GDP, and that the accumulative MEW accounted for the entire decline in the household savings rate since 1995. It is therefore easy to see that a drop in home prices would have highly negative consequences for the global economy as well.
For the last few years the global economy has been held together by a delicate balance in which soaring U.S. home prices supported domestic consumer spending that pulled in imports from abroad resulting in rapidly rising trade deficits for the U.S. and big trade surpluses for the rest of the world, particularly China and Japan. As is by now well known, most of the huge store of dollars accumulated by the nations running the surplus has been constantly recycled into the U.S. largely through the purchase of Treasury securities, resulting in the so-called “conundrum” of unexpectedly low long-term rates. These relatively low long rates were reflected in the low mortgage rates that goosed housing prices and allowed for the positive feedback loop in which both the U.S. and its trade partners benefited.
The real issue that separates the bulls from the bears at this point is this—how long can the positive feedback loop last? The bulls feel that this relationship is so advantageous to both sides that no one will want to see it end, and that the world, therefore, has found a new economic balance that will go on indefinitely. We disagree. The housing boom is clearly ending, and this is the glue that holds the balance together. Without continually rising U.S. home prices consumer spending declines, the savings rate climbs, U.S. imports drop, foreign economies soften and what was a positive feedback loop suddenly reverses and becomes a negative loop.
In other words, without the U.S. housing market to support it, the fragile balance holding the global economy together unravels with disappointing results for the economy, corporate earnings and the stock market. Judging from the tone of his research study, speeches and testimony, Greenspan seems to understand the gravity of the problem, but, in the end, always concludes that the imbalances can be resolved gradually over time. In any event, in another month it will no longer be his problem, and poor Bernanke will be around to absorb the blame. In the meantime we believe that the risks to the stock market are far higher than the complacent majority recognizes.
2005 Comstock Partners, Inc.. Dec 2005
counter_violent
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kriesau said:
Call me a cynic, what better way to *test* the poor bugger stepping in to Greasepans shoes
C V
mickandpete
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In a nutshell
The rest of the world will cease funding the average Americans high standard of living.
About time say I.
The rest of the world will cease funding the average Americans high standard of living.
About time say I.
counter_violent
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dc2000 said:
I only deal in 1/2 hrs try 19.15
........South ...... 
macbonzo
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If there is going to be a decent (100 points) rally over the last two sessions, I think you will have to pay attention to volume. Over the last two days the volume has been barely 1bn shares on NYSE. On a normal day you would expect 1.7bn
The people who are trading are hedge funds. As I said in my last post, these guys had a very poor year and you saw them dump a lot of oil/energy stocks on Tuesday. Yesterday, despite, NYMEX crude getting above $60 at one point, the markets could not make much headway.
If we get some other market participants in today and tomorrow, and get volume up to 1.5bn then I think we could see some movement toward 10900.
The people who are trading are hedge funds. As I said in my last post, these guys had a very poor year and you saw them dump a lot of oil/energy stocks on Tuesday. Yesterday, despite, NYMEX crude getting above $60 at one point, the markets could not make much headway.
If we get some other market participants in today and tomorrow, and get volume up to 1.5bn then I think we could see some movement toward 10900.
