Matrix Blog

Source: WSJ

The Fed increased the Federal Funds rate to 4.25% [WSJ], the 13th increased since June 2004. However, for the first time since 2002, it omitted the word “accommodative” which means that rates are nearing the point where they neither stimulate or deter economic growth. The less restrictive wording will give Bernanke. Greenspan’s replacement, a little more flexibility.

For housing: If inflation is in check, then mortgage rates may be less likely to move a whole lot higher making the transition to a less frenzied housing market more attainable.

However, its not clear whether inflation really is in check. Barry Ritholtz of the Maxim Group and webmaster of Big Picture clearly disagrees with this assessment:

“Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained.” Quite frankly, we do not believe them. We know that beyond the rises in food and energy prices, nearly everything — from healthcare to building materials to education costs to insurance to commodities — costs more. And gold, the world’s best inflation indicator, is well over $500 per ounce. Where ever we look, we see evidence that prices have limited stability and an upward bias.”

Barry adds in a comment:

Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally.” – P.J. O’Rourke

The WSJ summarizes:

“Overall inflation recently topped 4%, at an annual rate, because of soaring energy prices. Excluding food and energy, it is only about 2%, but Fed officials worry that higher energy prices will eventually lead to higher wage demands and prices for other goods and services. Although gasoline prices have fallen back from their levels reached just after Hurricane Katrina struck the Gulf Coast, natural-gas prices have climbed, hitting a record yesterday as cold weather blanketed the Northeast.”

Tags: Hurricane, Barry Ritholtz, Hurricane Katrina, Alan Greenspan, Ben Bernanke

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Its been subtle, but there has been a change in housing market terminology over this past year. There have been several distinct segments to the trend, in terms of how what terminology is used to describe it.

Housing “Boom” [January to June]

In the first half of 2005, the media generally used the phrase “housing boom” to describe the vibrant state of the housing market. Several years of rising prices and success stories for brokers and builders seemed to fill the news.

Housing “Boom” = Housing “Bubble” [July to September]

Over the summer, during the barrage of bad news, including Katrina and Rita Hurricanes, spiking gasoline prices, worsening conditions in Iraq, political discord in Washington, growing inflation concerns and rising mortgage rates (wow, some major gloom and doom was abound) influenced the media to some sort of tipping point. Many of the articles during this period shifted from talk of a boom, with risk of a bubble, to if the bubble was going to burst.

Housing “Bubble” [October to November]

Lately, the housing discussion has firmly shifted to use of the word bubble as a key descriptor of the state of the housing market and the orientation became a matter of when the bubble will burst. This thinking seems to have its own momentum despite the significant change in many of the indicators that gave us reason for concern this summer.

For example, economic damage to the national economy from the hurricanes is now largely believed to have less significant implications. Mortgage rates have leveled off and have actually retreated lately. Gasoline prices have fallen sharply, core inflation has remained low and housing prices have not fallen.

Housing “Expansion” [December +]

Now the NAR is beginning to call the current real estate environment a housing expansion [Washington Post] Of course, a market characterized by more balanced conditions can not be characterized as an expansion.

Suggested dramatic titles for next phase (not necessarily correlated with actual events)

Housing “Bust” [?]

Housing “Black Hole” [?]

Housing “Katrina Effect” [?]

Housing “Rebound” [?]

Housing “Explosion” [?]

UPDATE January 29, 2006

Housing “Soufflé” [?] [See the Big Picture blog]

Tags: Hurricane, Hurricane Katrina, Big Picture Blog

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Toll Brothers, the nations largest builder of homes, said that housing prices were not soaring anymore and that future sales projections would have to be revised. [NYT] Still, they project an increase of 7% more homes to be built next year. They have begun to offer additional amenities to encourage sales.

“Per capita disposable income grew 3.6 percent over the last year, according to the Commerce Department.

More than four out of five economic forecasters surveyed by Blue Chip Economic Indicators said they expected existing-home price growth to slow to 5 percent by the end of 2006, from 13 percent over the last 12 months.

“All of a sudden, the ads in the paper show special mortgage deals, special incentives,” Mr. Toll said last week, referring to new housing developments nationally. “That’s an absolute indicator that the market has softened.”

Mr. Toll also attributed his company’s new sales forecast to toughening local regulations, saying governments in many cities were delaying new projects to placate existing residents who want slower growth.”

Since the recent hurricanes, home prices are not appreciating significantly anymore. The average price of their homes are $679,000, and the average buyer has an income over $100,000. It would seem to me that since their average sales price is likely double the national average (the median is about $220,000), that their market is essentially the upper end and is not necessarily representative of the overall market. Still it does suggest a slow down.

John Mason, an appraiser and frequent commentor of posts to this blog writes:

The Toll Brothers revising future sales and profit projections.
I never thought of it before, but now that these companies have grown to the point that they are publicly traded [NYT] on the exchanges, we get to see a more transparent market.

Softer Real Estate Outlook Sends Markets Into Retreat [NYT/AP]
Is the House Party Over? [WSJ]

Tags: Hurricane

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Source: WSJ

Hiring cooled for the second straight month but wages rose at their fastest rate in two years [WSJ]. The BLS indicated that weakened job gains were not generally attributable to areas impacted by the hurricanes. In fact, the job gains would have been even weaker if not for the resolution of a large strike at Boeing and hurricane-related construction. Rising wages are expected to keep pressure on the Fed to keep raising rates.

Increasing price pressures are creating a new “conundrum” for policy makers. According to a WSJ article by Mark Gongloff, we don’t seem to be in a “Goldilocks” economy anymore – not too cold, not too hot – that the markets prefer.

Either way, it doesn’t appear that mortgage rates will be falling in the near term as a result.

Bureau of Labor Statistics Employment Situation Summary for November [BLS]

Tags: Hurricane

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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: Alan Greenspan, Hurricane

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The spike in gasoline prices occurred before the wrath of hurricanes in late summer. After adjusting for inflation, rising gasoline prices pre-hurricane were still relatively low in historical terms and perhaps thats why inflation had remained low. At that time, bond investors viewed the sharp increase as more likely to provide a drag on the economy rather than stir up inflation concerns.

There has been a lot of speculation that high gasoline prices are stimulating inflation. However, for perspective, gasoline prices today adjusted for inflation are about the same as the 1950’s but real per capita income was less than half as much today [Boston Globe]. In other words, gasoline prices are not high relative to historic norms.

However, that can be a bit simplistic since the economic engine is built around lower price levels than we are currently experiencing. The persistence of high gasoline prices may be one of the primary inflation catalysts as as core inflation (excluding food and energy) is virtually flat. To make matters worse, oil companies are now posting record profits [Marketwatch] which is of particular concern to many since the gasoline prices have risen so much in such a short period of time.

Inflationary pressures are now beginning to influence a modest rise in mortgage rates.

Of note
Gregg says oil company profits should be taxed [Boston Globe]
Katrina & Oil Prices: The Perfect Storm [Matrix]

Tags: Hurricane Katrina, Hurricane

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The NAR reported that existing home sales were unchanged for September [Marketwatch] at the annual seasonally adjusted rate of 7.28 million homes, the second highest in history. The hurricanes prompted a sharp increase in purchases outside the damaged regions which offset weaker sales levels in other regions.

The median sales price of a US existing home was $212,000, up 13.4% over the prior year. Inventory increased 0.3% to 2.85 million or a 4.7% supply. The NAR interprets inventory as still “relatively lean.” I am a big fan of the charts churned out by Calculated Risk, and once again they have created an excellent graphic – this time covering inventory.

So existing homes sales, which is about 10x the number of new housing starts and therefore more telling of the overall housing market condition, was at a record level but did not see gains. At the same time, rising inventory appears to be gaining momentum. This should temper price appreciation in the coming months.

Other Related
Existing Homes: Sales Strong, Inventories Rise Seasonally [Calculated Risk]
Sept existing home sales flat [Reuters]

Tags: Hurricane

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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: Beige Book, Hurricane

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Greenspan’s conundrum has been the fact that [Financial Times] bond yields have remained low. We are expecting to see some upward movement as more inflationary data comes out over the next few months.

Two sides are presented as to why the bond market yields have remained low, which has extended the housing boom and has been counter to historical patterns:

Why is the bond market right? Investors are buying bond yields at low rates because they believe the economy will slip. A flat yield curve often pre-dates a recession. Also, the bond market is not concerned about growth right now, only inflation. With central banks keeping rates low as well as heated competition from Asia. Also, demographics may be keeping yields low. The 25-44 year old age group is shrinking so consumption growth should shrink as well keep rates low in the long term.

Why is the bond market wrong? A recession is not in the forecast and the equity (stock) markets are not worried about one. Also, there may be a global savings surplus – and we hear this a lot – there is so much capital out there, seeking out limited opportunities for investment. A potential revaluation in the Yuan, high US budget deficit and further inflationary economic data would cause yields to re-adjust to proper levels. There was an article today in the Wall Street Journal that suggests that global inflation may return.

The sharp rise in energy costs and economic damage caused by the 2 recent hurricanes has added to the pressure.

In other words, no one really knows what the long term outlook is for bond yields. Yet it is critical to the housing market since mortgage rates are usually tied to bond yields.

On the other hand, the NAR’s Home Sales Forecast is rising [RisMedia]

[NAR’s 10-2005 US Economic Outlook] [PDF]

Tags: Alan Greenspan, Hurricane, NAR, National Association of Realtors

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After the release of our 3rd quarter Prudential Douglas Elliman Manhattan Market Overview last Tuesday to the media and the frenzy of coverage during the week as a result, the New York Times ran an excellent overview of the market story this weekend called A Mixed Message [NYT].

Since then, I have received many inquiries about the state of the market over the week from real estate brokers, wall street firms and lenders to interpret the statistics in the report that were played over and over in the media firestorm. Whats been fascinating about this whole experience is how much coverage was given to the average sales price statistic, which could not stand on its own without explanation. Hopefully I don’t sound too cynical but this stat was likely used because it showed the most negative result.

Here’s a quick list of the highlights of the current market that are most useful:

• The average price per square foot set an all-time record reaching $984 per square foot and rising 1.4% from the prior quarter. This is the telling statistic. The overall market increased this quarter, but not at the same torrid pace as before. The rate of appreciation has eased. In fact, since larger apartments generally sell for more on a per square foot basis than smaller apartments, one could make the argument that the shift in unit mix also tempered this indicator as well.
• There was a significant shift in the mix of apartments that were sold. The average sales price dropped 12.7% because the market share of entry-level apartments (studio and 1-bedrooms) spiked 5% and activity at the upper end dropped off.
  
• Entry-level sales surged because of concerns over modest increases in mortgage rates are expected. Of course, this has been the speculation since mid 2003 but this time, with rising fuel prices, comments from the Federal Reserve about housing, mortgage rates may actually rise.
  
• High end sales activity eased rather than prices dropped. The luxury market average sales price dropped 26% from last quarter because fewer sales at the upper end occurred. There were 17 sales at or above $10M in the 2nd quarter and only 4 sales at or above $10M tracked in the 3rd quarter. In fact, a high end broker contacted me to say there were 5 such sales this quarter, but didn’t realize that one of them closed in the prior quarter. Nevertheless, whether 4 or 5, the sales activity was well below 17 sales. This doesn’t indicate that prices collapsed, but that a shift in the mix of apartments that sold in the upper 10% of the market.
• Inventory did increase this quarter and was more heavily weighted with condos than co-ops. Since inventory came on at generally the same pace as the number of sales eased, inventory built up. This was attributable to seasonal considerations (thats a stretch) and bad economic news, rising gasoline prices, over saturation of bubble speak for the past 6 months and negative economic news relating to the 2 hurricanes.
  
• There are expectations of record Wall Street bonuses at yearend due to the solid year seen by investment bankers and a number of other sectors in the financial district. Historically, Wall Street bonus income has flowed through the real estate economy after the New Year.
  

Here are a handful of all the interviews I did which basically re-iterate most of these points.

[Focus on Business (Canada)]

[Bloomberg Television]

[WCBS Channel 2]

[WNYC Radio (Brian Leher Show)]

[WNYC Radio]

[Bloomberg Radio]

[WCBS Radio]

Tags: Hurricane, Wall Street Bonus, Canadian Housing Market, Radio

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The Conference Board Consumer Confidence Index falls to its lowest level since October 2003

This survey for September runs through the 20th so it incorporated the effects of Hurricane Katrina and Rita, the spike in gasoline prices and less optimistic job market.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.

Despite the sharp drop, the Fed is talking about future interest rate hikes [MarketWatch]. Ironically, it would seem that consumer pessimism is better suited for the housing market, rather than a robust economy, by keeping mortgage rates low.

Tags: Hurricane Katrina, Hurricane

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The University of Michigan Consumer Sentiment Index fell to its lowest level since 1992, below post-9/11. The drop was attributed to the Hurricane Katrina ravaged Gulf Coast region and record gasoline prices [Subsc.]

Retail sales fell 2.1% in August [Subsc.], the largest decline in 4 years. Auto sales fell 12%.

Despite the spike in gasoline prices, the drop in retail sales and auto sales and flat core inflation, the Fed still sees that inflation is still a threat. At what point will the bond market come on board? These factors can also make the argument that we are near an economic slowdown and inflation is not a threat. Raising short term rates could further weaken the economy. All this could bode well for mortgage rates if economic conditions remain the same.

The Fed is expected to raise the federal funds rate on Tuesday because it believes the economic malaise that seems to be gaining momentum, is temporary. The bond market seems to agree, seeing a slight 0.01% uptick in mortgage rates over the past two weeks.

Tags: Hurricane, Hurricane Katrina

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