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Inflation Is As Inflation Does, But Housing Doesn’t

May 18, 2006 | 8:33 pm | |

Investors, real estate investors and consumers have all been scratching their heads lately. Everyone is looking at short-term inflation pressures and contradictions in data and wondering what affect that will have on the Fed’s next move.

Yesterday, the stock markets dropped sharply [NYT] in response to new concerns about inflation as consumer prices increased. Wholesale inflation rose at a brisk pace in April [DFP], pushed up by rising energy costs, as factory output rose and homebuilding slowed.

Just two days ago, a falling dollar and weakening housing market suggested the Fed might pause and not raise rates at the next FOMC meeting [Bloomberg] causing worries high commodity prices could slow the global economy. Oil prices have trended downward recently [Forbes]. Core inflation was tame, posting a 0.1% increase in April and lower than expected and housing starts dropped 7.4% last month and down 20% since January.

So which is it? Depending on the report you read, inflation is looming or it isn’t. The Fed will continue their policy of measured increases or they won’t.

The Fed has basically postioned itself to wait an see what the data tells them between now and the next FOMC meeting. So we get day to day changes in the interpretation of the state of inflation. The uncertainty of whether mortgage rates will continue to rise places further pressure on the housing market.

The mixed economic reports [AR] should give the Fed a lot to think about.

The stock market seemed to show belief that inflation was not built into pricing yet. Even the zen-god of the bond market, Bill Gross of PIMCO changed his forecast [Globe].

Bill Gross, the world’s most influential bond fund manager, raised his forecast for benchmark ten-year bond rates Wednesday, admitting he underestimated the strength of the global economy.

The takeaway from this economic stat chaos is that despite stronger consumer pricing, housing market participants are unsettled. It would seem to me that the impact of a weakening housing market has not impacted inflation data yet.

The economic repercussions of a weakening housing market is a significant economic unknown and additional rate increases will expose further weaknesses, compounding the problems. I remained concerned that inflation is more of a catalyst for a slowdown (in a weird twisted way) rather than a long term condition of an over heated economy.

Cart before the horse.


Housing Myth Fodder For Cocktail Party Chit Chat

May 8, 2006 | 12:03 am | |

In Unmaking the Myths [CNN/Money] the author tries to explain why several items of conventional wisdom are not holding up under changing market conditions.

Here are some thoughts, although I don’t think these are strong elements of conventional wisdom to begin with.

  • Scarcity of buildable land on the coasts ,Äî protects the balance of supply and demand an keeps housing prices high. We hear this discussed in Manhattan quite a bit (I plead guilty myself), where its an island and the lack of land has pushed development to the other boros due to high land prices. However, recent re-zoning efforts by the Bloomberg administration make this argument less plausible. Without this change, the argument is still weak since the lack of sites is more of a phenonom of land sellers responding very quickly to improving conditions, thereby ratcheting up the cost of site assemblage.

  • Big builders learned their lessons from prior booms and only build when they have firm buyers in place – I am not sure I agree with this as a myth to begin with. I think this argument applies more to commercial development than it does to residential development. A glut of office development characterized the last building boom. I believe that builders know how to build and its naturally difficult to stop doing so once the momentum gets going.

  • Home prices don’t drop in areas where employment is rising. – The article reports this as happening in Boston, although I believe that Boston’s economic prospects and employment are weaker than Washington, DC, which may make for a better argument. Washington, DC has some of the best employment prospects in the northeast but a signficant over supply of condo housing and investor activity.

  • Hot markets will glide to a soft landing. ,Äî Thats the spin by NAR these days after 6 months of denying a market change was even happening. This is an overly simplistic rational. The missing element here is investor activity. I think markets with heavy investor activity are the most vulnerable. Many investors don’t have the deep pockets to carry their properties indefinitely. Again, each local market behaves differently so its misleading to hard sell the point that all is well. Even the phrase “soft landing” is comforting in its terminology. Some markets will be unaffected, some will be moderately affected and some will be severely affected. CNN quite aptly calls them Dead Zones, Danger Zones and Safe Havens.

One of my favorite myths is that:

  • The media caused the housing boom to end ,Äî Thats simply not true. The media may have piled on when the market began to show weakness, but it didn’t cause the change. On the other side of the argument, it could be said then that the media caused the housing boom. That is giving the media too much credit.

I think that the most significant myth is that:

  • The housing boom was caused by a change in lifestyle demands. – The housing boom and all the peripheral was stimulated, jump started, caused, etc. by low mortgage rates and loose underwriting standards. Lifestyle changes and demographic changes became options as housing payments dropped. Cheap money bred an explosion in development and sales activity. These other factors took the boom further but it all began with low mortgage rates.

If The Economic News Is Good, Then Why Are Many Uneasy?

May 1, 2006 | 12:01 am | |
Source: LA Times

The economy seems to be humming along nicely. GDP rose by 4.8%, up from last quarter [LA Times] so whats the problem?

Source: WSJ

Wages did not show the same improvement [WSJ], which was not anticipated by economists. Unemployment has fallen and with that, there is usually the expectation that workers are in a better position to negotiate their wages . Despite the robust economic growth, a separate Labor Department report showed that compensation costs for employers rose only 0.6% in the first quarter — the slowest quarterly gain in nearly seven years — following a 0.8% gain in the fourth quarter.

Yet unemployment filings showed a modest increase [Ch Trib] still suggesting employment is gaining.

Mortgage volume is dropping sharply as mortgage rates continue to rise [Detroit News] – almost a half percent for fixed rates since the beginning of the year.

At the same time, an improving labor market and long-term interest rates that are still close to historic lows will limit the slowdown in housing, economists said. “As long as (those) two very important pillars of the housing market remain in place, housing will do fine,” Bob Walters, chief economist at Livonia, Mich.-based Quicken Loans Inc., said. Job growth “is providing a foundation for the housing market.”

A softening housing market and rising energy costs [Boston Globe] While the consumer has been driving the economy for years, businesses are now kicking in full throttle. This is what I think the Fed has been hoping for. The economic baton would be passed from consumer to business.

However, if housing prices cool too quickly, consumers could reign in spending. In addition, energy costs could trigger inflation, causing the Fed to raise rates again. Lower consumer spending, coupled with higher borrowing costs could stall the economy. A stalled economy spells further weakness in the housing market.

See what I mean?

Navigating A Forest Of Misinformation

April 18, 2006 | 12:01 am | |

The numbers are coming at us at a rapid fire rate but if we don’t stop long enough to think about what they mean, then its all a waste of time. All the information streamed at us is often not interpreted. Thats good, right? Pure raw data. No potential for spin. Better?

Not really

To see larger graphic

Employment figures are unnaturally low because of the shift in behaviors of certain demographics:

In Floyd Norris’ What One Low Number Doesn’t Show [NYT] he demonstrates that a low employment figure doesn’t indicate a tight employment situation. The current stats do not consider the change in demographics and who is actually looking for work as compared to 1983.

23% of inflation figures include housing data but its low because the government uses a rental equivalent figure for a sale:

In John Wasik’s What U.S. Government Won’t Reveal About Inflation [Bloomberg] he contends that it is in the government’s best interest to keep inflation low because of their inflation related obligations. I have written about this before.

The workforce will grow more slowly than we would expect because of aging baby boomers but the track record of using demographic analysis, such as, the ages of the workforce in ten years, is poor at best:

In Michael Mandel’s Demographics is not Destiny [BW] he contends that the recent study released [pdf] that the slow growth is the labor force is a weak argument and the researchers essentially say so in their closing arguments of the report. This has broad reaching impact on the housing market since one of the main purchasing segments has been second home and investor purchases by baby boomers. Here’s two reports on it.

Access to more information is exciting, but it requires more analysis, not less. I am sitting here thinking employment stats are overstated, inflation is understated and whether or not the “*” should be dusted off in Major League Baseball. Its a lot for any reasonable person to digest.

The Fed And FDIC Studies: Retirement’s Impact On Housing Trends

April 14, 2006 | 2:38 pm | |

[Sorry for the late posts today, a bit under the weather -ed]

There has been a lot of discussion about retirement and housing late – here are two studies that discuss the trends. The fist is a report by FDIC that discusses baby-boomers and immigrants with housing demand. The second study, which is not available yet, was done by the Federal Reserve discusses the the impact of the growing baby-boom retirement population and its impact on the economy.

Banking on the Baby Boomers: How Demographic Trends Are Reshaping the Financial Landscape [FDIC (pdf)]

A snapshot of U.S. population growth during the past 20 years shows significant increases in the numbers of aging baby boomers and foreign-born individuals. Although these groups differ in age, income, education level, and household size, both are expected to significantly affect the demand for owner-occupied housing.

The housing discussion begins on page 17.

  • Baby boomers are living longer, are wealthier and more active than prior generations
  • Current research finds that they don’t exclusively favor the sun belt states anymore
  • They are downsizing but want homes with more amenities.
  • They prefer 1-family, 1-story homes with hgiher ceilings and larger garages
  • Imigrants are a large group with considerable potential for growth


A new Federal Reserve study has shaken economists’ forecasts by suggesting the U.S. economy will have to decelerate much more over the next decade than most now expect.

Revolutionary Fed Study Has Economists Rethinking Forecasts [Bloomberg]

The study, to be published in July, finds that the retirement of the Baby Boom generation will force far-reaching adjustments in the way the economy works. Forecasts for everything from growth and employment to corporate profits and interest rates will have to be recast.

The problem will be that the retirement of baby boomers will weaken the labor force over the next 10 years. With a smaller work force to sustain the economy, there is more inflationary pressures and wage pressures ahead. This could complicate the Fed’s task of keeping inflation reigned in by keeping moortgage rates at a higher level.


Like Oil And Water Housing Booms: Too Much Of A Good Thing

April 10, 2006 | 12:01 am | |

Here’s an interesting dynamic relating to housing controls in some oil producing countries.

On one hand, Russia, a country struggling with free market forces, is trying to reduce subsidies toward housing by shifting more of the burden to its citizens and supplementing some of the costs from the surplus income generated by oil revenues. Some of its citizens are protesting the changes [Moscow Times].

Tens of thousands of demonstrators rallied across the country on Saturday to protest hikes in rent, utilities and housing maintenance fees, which have been rising because of the Cabinet’s efforts to reduce subsidies.

On the other hand, Venezuela, a country seemingly moving toward a more authoritarian state, has decreed that housing price increases will be set by the government [Bloomberg]. Housing prices appreciated 35% last year because of the lack of new housing, and presumeably demand increased because of economic gains from additional oil revenues.

Venezuelan President Hugo Chavez said he may set prices for private housing and expropriate apartments and houses from owners who refuse to sell at regulated prices.

Like the US, it seems that many other countries are also dealing with the economic impact related to housing [Weekly Standard].

[Media Chain-links] 1Q 2006 Manhattan Market Overview

April 4, 2006 | 7:39 am | | Public |

The 1Q 2006 Manhattan Market Overview that my appraisal firm, Miller Samuel, prepares for Prudential Douglas Elliman, was released today. I always think its interesting (actually, its fun) to see how the various media outlets (Big and Small Media, Blogs) respond to the exact same set of data and how the real estate brokerage companies who write alternative reports, frame their comments.

This list is in no particular order and excluded all the redundant articles (ie news feeds). I will keep adding to it through the week after the initial post.

Apartment Prices Up Again After a Slump in Manhattan [NYT]
Housing frenzy slows down[NYDN]
Wall Street bonuses lift Manhattan apartment prices [Reuters]
Reports: Luxury Housing Boom May Be Reaching Its Crest [NY Sun]
First Quarter Reports: Thousand Island [NYO The Real Estate]
Housing market still steady [NY Newsday]
City Apts. Defy U.S. Bubble Trouble [New York Post]
Condo boom boosts Manhattan real estate market [Inman News]
Manhattan housing market shows weakness [CNN/Money]
Manhattan Apartment Sales Cool Off []
Manhattan Apartment Prices Climb at Slowest Pace in Three Years [Bloomberg] IMMOBILIARE: SALE, SI SGONFIA OPPURE CROLLA [Wall Street Italia]
Manhattan housing market booms in first quarter [The Real Deal]
State o’ the Market Update: Through Thick and Thin, ‘Essentially Flat’ [Curbed]
Brokers say New York real estate market is cooling [Financial Times]
[Wall Street Bonuses Fuel Manhattan Real Estate Surge [DJ]](no link)
A game of telephone [Property Grunt]
Manhattan Market Up, Psychology Down in Q1 [Brownstoner]
Real Estate Rashomon [Walk-Through]

Here are a handful of radio and tv clips as well.

[Bloomberg TV]




[WCBS Radio]

Tags: , , ,

Land Captains Industry

March 15, 2006 | 1:02 am | |

In the LA Times Seeing Factories as Essential Parts, the tag line reads The shape of modern American cities may be changing as urban planners weigh the conflicting merits of housing versus industry.

In many large urban markets, like Los Angeles and New York, it is getting more and more difficult to consolidate large parcels of land to create more housing. Politicians are all for it because it replaces a tepid tax base with a strong tax base. New York City has upzoned neighborhoods to encourage development, while land in outlying areas of LA are becoming scarce.

When is enough, enough? I have heard the joke in the NYC said on more than one occasion that its only a matter of time that Manhattan will become one big condo development.

At the same time, restricting supply will push housing prices even further.

Local governments are beginning to take steps to protect industry as residential developers eye industrial land for housing:

  • Long Beach – Adopted a strategy in January for protecting jobs and creating business that discourages conversion of industrial property to residential or commercial uses. Formal policies are expected in a year.

  • New York City – Just wrapped up public comment on boundaries for a series of “industrial business zones” proposed by Mayor Michael Bloomberg last year. The Industrial Business Zone Boundary Commission could be convened by the end of the month to decide on the boundaries.

  • San Diego – Has mapped the city’s industrial areas and drafted a plan to protect prime industrial land. The City Council’s land use and housing committee began hearing testimony on the draft, and the Planning Commission will address it later this month.

  • San Francisco – Last month began a series of community meetings to discuss its Eastern Neighborhoods plan, proposed zoning changes to balance industrial land protection and residential development in the South of Market, Mission, Potrero Hill and Waterfront districts. The Planning Commission eventually will weigh in on potential zoning changes.

  • San Jose – Changed the general plan on 4,000 acres in North San Jose to increase industrial density on part and allow housing on the rest in a compromise to protect manufacturing land and allow necessary residential development. The plan is in limbo after an unfavorable court ruling on March 2. The city now must decide how to proceed.

  • Santa Monica – Is updating its general plan to find ways to preserve areas for industrial and light manufacturing uses. The new plan should be completed within a year and a half.

  • Ventura – Recently debated industrial protection as it refigured its general plan. Zoning and economic development details are in the works.

Supply would certainly temper prices in a weakening market, but what happens when industry can’t afford to locate in the very same market the housing market is there to serve (at least partially?) The influx of new housing units can change the texture and characteristics of an area to the point where the reasons for moving there in the first place are lost.

There is a fine line between progress and a solid tax base.

The Fed Observes The Europeans: What To Do With Housing?

March 1, 2006 | 12:01 am | |

With Bernanke’s stewarship of the Fed underway, I have wondered if the Temple was paying short shrift to the impact of the weakening housing market on economy. Comments made by Bernanke seemed to indicate that housing was doing just fine. Everyone knows (who follows the real estate market) that a change has occured as evidenced by the fourth successive monthly decline in new housing sales [BW].

In the article Fed Finds Overseas That Even Steady Home Prices May Hurt Growth [Bloomberg] the red-hot U.S. housing market showing signs of coming off the boil, Fed officials are again looking abroad for hints on what lies ahead for the U.S. This time the focus is on Australia, the U.K. and the Netherlands, where home-price advances peaked after housing booms that had significantly spurred economic growth.

The lessons learned?

  • A bust doesn’t always follow a boom.

  • Prices that are not rising – they can stay flat or decline – can have a significant negative economic impact.

What patterns were seen? Within a year and a half after markets peaked in the Netherlands, Australia and Britain, prices in all three had stagnated, hitting homebuilding, consumer confidence and spending.

  • Britain – prices rose 20% in 2004 and have remained flat since.

  • Australian – prices peaked in 2003 and have remained flat since.

  • Netherlands – prices peaked in 2000 and have remained flat since.

Economic growth in these countries was about half within a year after the housing markets cooled.

Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, says the Fed might have to take similar action. He forecasts U.S. economic growth will slow to 2.6 percent next year from 3.4 percent this year. The Fed, he says, will stop raising its target rate when it gets to 5 percent and will lower it a full percentage point next year to cushion the economy from the fallout of the housing slowdown.

If his theory sounds vaguely familiar…
A Weakening Economy (If It Is), Has The Makings Of A Refi Boom In 2007 (If It Does) [Matrix]

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Housing Boom Provided Political Capital In Most Capitols

February 10, 2006 | 12:01 am | |

Last week, NYC’s Mayor Bloomberg made a gloomy forecast of the housing market over the next few years. General consensus reaction to his speech was its apparent attempt to lower expetations of those who wanted to spend the surplus, generated largely due to tax receipts generated from the housing market.

Other Politicians like Jeb Bush of Florida [Fl Politics] have used the [excess real estate related tax revenue to pull out all the stops [Orlando Sentinel]]((,0,5982351.column?coll=orl-news-headlines-state) and try to cement his legacy [Tampa Tribune] in his eighth and last year in office.

Politicians have realized an important lesson in this most recent housing boom. Budget surpluses have the amazing ability to help politicians push their agenda without giving away too much in the process.

That being said, I wonder if the positive political mind-set for housing-related incentive programs will grow more favorable over the next few years as the momentum of the past five years of the housing boom carries over, no matter what actually happens to the market.

Super Bowl Housing Correlations (Well, Not Really) and The Super Ball

February 6, 2006 | 12:06 am | |

As we enter the post-Superbowl housing market, here’s a few items of interest (well, at least to me). Actually, I never thought of the Superbowl as a milestone for the housing market, but some people apparently have.

But what few folks may know is the fact that the Super Ball ended up becoming the idea for the term “Super Bowl.” The first two contests between the NFL and the AFL were labeled the “World Championship Game.” After the second such contest, the owners were sitting around trying to come up with a snappier name when Lamar Hunt, the guiding light of the American Football League, and the owner of the AFL’s Kansas City Chiefs, remembered watching his daughter play with a high-bouncing Super Ball a few days earlier and ‘ball’ morphed into ‘bowl.’ Voila…Super Bowl!

The Super Bowl Indicator predicts a good year for the stock market if a team from the old NFC wins and a bad year when a team from the AFC wins. Then again the Super Bowl Indicator has lost some of its magic in recent years. Maybe we should switch to political indicators, which would suggest big gains in stocks during an election year.

But is the stock market truly showing signs of prosperity, or is it just BS?

I would like to suggest the latter and that it might not be a good time for you to obtain a home equity loan to invest in hot tech stocks. We are going through a housing bubble, and stock valuations as measured by stock price-to-earnings (PE) ratios are at bubble levels. The buy low, sell high philosophy would lead you to sell stocks now, not buy them.

In the ever-escalating battle to turn the Super Bowl, the premier U.S. sporting event, into a defining metaphor of American life, Merrill Lynch & Co.’s chief economist for North America, David Rosenberg, has broken new ground.

He says the economic numbers favor the Seattle Seahawks over the Pittsburgh Steelers in the National Football League’s title game, which often turns into a tongue-in-cheek referendum on the competing cities. Las Vegas oddsmakers favor the Steelers over the Seahawks today by 4 points.

“If the Seahawks match up to the city’s relative economic and market performance, then the oddsmakers may have the wrong team,” Rosenberg wrote in a Feb. 2 report after reading a sports column titled: “Give Me a Good Reason to Root for the Seahawks.”

Take job growth, for instance. That goes to Seattle, with 3 percent in 2005 to Pittsburgh’s 0.2 percent, according to Rosenberg. There’s unemployment: Seattle edges Pittsburgh, 4.6 percent to 5 percent. And Seattle home prices jumped 13 percent last year compared with 4 percent in Pittsburgh, Rosenberg wrote.

Well, Pittsburgh won decisively, so the moral of the story is: there is no correlation between the Superbowl and the housing market, as much as we would like there to be.


Mayor Bloomberg Presents Preliminary Budget, Housing Projected To Decline 10%

February 1, 2006 | 12:03 am | |

Mayor Bloomberg Presented His FY 2007 $52.2 Billion Preliminary Budget [NYC] yesterday.

The project projects continued economic growth but with less emphasis on the housing sector.

New York’s real estate market is expected to slow, however, with a 10% decline in home prices, a 14% decline in home sales over the next few years and a significant decline in real estate transaction taxes that have buoyed the City’s tax revenue in the last few fiscal years.

The language is not clear but it looks like the city is projecting a 10% decline in housing prices and a 14% decline in the number of sales over the next few years. Housing has been one of the primary reasons the city currently has a surplus.

This is 2007, not projection starts mid-2006. This budget used rising interest rates as the primary catalyst for weakening housing, Wall Street stock price advances and profits.

I find this logic interesting since some analysts disagree with the Fed’s stance that the economy is strong, using the 1.1% increase in GDP as evidence that the economy is weakening. If so, some predict the Fed may loosen rates in early 2007, which would influence mortgage rates to go lower. Of course, this could be completely incorrect and the economy is actually doing better than the statistics show.

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