But Then What - Where Business, Economics and Politics are, and where they're going

Signs Life In Phoenix Housing

Posted by Tom Lindmark on April 18th, 2012

What’s going on with Phoenix real estate. If you believe the realtor hype prices are going through the roof, supply is practically non-existent and buyers are trying to shove competitors aside to get what homes are available. As you might suspect the truth is a bit more nuanced.

To get some perspective on the market I pulled up the latest (Feb. 2012) report from Arizona State University’s business school. It paints a picture of a market on the mend, albeit in less than an organic mode, but one with wide price trends among the various sales components. Here are their headline observations:

Headlines:
• Overall single family home prices are now higher than 12 months ago:
o The median sales price is up 8.3% from $115,000 to $124,500
o Average price per square foot is up 4.1% from $81.07 to $84.36
• Pricing has moved higher since reaching a low point in September 2011
• Supply is down 42% compared with 12 months ago
• Monthly foreclosure starts rose in February 2012 but were still down 9% from February 2011
• Monthly foreclosures completions were down 52% from February 2011
• There has been a 72% reduction in the number of homes reverting to lenders at trustee sale
• Overall sales were 9% higher than in February 2011
• Single family home sales increased for
o New homes (up 26%)
o Normal re-sales (up 63%)
o Investor flips (up 71%)
o Short sales and pre-foreclosures (up 34%)
o HUD sales (up 9%)
o Third party purchases at trustee sale (up 15%)
• Single family home sales reduced for:
o Bank owned homes (down 40%)
o GSE (Fannie Mae, Freddie Mac, etc.) owned homes (down 58%)

As a point of clarification, all the comparisons in these bullet points are February 2012 to February 2011.

The number that I suspect jumped out at you is the 8.9% increase in the median sales price. Don’t start hyperventilating. Go to the article and you will find a couple of graphs that clarify the situation. You’re going to see that the sales price of new homes and normal resales in fact declined 2.2% and 22.2% respectively. Things aren’t quite coming up roses yet. The overall increase in sales price was driven by sales of foreclosed homes and investor flips, though to be fair the decline in normal resales is overstated due to the absence of sales at the higher end.

To put this another way, investors are crawling all over each other to get what for the time being is a dwindling supply of appropriate rental property and in the course of doing so are driving up prices. A few of them, probably the smart ones who got in early, are taking their money and running.

Nevertheless, the supply of homes for sale under $250,000 stood in February at a 25 day supply. You don’t have to be a student of real estate markets to understand that represents a considerable supply/demand imbalance. Assuming investor demand remains solid, an inordinate number of current investors don’t decide to cash in and organic demand builds, even slowly, it seems reasonable to expect prices to firm if not escalate.

Here is the summary from the ASU report:

After a slump during the third quarter of 2011, the Phoenix residential market has improved significantly for sellers and a swift recovery is now well under way. Supply of single family and condo homes is now very low, interest rates are low, the economy is showing signs of life and prices are still very affordable
compared with salaries and rental rates. However the supply of homes is now so tight that buying one is ften quite a struggle, primarily due to the intense competition for the few homes available for sale. Public sentiment toward housing remains relatively poor but is now starting to improve as signs emerge that the worst of the housing crisis is over. Loans are still hard to come by and a financed buyer is usually at a distinct disadvantage when competing against a cash buyer who is prepared to waive their appraisal contingency.

With prices that have declined from their peak in June 2006 more than almost anywhere in the US, we still have a large number of homeowners with loans that exceed the market value of their home. Following the launch of HARP 2.0 and the recent settlement between the states and five large lenders,these homeowners may have more of an opportunity to refinance into low interest loans. This will not resolve their underwater condition, but perhaps it will reduce their monthly payments and allow them to feel less financial stress. At the moment the success of these programs remains to be proven.

Given that wholesale reductions in loan principals appear unlikely, the main mechanism available to solve underwater loan problems is for prices to rise. Overall prices have already improved by some 15% since September 2011 and are currently on a strong upward trend. However that trend is fueled mainly by the rise in the prices of lender owned properties, auctioned homes and flips. Normal re-sales and short sales have yet to really participate in the improving price movement. It will take many months of strong improvement for the negative equity problem to abate, and there is little chance of pricing achieving the heights of 2006 in the medium term. However we now have a severe supply/demand imbalance that favors sellers and sets us up for the possibility of a significant rise in pricing at the lower and middle sectors of the market in the immediate future.

For what they’re worth, some observations:

The significant amount of rental property acquired by investors over the past few years will probably constitute a shadow inventory for some years to come. As interest rates rise creating investments that are equal or superior to their investment real estate, expect this class to look towards cashing out. Keep in mind that maintenance costs are going to increase as the properties age, so the overall return is probably going to decline.
The still disappointing level of new homeowner buyers is discouraging given the attractiveness of prices, escalating rents and extraordinary interest rates. I suspect this has something to do with fresh memories of the crash as well as less than stellar incomes. A lot of potential owners have jobs but they aren’t pulling in the incomes they enjoyed before things went south. Discretion for them is the watchword.
A truly organic market in which first time homeowners become move-up buyers and thus support the higher priced end of the market is probably years away. Consequently the upper end of the housing market will most likely suffer for some years to come.

It strikes me that the macro view hasn’t captured the dynamics of the Phoenix market and I suspect that’s true of other real estate markets as well. The data tends to be too sketchy and dated to adequately reflect granular changes. To that end, one should probably be leery of reports that attempt to paint too dire a picture of the market generally as well as skeptical about the need of or utility of large government programs intended to “cure” housing.

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What Happens To Bubble Assets

Posted by Tom Lindmark on February 29th, 2012

This graph(click on it for a larger view) from Jake at EconompicData.com doesn’t really need much embellishment. Just remember it the next time you hear the political class or the real estate lobby pontificating about the need to goose home purchases.

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The End Of Football

Posted by Tom Lindmark on February 10th, 2012

A couple of very good economists, Tyler Cowen and Kevin Grier, have published an important work that deserves everyone’s attention. They lay out a credible case for the end of football in the U.S.

The most plausible route to the death of football starts with liability suits.¹ Precollegiate football is already sustaining 90,000 or more concussions each year. If ex-players start winning judgments, insurance companies might cease to insure colleges and high schools against football-related lawsuits. Coaches, team physicians, and referees would become increasingly nervous about their financial exposure in our litigious society. If you are coaching a high school football team, or refereeing a game as a volunteer, it is sobering to think that you could be hit with a $2 million lawsuit at any point in time. A lot of people will see it as easier to just stay away. More and more modern parents will keep their kids out of playing football, and there tends to be a “contagion effect” with such decisions; once some parents have second thoughts, many others follow suit. We have seen such domino effects with the risks of smoking or driving without seatbelts, two unsafe practices that were common in the 1960s but are much rarer today. The end result is that the NFL’s feeder system would dry up and advertisers and networks would shy away from associating with the league, owing to adverse publicity and some chance of being named as co-defendants in future lawsuits.

The entire article is worth a read. Given that they are cold blooded economists, they nicely lay out the positives and negatives of a world without football. While I think they make a persuasive case, I do think they failed to consider one fact.

If indeed the existence of football is truly threatened by the machinations of the legal profession tort reform will become overnight the foremost political issue of the 21st Century.

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Everyone Into The Corporate Bond Pool

Posted by Tom Lindmark on February 8th, 2012

Time to call an end to the blogging sabbatical. Let’s start with a look at what the flood of cash from central banks is creating.

Today’s lesson comes courtesy of Ambrose Evans-Pritchard, who notes that the corporate bond market is on fire.

“The credit market’s on fire,” said Suki Mann at Societe Generale. “We have seen a massive grab for yield. The mood is so good that even if Greece were to default it would probably make no difference.”

The average borrowing cost for high-grade US companies has dropped to 3.52pc, just shy of all-time lows. American firms took advantage of the hunt for safe yield to raise $70bn (£44bn) last week alone, led by McDonald’s and IBM.

The recovery in Europe has been electric since the European Central Bank (ECB) opened the floodgates in December, lending banks €489bn (£410bn) at 1pc for three years, with more to come later this month.

Europe saw the biggest one-month compression in high-grade debt yields in January since records began, excluding the V-shaped rebound after the 2008 crash. Telecom Italia’s yields have dropped 180 basis points this year.

“The ECB was the game-changer. A lot of this money seems to have gone into corporate bonds and it makes sense because non-financial corporates are the strongest in history with big cash reserves and very defensive balance sheets,” he said.

There is little arguing with the point that high grade corporate credit is probably as strong as it’s ever been. Cash reserves are substantial and profits robust. Still, one has to at least raise an eyebrow when P&G is paying 2.1% for five year money while GE is clocking in at 2.24%. Yes, that same GE that had to tap TARP funds just a couple of years ago to stay afloat.

Somehow, this all seems just a bit too good to be true. Something like house prices that never quit rising, or technology stocks which seemed immune to the laws of physics. Central bank bubbles are beginning to appear to be the true ”New Normal” of the 21st Century.

Evans-Pritchard does note one casualty of the central bank largesse — senior creditors of banks. As he notes, the willingness of the ECB to accept any and all collateral means that European banks (American as well?) are cleaning the closets and pledging just about anything that isn’t infested with maggots in order to draw down cheap ECB loans. If the deluge arrives those creditors are going to find little left to satisfy their claims.

Aside from the banks,there’s probably little to worry about here. After a couple of bubbles, we’re all saner, more sober and wiser, and readily able to see froth when it appears. Aren’t we?

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Two Fine Analyses Of The Euro Mess

Posted by Tom Lindmark on December 1st, 2011

Here are two of the best perspectives on the Euro crisis (dilemma?) I’ve read. Tyler CowenT has an interesting list that refutes the argument that there is some sort of moral imperative for Germany to aid its neighbors while Ed Harrison provides an excellent prospective on the probable solution to the issue.

I believe that Cowen thinks in the end that the Germans will not cave, while Harrison sees a deal. My heart is with Cowen while my much more cynical brain believes Harrison is probably providing the proper analysis. That being said, I don’t think that the “solution” will do much more than forestall the final reckoning.

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The End Game In Europe

Posted by Tom Lindmark on November 26th, 2011

Tyler Cowen commenting on the failed German bond auction offered perhaps the most succinct analysis of the dilemma facing Europe:

Maybe these markets simply will shut down soon. There is so much talk about what the Germans should do, but I don’t see the viable options. With Germany’s own credit status now in doubt, eighty percent debt to gdp ratio, massive welfare state, and unfavorable demographics, are they supposed to endorse — going to endorse — ten or fifteen percent price inflation for a few years’ time, all with no guarantee of reforms in the economically weaker countries? And is that inflation then followed by a subsequent deflation? Or does it continue forever? And would Germany have to move to a regime of wage flexibility for the professions too? How politically feasible is that? I don’t see how the Germans benefit from going down this road, even if you think, as I do, that the alternatives are quite dire.

And amid all the talk among politicians, technocrats and the media about what should or not should be done, he properly notes that there are questions of democracy which should be considered.

The motto “no monetary union without a fiscal union” isn’t wrong, but more to the point is “no fiscal union without a common electorate.”

Even assuming, however, that Europe could expeditiously merge in such a fashion as to allow for continent wide referendums on solutions, it is not all that clear to me that would be in the best interests of the German citizens or for that matter those of their northern neighbors. The collective voting power of the failing countries might well be able to dictate the terms of any new regime. Certainly the antipathy to fiscal reforms so far demonstrated doesn’t argue for any sort of outcome which would not negatively impact the more responsible countries.

Now along comes Holman Jenkins in the WSJ who alludes to a potential way out of the dilemma:

A month ago, as far as the eye could see, Germany was to be the last good credit in Europe, able to bail out all the others. Well, that illusion has liquidated itself in a hurry. Investors sent a message at Berlin’s Wednesday bond sale, sitting on their hands for $3 billion being offered. The message: Markets are getting ready to punish Germany for the sin of its neighbors’ overborrowing, unless Germany allows the sin of money-printing to paper over those sins in the short term.

Then what? Despite the overheated reaction, a six-page German memo that surfaced last week is a most promising document. It describes, if you look between the lines, a Europe that becomes safe for sovereign default. No bank runs. No precipitous withdrawals from the euro. Instead a generous, pro-reform receivership for bankrupt governments at the hands of fellow European governments.

The deadbeats would get debt relief at the expense of Europe’s banks, which hold much of their debt. The deadbeat governments would get new funding from somebody (likely the European Central Bank), in return for welfare and labor-market reforms that would be democratically practical because they would be coupled with debt relief.

Herein resides the best possible solution to the European impasse: an outcome that restores growth, avoids self-defeating austerity, and allows the best possible recovery for bondholders, who would collect more pennies on the dollar than they would if debtor countries were pushed into depression in a futile effort to pay every centime. The only downside would be a modest appearance of subservience to Berlin.

Now Jenkins does readily admit that it takes a certain bit of optimism to believe that this would truly work as smoothly as outlined, but it does seem to address some of the issues that Cowen raised.

Extinguishing the existing debt and funding ongoing needs by the ECB would certainly be much less inflationary than flooding the market with Euros in order to maintain the status quo. While any imposed solution is going to be an affront to the concept of democracy, the tone of this one would at least probably be grudgingly accepted by most of the parties’ electorates. The fiscally conservative countries could at least hope that the ECB printing presses don’t send inflation running and the aid recipients’ populace would hopefully see that their diminished living standards are preferable to the depression they were staring down.

What becomes of the banks that are forced to eat the losses is another matter. Germany, France and a few other countries are going to have to cope with massive recapitalisation to the detriment of their economies. It remains to be seen if bank creditors will finally pay a price, but at least the plan would provide time for an orderly reorganization as opposed to the hysteria that would most likely result from a collapse of the EU.

I suspect that something along the lines of what Jenkins has outlined will come to pass. In some respects this all seems creepily like the period leading up to the passage of TARP. All sorts of plans floating about, predictions of the end of at least banking as we knew it in the US, hard positions and politicians taking everything up to the brink. And then we muddled through.

Expect the EU to do so as well. The careers of too many politicians and technocrats depend on it and, while I don’t think it would be Armageddon the alternative would in Cowen’s words be “dire.”

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There Really Aren’t Any Fundamental Problems In Europe

Posted by Tom Lindmark on November 21st, 2011

Well at least Felix Salmon disses the technocrats in his latest missive on the Euro crisis. Quite out of character for the Progressive side of the blogosphere. Not content, however, to speak truth to power he then proceeds to aver that the real problem is that bankers and technocrats are simply trying to kick the can down the road while they line their own pockets.

In his telling, the continent is faced not with failing economies but rather a liquidity crisis that could easily be cured if only more money were forthcoming to douse the flames. Naturally, from this viewpoint austerity is the worst of all possible solutions. No need to bring national spending into some semblance of long-term balance when some freshly minted ECB Euros will salve the wounds.

Thank God the bond vigilantes have this all wrong and none of us need worry about living within our means.

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