Matrix Blog

Federal Reserve, New York

Cold Weather Walking Holiday Transit Strike Link-as-borg

December 22, 2005 | 10:16 am | |

Here’s a roundup of housing-related links from the past week:

  • Joint Release by OCC, Federal Reserve, FDIC, OTS, NCUA [OCC] — “The federal financial regulatory agencies today issued for comment proposed guidance on residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest.”

  • U.S. Nov. PPI down 0.7%, core PPI up 0.1% [MarketWatch] — “U.S. prices of raw materials and other producers’ inputs fell 0.7% in November, the Labor Department reported Tuesday. This is the largest monthly decline since April 2003. Excluding food and energy costs, the core PPI rose 0.1%.”

  • Housing Starts Rise, Core Inflation Tame [NYT] — “U.S. housing starts rose 5.3 percent in November, defying Wall Street expectations for a slowdown, while producer prices posted their biggest drop since July 2004 and showed well-contained inflation outside the volatile energy and food areas, the government said Tuesday.”

  • Has the Fed Finished Tightening? [BW] — “After tightening for the 13th time (appropriately on Dec. 13), the Federal Reserve appears to be signaling that it’s nearing the end of the rising-rate cycle. Standard & Poor’s expects another 25-basis point hike at the Jan. 31 meeting, and another 25 basis points in March, if economic growth remains strong. We then expect the Fed to close up shop for the rest of 2006.”

  • Builder Sentiment Cools Further In December [NAHB] — “Confidence of single-family home builders slid further this month from its summer peak, yet remained well within the positive range, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December, released today. The overall HMI declined four points from a slightly revised November number to 57, while the component measuring builder expectations for future sales held firm at 65.”

Tags: ,

We Wish You A Merry…And A Neutral New Year

December 12, 2005 | 12:01 am | |

In Jennifer Ablan’s article A Shift to Neutral in ’06 [Barrons] “The real conundrum for investors and economists is to figure out when the Federal Reserve has reached a “neutral” interest rate. That is, a level that neither stimulates nor slows economic growth.”

Right now we seem to be firmly ensconced in a flat yield curve economy. I get worried this could lead to a recession if the Fed doesn’t stop soon.

Source: Barrons

“But among the eclectic group of 15 economists, strategists and traders Barron’s surveyed, more than half believe the Fed isn’t too far from reaching the magic level.”

“All our panelists say the Fed’s policy-setting Open Market Committee will boost its fed-funds target rate by 25 basis points (a quarter-percentage point), its 13th consecutive hike, to 4¼% when it meets on Tuesday. And according to the average estimate of those polled, the Fed will then raise short-term interest rates two more times, to 4¾%, by the end of June. But a majority of our group sees the monetary authorities cutting them once by 25 basis points in the second half, to 4½% by year’s end.”

“Last week, Greenspan wrote to Rep. Saxton that “a flattening of the yield curve is not a foolproof indicator of future economic weakness.” Earlier this year, Greenspan dismissed the argument that slowing growth was bringing down long-term interest rates. “I didn’t want to leave the implication with respect to the yield curve as though I’m concerned that the potential tilting of the yield curve is precursing a significant economic weakness,” he said, adding that low rates could be due to “new forces” in the international marketplace.”

It seems to me that the Fed during Greenspan’s tenure goes at least 2 rate increases too far and within the following year and a half returns to rate cuts…which could mean rising mortgage rates for the next year but not at a rapid clip. Possible mortgage rate reductions in 2007?


Baby Boomers: Please Work Past 65 And Be More Productive

December 5, 2005 | 12:05 am | |

In the article Fed Study Says Home Prices May Fall as Population Ages [WSJ], US housing prices could collapse by 2015 if the retiring baby-boomers reduce the labor pool and productivity.

The study The Baby Boom: Predictability in House Prices and Interest Rates [pdf] indicated that credibility for this study is based on his model’s ability to predict the boom and bust of the Japanese real estate markets in ’74 and ’90.

The retirement of the baby boomers is expected to reduce the working-age population and, along with it, economic output per person, according to the study by Robert Martin, an economist in the Fed’s division of international finance. The report is not an official view from the Federal Reserve.

Martin says “in the near term, house prices will peak in level terms sometime between 2005 and 2010,” and the model shows they begin to collapse by 2015, the study said. “Following the peak, house prices decline over 30% in value over the next 50 years.”

The gloom and doom of the study will be moot if workers remain in the work force past age 65 and there are sufficient gains in productivity. You can see the population trend in this cool gif file created by Calculated Risk, one of my favorite econ blogs out there.

Calculated Risk Blog: US Population distribution by age, every decade 1920 – 2000, plus 2005.

The Economy and Real Estate Shows Their Strength In Beige

December 1, 2005 | 12:01 am | |

The Federal Reserve released their Beige Book today [], an anecdotal description of the US economy broken out by the 12 regions of its member banks and collected before November 21st. The information is based on interviews with businesses and other sources and is not the official view of the economy by the Fed.

View The Beige Book [Fed]

Residential real estate markets generally remained upbeat, but many districts reported slowing activity. Residential mortgage lending was down in several districts, while stronger commercial real estate markets were found by many of the banks

Home sales were reported to have eased off in the Philadelphia, Richmond and Cleveland districts. Housing sales remained fairly strong in New York City, but the New York district reported that sales in New Jersey had moderated and that inventories were high.

Both the Chicago and Atlanta districts reported flat home sales, and excess inventories were noted in the Kansas City district, though sales there were up slightly. St. Louis and Dallas said home sales were strong in most metro areas, and San Francisco said sales continued at a rapid clip.

The upbeat economic news [NYT], including the revision of GDP [Businessweek], is expected to prompt the Fed to continue raising short term rates [MSNBC].

Source: NYT

Note: Miller Samuel provides market feedback to the Fed for the Beige Book.


New Housing Data: Is The Glass Half Empty Or Half Full?

November 30, 2005 | 12:02 am | |

It depends on who you listen to…

Today the US government reported a record number of new-home sales [MarketWatch] which seemingly contradicted yesterday’s release of existing home sales [WSJ] by NAR.

This has brought further debate to the housing market interpretation. The media seems to be betting on a burst of the bubble [MarketWatch] while the NAR seems confident in a soft landing next year.

The MarketWatch article suggests three paths are possible:

  1. “any further acceleration in housing could fuel a spurt in consumer spending, but at the risk of forcing the Federal Reserve to continue raising interest rates beyond what’s now expected.”

  2. “a collapse in housing, if it were to happen, could slow job growth, shatter consumer confidence and lead to a significant retrenching in their spending.”

  3. “a gradual decline in housing would likely keep the U.S. economy growing at a slower but healthier pace, allowing the Fed to conclude its rate hikes. Most economists expect this third option to come to pass.

“Being the first to call the end of the housing boom has become a favorite parlor game for economy watchers. As evidence, they’ve gleefully pointed to the reduction in mortgage applications, to an increase in unsold homes on the market, to a slowing in home price appreciation and to a drop in home-builders’ confidence.”

This is interesting because the existing home report and the new-home report are based on a different data set and mean very different things in a changing market [Matrix].

Existing home sales lag the market by 30 to 60 days or more because they reflect closed sales. New home sale stats are based on contracts.

So if there is a change in the market, new home sales would be considered the leading indicator. However, its reliability should be tempered by the fact that new home sales represent about 10% of existing home sales.

In other economic stats released today:

At the same time, consumer confidence spiked [] reversing a 2-month slide.

US Factory orders rose 3.4% and durable goods orders posted strong gains as well. [ABCNews]

Tags: , , , ,

Ain’t It Cooling?: The Number Of Sales Eases From Historic Highs

November 15, 2005 | 10:26 am | |

According to a survey by Real Trends by 48 of the major US real estate firms, the number of contracts signed this month compared to the same month last year dropped 8% but remained at historical highs [WSJ]. Of course this is not necessarily representative since nearly half of the 90 major brokerage firms did not reply to the email survey. Still the story was on page 1 of the Wall Street Journal.

“‘The air is coming out of the balloons,’ says David Lereah, chief economist at the National Association of Realtors, the nation’s leading real-estate trade group.”

“‘We believe the market has peaked,’ says Doug Duncan, chief economist of the Mortgage Bankers Association. Because of brisk sales earlier this year, he expects sales of new and previously occupied homes to reach a record 8.3 million in 2005, up 4% from 2004. But he believes sales will decline 3.5% next year, ending a four-year streak of record-setting totals.

A cooling of the market is likely to be welcomed by the Federal Reserve, which has worried that home prices have become frothy and banks’ mortgage underwriting standards have slipped. For the past few years, fast-rising home prices have allowed people to borrow more against their home equity, fueling a spending boom. Last month, Fed governor Donald Kohn, citing ‘some indications that housing markets are cooling off,’ said this would force consumers, who are not saving any of their current income, to save more to build wealth, restoring balance to the U.S. economy.”

The gist of this WSJ article is the fact that the market is cooling but remains at record levels. In other words, the number of transactions will ease from historic record levels. However, articles on the housing markets like this seem to blend the number of sales with price levels to the average reader. The takeaway here is that the “frenzy” is generally over, the number of sales will ease and that housing prices are not expected to rise as rapidly as years past.

Tags: , , ,

More On The Sacred Cow: Mortgage Tax Deduction Recommendation Goes To The President

November 3, 2005 | 10:15 pm | |

When the president formed the tax advisory panel to simplify the tax code (explore a replacement scenario for the Alternative Minimum Tax), he requested that the group preserve support for home ownership – read between the lines: keep the mortgage interest and property tax deductions.

Long considered untouchable, the deductions for mortgage interest and property taxes represent $75 billion in lost tax revenue for the federal government and was recommended [NYT] for elimination by the panel.

limiting the home mortgage interest and real estate tax deduction: Essentially “cutting it from the current cap of a little more $1 million to as low as $227,000 in cheaper housing markets like Springfield, Ohio, to as high as $412,000 in places like New York and many of its suburbs.”

giving a tax credit a tax credit: “equal to 15 percent of the interest paid on a mortgage below the cap, rather than a deduction that can be worth as much as 35 percent for taxpayers at the high end of the income scale.”

Critics of the deduction say that it has done very little to increase homeownership:

“For all the talk of bolstering home ownership, said Edward L. Glaeser, an economics professor at Harvard [Miller Samuel], the mortgage tax deduction has done very little to help people into homes. He said the subsidy to taxpayers implicit in the deduction had varied widely over the last 40 years, going up and down with the fluctuation of inflation and interest rates. Yet home ownership over the period has drifted in a band of 63 to 69 percent.”

The deduction would be phased out over 5 years.

Its interesting to see well-respected economists like Mr. Glazer, and Mark Zandi of come out against the deduction. Analysis as to its impact on the housing market will undoubtedly be done. One would expect that there would be a loss of a significant amount of home equity since nominal monthly housing payments could be 30% to 40% higher. It has been speculated that the loss of the deduction would result in a loss in US property equity of at least 15% if the deduction takes effect.

I wonder if the tax panel expects this would be a zero-sum gain or close to it based on the premise that all other revenues would still be maintained if the deduction was enabled. Since housing is one of the largest economic sectors there is, construction and other services related to housing would be hit hard, lowering tax revenues from those sources.

…all for the sake of simplifying the current tax code.

Webmaster’s note:
The anecdotal use of the phrase sacred cow appearing in the NYT article was used here first on Matrix yesterday 😉
Those Evil Hamburger Eating Rich, The Tax Panel Wants Their Fair Share Of The Sacred Cow [Matrix]

A Category 12: Fuel Costs Signal More Measured Hikes From Fed Down The Road

November 1, 2005 | 10:44 pm | |

The Fed continued its “measured” rate increases showing continued concern over inflation [FOMC] even though core inflation was very low. The drop in fuel prices in recent weeks was not enough assurance that inflation was contained [Marketwatch]. They signaled more rate increases to come. At this pace, there could be as many as 2 more increases before Greenspan steps down on January 31st.

This is the highest rate level since June 2001 when the economy at that time began to slip into a recession. There is some speculation that the Fed may not stop until the discount rate reaches 5%.

The St. Louis Fed has a composite of key economic indicators [PDF] that shows inflation remains a concern (CPI). GDP which has been flat with a recent gain, adjusted for the hurricane effects [WSJ], employment levels show bigger gains than last year, the unemployment rate is down, but hourly wages are up but only at about the same rate as last year.

In other words, the economy seems to be generally better yet inflation remains a concern. The rising Federal defecit and concern about energy costs this winter are keeping the pressure on bond yields and long term rates. As a result, mortgage rates continue to trend upward.

If there is a silver lining in all this, fuel prices appear to be cooperating and much of the inflationary numbers the Fed has been looking at were hurricane related and could ease after the first of the year. Lets hope the Fed does not go too far with this measured increase strategy and choke off consumer spending as they did prior to the last recession (June 2001).

Tags: ,

Nobel Prize In Economics: Housing Without A Helmet And An Invisible Hand, eh?

October 27, 2005 | 9:10 am | |

Thomas Schelling, professor emeritus at the University of Maryland won a Nobel prize in economics whose work on the relationship between competition and and social welfare was highly regarded [NYT]. He contended that we can learn more about what people value by looking at the rules that result rather than the choices made by each individual. This is contrary to Adam Smith’s theory of the invisible hand that says that self interest promotes the greatest good of all.

Using a hockey example, a player may increase their odds of winning by playing without a helmet because of better visibility but increases their odds of injury. However, if everyone follows suit, then all players increase their odds of injury and the advantage of winning evaporates. This is why helmet rules come into play. Similar comparisons can be made to restrictions on Nascar race cars, labor wage gains, working longer hours for a promotion, etc.

“As in hockey, many of the most important outcomes in life depend on relative position. Because a “good” school is an inescapably relative concept, each family’s quest to provide a better education for its children has much in common with the athlete’s quest for advantage. Families try to buy houses in the best school districts they can afford, yet when all families spend more, the result is merely to bid up the prices of those houses. Half of all children will still attend bottom-half schools.”

In other words, if everyone takes the same action, the bar is simply raised higher making it more difficult for everyone or negating the perceived advantage of the original action.

Webmaster’s Note: The author of this NY Times article is Robert H. Frank , an economics professor at Cornell University and co-author of “Principles of Microeconomics” with Ben S. Bernanke, recently nominated to replace Alan Geenspan as Chairman of the Federal Reserve. This is one of the best articles on economics I have read in a long time.


Hawaiian Shirts and Bermuda Shorts: Bush Names Bernanke To Replace Greenspan

October 25, 2005 | 7:56 am | |

As the Greenspan era comes to a close, I am going to miss the new phrases that would enter our vocabulary from time to time such as “frothy”, “irrational exuberance”, “conundrum”, “speculative excesses, “Greenspan-speak” and others. Most of all I am going to miss the confidence the markets placed in his policies. Replacing him is a tough act to follow although the financial markets appear relatively happy [Marketwatch] with the choice as the Dow and S&P had their biggest increase in 6 months after the announcement [Marketwatch].

Yesterday President Bush nominated Ben S. Bernanke, a former Federal Reserve Board member and Princeton professor who currently chair’s the President’s Council of Economic Advisors to be the next Chairman of the Federal reserve [NYT]. He is considered a “first, among equals” to his peers but his political views are largely unknown [NYT]. He actually penned a story in 2000 on the topic of replacing Greenspan [WSJ].

On a lighter note, there is some hope to fill the vocabulary void that I so enjoyed with Greenspan. He appears to have a sense of humor.

My proposal is that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.

“Until he joined the Council of Economic Advisers, Mr. Bernanke had little contact with Mr. Bush [WSJ], and indeed in many ways is the antithesis of the power-suited business executives that Mr. Bush has preferred for top economic policy posts. But he appears to have earned Mr. Bush’s trust. Earlier this year, Mr. Bush gently chided Mr. Bernanke for showing up at an Oval Office meeting wearing a dark suit with tan socks, according to several people familiar with the incident.

A few days later, Mr. Bernanke showed up early for another meeting with Mr. Bush and distributed tan socks to the meeting’s other participants. When Mr. Bush arrived, all, including Vice President Dick Cheney, were wearing tan socks. Mr. Bush laughed.”

One of the more notable differences between Greenspan and Bernanke is how they handle inflation. Bernanke subscribes to the theory of setting a formal “Inflation Target” [WSJ]. which would demonstrate the Fed’s commitment to low inflation. Opponents of the strategy say that it will limit the central bank’s flexibility.

The WSJ has a series of charts that show the economic success of the Greenspan era.





Tags: ,

Beige Book: Despite Storm Of Bad News, Real Estate Economy Remained Generally Strong

October 22, 2005 | 5:14 pm | |

The Federal Reserve released its anecdotal analysis of the overall economy this week [Bloomberg]. It is the first report completed since the double hurricane barrage of bad fortune in September.

The housing market, while remaining ‘generally strong,’ showed more signs of cooling in other areas, the survey said. The New York and Boston districts said homes were sitting on the market longer, while inventories of homes for sale increased in the Chicago and Kansas City regions. Demand for office, retail or industrial real estate increased in all areas, the Fed said.

Residential real estate activity remained generally strong, but reports that demand for homes has eased have become somewhat more common. [Beige Book]

The Fed intends to continue raising short term rates at a “measured pace.” Immediately after the hurricanes, it was generally thought that the Fed may ease in its attempts to reign in inflation as the economy felt the drag of hurricanes. However, this was short lived. Rising wages and gasoline prices continue to raise inflationary concerns.

As a result, mortgage rates have continued to trend upward.

The next Beige Book is scheduled for release on November 30, 2005.

Tags: ,

OCC Goes Exotic: Will Issue Guidelines On Mortgages This Fall

October 22, 2005 | 3:52 pm | |

Earlier in the year, the Chairman of the Federal Reserve indicated that interest only loans were of “particular concern” and the OCC began to review the economic risk of these products to the housing market [Washington Post] but wanted to be careful about overreacting.

Source: CNN/Money

With the significant growth in interest only mortgages over the past 5 years, “the Office of the Comptroller of the Currency, along with other financial regulators, will issue guidelines for mortgage lenders that could make lenders think twice before readily offering exotic mortgages [Marketwatch] to potential buyers.”

This may help stabilize the housing market by limiting easy access to credit [CNN/Money]. Fewer buyers competing for the same property means more balance between supply and demand.

Lets review:
Few buyers to qualify for mortgages
More properties available for sale [Matrix]

Housing market cools…

Get Weekly Insights and Research

Housing Notes by Jonathan Miller

Receive Jonathan Miller's 'Housing Notes' and get regular market insights, the market report series for Douglas Elliman Real Estate as well as interviews, columns, blog posts and other content.

Follow Jonathan on Twitter

#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
NYC CT Hamptons DC Miami LA Aspen
Joined October 2007