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The economic impact of a slight increase in house prices

The economic impact of a slight increase in house prices

by Bill McBride on 8/07/2012 

If I’m correct about house prices bottoming earlier this year – and the CoreLogic report released this morning is another indicator that prices might be increasing a little – a key question is: What will be the economic impact of slightly increasing house prices?

We saw the impact on Freddie Mac this morning. Freddie reported net income of $3 billion compared to a $2.4 billion loss in Q2 2011. Freddie noted that the decline in its loss provision was due to “improvements in the number of newly impaired loans and to lower estimated future losses due to the positive impact of an increase in national home prices.”

Also I expect CoreLogic and Zillow to report a meaningful decline in the number of homeowners with negative equity in Q2. We might see something like 1 million households that regained a positive equity position at the end of Q2 2012. These are borrowers who might find it easier to refinance, or sell if needed.

We will probably also see a meaningful decline in the number of newer mortgage delinquencies. Note: The MBA Q2 National Delinquency Survey results will be released this Thursday.

Another impact that we’ve discussed before is the impact on listed “For sale” inventory. Seller psychology is very different if prices are perceived to be falling, as opposed to if prices are stabilizing or even increasing. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. That behavior pushes up inventory. But if potential sellers think prices are stabilizing, and may increase, then they are more willing to wait until it is more convenient to sell. I think we’ve been seeing this change in psychology for some time.

And private mortgage lenders and homebuilders will regain confidence in the mortgage and housing market. Flat to rising prices give homebuilders a better idea of the pricing needed to compete in the market – while more consumer confidence in house prices is leading to more demand for new homes. Note: Residential investment is the best leading indicator for the economy, so this pickup in new home sales and housing starts suggests a pickup in the overall economy (barring exogenous events – like the European crisis – or policy mistakes).

In conclusion: There are many positive economic impacts from flat to rising house prices and we are just beginning to see the positive impact on the overall economy.

Read more at http://www.calculatedriskblog.com/2012/08/the-economic-impact-of-slight-increase.html


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Buffett’s Views on Housing

Buffett’s Views on Housing

by CalculatedRisk on 2/25/2012 

In Feb 2010, Warren Buffett wrote:

[W]ithin a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious.

Of course I disagreed with his timing.

Then in Feb 2011, Buffett wrote:

A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.

As I noted last year, the key word was “begin” and sure enough – based on housing starts and new home sales– it appears a modest recovery has begun.

Today Buffett wrote:

Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong.

Really? And I was going to give him a little credit this time. Oh well.

More from Buffett:

Housing will come back – you can be sure of that. Over time, the number of housing units necessarily matches the number of households (after allowing for a normal level of vacancies). For a period of years prior to 2008, however, America added more housing units than households. Inevitably, we ended up with far too many units and the bubble popped with a violence that shook the entire economy. That created still another problem for housing: Early in a recession, household formations slow, and in 2009 the decrease was dramatic.

That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.

At our current annual pace of 600,000 housing starts – considerably less than the number of new households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This process will run its course at different rates around the country; the supply-demand situation varies widely by locale.) While this healing takes place, however, our housing-related companies sputter, employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depressionof its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.

Buffett makes several key points:
1) Housing completions have been at record lows.
2) There are currently more households being formed than new housing units completed, and this is decreasing the excess supply.
3) The excess supply will be “sopped up” at different rates across the country.
4) Housing is a key reason for the sluggish economy (not the only reason).

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Why Bank Bailouts Haven’t Led to Jobs

Why Bank Bailouts Haven’t Led to Jobs

1:56 PM Monday July 11, 2011
by Jeff Stibel

Jeffrey Stibel is Chairman and CEO of Dun & Bradstreet Credibility Corp. and author ofWired for Thought. Follow him on Twitter at @stibel.

Given the recent economic news, I will go out on a limb and state that we are officially headed back into recession, or what can now officially be called a double-dip recession. Business optimism is at a record low, commodities prices have jumped to inflationary levels, home sales recently dropped to prices not seen since 2008, and job growth is anemic. We are just waiting for GDP data to confirm the inevitable. As Forbes reported, the Chairman of the Federal Reserve has admitted that he is officially “clueless on the economy’s soft patch.”

Things are a bit more convoluted than they were back in late 2008, when it became clear that the United States and much of the rest of the world was in a recession. It was largely believed that the recession was caused by reckless banks and a crisis in confidence. The result was reduced consumer spending, financial uncertainty, and a stark reduction in the number of jobs available. Congress was convinced that they must stabilize the economy by infusing big banks with capital. And infuse they did; to the tune of $700 billion. Almost three years later, many banks have repaid the loan (and have also posted record profits), yet by all accounts it appears as if we are sliding back into a recession. What happened?

When it comes down to it, economic recoveries depend on job growth, which is what the stimulus was intended to trigger. Banks were supposed to lend money to companies, who would in turn spend money to create new jobs, which would mean more employed people with money to spend, which ultimately would boost business revenues and create new jobs — a virtuous cycle.

But jobs haven’t really grown. For a few months in a row, we were thrilled to see 160,000 new jobs created per month. Unfortunately, these gains were largely illusory. The new jobs created weren’t steady, full-time, middle class positions. Instead they were part time, project based, transient, and low wage. Many can be attributed to a McDonald’s hiring surge. Even these low wage jobs are hard to come by — there were over one million applicants for the available 62,000 McDonald’s positions, making gaining employment at McDonald’s just as difficult as gaining admission to Harvard University. Numbers released earlier this month show what is probably a more accurate reflection of “real” job growth: only 18,000 new jobs created in June. Even worse, the Labor Department adjusted the May numbers downward to 25,000 — less than half of their initial assessment.

So I should modify my statement to say that economic recoveries depend on real job growth. Past downturns, including the Great Depression, triggered massive increases in new business creation. This one is different: since 2007, we’ve had a 23% drop in new business creation. In the same period, we’ve also suffered a net loss of 7 million jobs.

Job growth, as it turns out, is largely driven by small businesses. Typically this comes from new business creation that builds a small business economy that drives 64% of all jobs. But in order for small businesses to be created and hire during economic downturns, they need access to capital, which is often provided by big banks. This, of course, was a primary driver of the $700 billion in economic stimulus that went to banks but, as we have learned, it did not go to small businesses. And this is the primary reason why we are still in a recession.

Many thought that the $700 billion bailout was going to trickle down to small business owners. This didn’t happen. The banks took the money, invested it, earned a large return for themselves, and then repaid the government. The 22 largest recipients of the bailout actually reduced small business lending by over $59 billion through last year. Congress largely considers this program a success: they avoided a complete financial collapse and recouped a good portion of the money invested. But the economy desperately needed (and still needs) that money to circulate to small businesses.

During the recession, small business owners did what they could to survive — they tightened their belts, reduced their costs and cut headcount. Today, only 5% of business owners think it’s a good time to expand and very few intend on creating full time jobs (though 58% of employers say they plan to hire more temporary and part time workers). There are considerably more business owners who expect business conditions to be worse in six months rather than better. Even the businesses that are optimistic and thus inclined to secure financing are finding loans hard to come by. A recentPepperdine University study found that only 17% of small businesses who applied for loans were able to get them. It is no surprise that small business owners’ optimism has declined for three straight months and that only five percent of them think this is a good time to expand.

What’s the solution?

We must go back to the drawing board and figure out how to get cheap and convenient capital into the hands of small business owners. Stimulus money needs to be earmarked for small businesses. Banks that took loans from the government need to start spending on small businesses. This is as good for them as it is for the overall economy.

Some banks understand the mutual benefit and are starting to invest in small businesses of their own accord. Goldman Sachs is giving away $500 million to small businesses, with the stated purpose of unlocking small business “growth and job creation potential.” JP Morgan Chase plans to increase their small business lending practice to $10 billion annually. And Bank of America is increasing by $5 billion annually. Plans and pledges are important, but action is needed: the pledged money needs to be spent.

The funds must come with relative ease and favorable terms, just as it did for the banks who received a bailout. Many business owners say they don’t want loans because the terms are so stringent and the process is overwhelming. But if the terms are reasonable and the process is easy, few businesses would refuse an opportunity to grow.

Every recession in recent history has ended with job growth coming from small business creation… except this one. That’s why the recession is not ending. To end this once and for all, we must help small businesses help the economy by giving them easy access to capital from which to hire employees whom will ultimately be contributors to the overall economy.

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Housing: Governors are not immune to the housing bust

Housing: Governors are not immune to the housing bust.

by CalculatedRisk on 3/01/2011 09:03:00 AM

Note: At 10 AM, the ISM Manufacturing Index for February and Construction Spending for January will be released. Also Fed Chairman Bernanke provides the Semiannual Monetary Policy Report to the Congress (Senate testimony).

From Ted Nesi at wpri.com: Governor Chafee has a house he’d like to sell you

[Gov. Lincoln Chafee] and his wife, Stephanie, listed their seven-bedroom, three-and-a-half-bathroom house on Providence’s East Side last week for $889,000.

The Chafees purchased the house for $939,000 in 2006 …

So he is asking $50,000 less than he paid. Case-Shiller doesn’t track Providence, but house prices have fallen about 15% in Boston and 22% in New York – and prices have probably fallen at least 10% in Providence. So I wouldn’t be surprised to see a price reduction.


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Builders Wonder If The Double Dip In Prices Will Include New Homes

Much depends on the economy’s recovery and buyers looking beyond unsold existing homes and foreclosures.

The fear that home prices will continue to fall over the next several months appears to have gripped economists who insist that a “double dip” in home values is either inevitable or already in motion, despite recent signs of recovery in the general economy.

However, there is also evidence that prices for new homes—which generally aren’t included in the widely watched housing indices—are stabilizing. Some large production builders have had success raising their prices (see chart below), although it’s hard to gauge whether that trend is sustainable on a broader scale when so few new homes are currently being sold—only 290,000 units on an annualized basis through November, according to Census Bureau estimates.

Some economists have been predicting for months that the housing market wasn’t finished adjusting to the stark realities of weak buyer demand, a surfeit of unsold existing homes and an ongoing deluge of foreclosures. “We should expect house prices to continue to fall, with nationwide prices dropping another 15 to 20 percent to complete the process of deflating the bubble,” wrote Dean Baker, co-director of the Center for Economic and Policy Research, in the New York Times last August.

The latest release of the Standard & Poor’s/Case-Shiller Housing Index, in which all 20 markets tracked showed month-to-month and year-to-year price declines in October, confirmed for some economists a trend they have been dreading. That includes S&P’s David Blitzer, who uttered the words “double dip” in his comments on the index’s findings. “It’s pretty clear the housing market has already double dipped,”Columbia University economist Nouriel Roubini told CNBC after the Case-Shiller data came out. “And the rate of decline is stronger than in previous months.” Roubini was one of the first economists to foresee an implosion of the housing bubble.

Patrick Newport of IHS Global Insight observed that existing home prices in several metro markets had actually triple dipped during the recession. And a provocative and depressing blog on the website The Automatic Earth on Sunday quotes a number of economists—including one of the more bearish, Peter Schiff—to make its predictive argument that home values will need to drop another 20 percent because capital for mortgage lending will be scarce and mortgage defaults will continue to rise, putting more distressed homes back on the market at discounted prices.

In an interview with BUILDER on Tuesday, David Crowe, NAHB’s chief economist, conceded that all this talk about home prices double dipping “certainly concerns us. Opinion drives impressions, and if you get enough economists saying the same thing, people will believe them. And you have to reflect on the dismal performance of the [housing] indexes of late.”

Crowe remains convinced, though, that the declines in the indexes—“and Case-Shiller in particular”—are the result of the tail end of the expiration of the home buyer tax credit. “We’re finally seeing a full three months worth of results and the consequent softness in house prices.”

In addition, Crowe points out that there’s no index tracking new-home prices on a consistent basis, so it’s difficult to draw conclusions about those prices from what’s going on with existing home sales. (The Census Bureau’s latest data show the median price of a new home sold through November, $213,000, was off by 2.7% from the same period a year ago.)

Crowe says NAHB’s membership is currently in a “spotty period” when it comes to pricing their products. “Builders who have figured out the segment of their markets that is robust are doing okay—not great, but okay because no one is doing great right now.” Indeed, if one looks at pricing trends among the industry’s public production builders, a definite leveling-off pattern emerges for most.

Builder Average selling price, 2010

(% chg. from 2009)

D.R. Horton              $206,100 (-3.4%)

Pulte                        $257,261 (-0.22%)*

Lennar                     $244.000 (-0.41%)*

NVR $295,700 (-1.6%)*

KB Home $208,100 (-0.26%)*

Hovnanian                $280,715 (-1.1%)

Ryland Homes $241,500 (+0.11%)*

Beazer Homes           $221,700 (-3.9%)

Meritage Homes $253,500 (+5.3%)*

Standard Pacific         $344,000 (+14%)*

MDC Holdings            $280,800 (-0.35%)*

Toll Brothers              $565,769 (-4.4%)

M/I Homes $226,000 (+11.9%)*

*through nine months of its fiscal year

Source: SEC filings

Some companies have enjoyed decent year-to-year price gains at least through last fall, including Standard Pacific Homes, which attributed its price increases to “the delivery of more higher-priced homes within Southern California and the reduction of deliveries in Florida.”

M/I Homes noted that it had benefited from a significant recovery in its business in the Midwest, where through September 30 its sales were up by 38% and its average selling price up by 12%.

Crowe of NAHB believes that most builders remain optimistic about growth in jobs and income levels in 2011. If those kick in, “that will bring out demand.” What builders have to be wondering, though, is how much steeper they might need to bring down prices to encourage long-sidelined buyers to re-enter the market and consider the purchase of a new house.

John Caulfield is senior editor for BUILDER magazine.


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Question #1 for 2011: House Prices

Question #1 for 2011: House Prices.

by CalculatedRisk on 12/31/2010 04:20:00 PM

Two weeks ago I posted some questions for next year: Ten Economic Questions for 2011. I’m working through the questions and trying to add some predictions, or at least some thoughts for each question before the end of year.

1) House Prices: How much further will house prices fall on the national repeat sales indexes (Case-Shiller, CoreLogic)? Will house prices bottom in 2011?

There is no perfect gauge of “normal” house prices. Changes in house prices depend on local supply and demand. Heck, there is no perfect measure of house prices!

That said, probably the three most useful measures of house prices are 1) real house prices, 2) the house price-to-rent ratio, and 3) the house price-to-median household income ratio. These are just general guides.

Real House Prices

The following graph shows the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter).

Real House PricesClick on graph for larger image in graph gallery.

In real terms, both indexes are back to early 2001 prices. Also both indexes are at post-bubble lows.

As I’ve noted before, I don’t expect real prices to fall to ’98 levels. In many areas – if the population is increasing – house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.

If real prices fall to 100 on this index (seems possible) that implies about a 10% decline in real prices. However what everyone wants to know is the change in nominal prices (not inflation adjusted). If real prices eventually fall 10%, that doesn’t mean nominal prices will fall that far. House prices tend to be sticky downwards, except in areas with a large number of foreclosures. That is key a reason why prices have been falling for years, instead of adjusting immediately.


In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratiosHouse Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph through October 2010 using the Case-Shiller Composite 20 and CoreLogic House Price Index.

This graph shows the price to rent ratio (January 1998 = 1.0).

I’d expect this ratio to decline another 10% to 20%. That could happen with falling house prices or rents increasing (recent reports suggest rents are now increasing).

Price to Household Income

House Prices to Median Household IncomeThe third graph shows the Case Shiller National price index (quarterly) and the median household income (from the Census Bureau, 2010 estimated).

Once again this ratio is still a little high, and I’d expect this ratio might decline another 10%. That could be a combination of falling house prices and an increase in the median household income.

This isn’t like in 2005 when prices were way out of the normal range by these measures, but it does appear prices are still a little too high.

House Prices and Supply

House Prices and Months-of-SupplyThe final graph (repeat) shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted).

House prices are through October using the composite 20 index. Months-of-supply is through November.

We need to continue to watch inventory and months-of-supply closely for hints about house prices. Right now house prices are falling at about a 10% annual rate.

Note: there have been periods with high months-of-supply and rising house prices (see: Lawler: Again on Existing Home Months’ Supply: What’s “Normal?” ) so this is just a guide.

My guess:
I think national house prices – as measured by these repeat sales indexes – will decline another 5% to 10% from the October levels. I think it is likely that nominal house prices will bottom in 2011, but that real house prices (and the price-to-income ratio) will decline for another two to three years.

Previous Questions (#2 and #3 still to come):
• Question #4 for 2011: U.S. Economic Growth
• Question #5 for 2011: Employment
• Question #6 for 2011: Unemployment Rate
• Question #7 for 2011: State and Local Governments
• Question #8 for 2011: Europe and the Euro
• Question #9 for 2011: Inflation
• Question #10 for 2011: Monetary Policy

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Analysis: Decline in home prices impacting small business borrowing

Analysis: Decline in home prices impacting small business borrowing.

by CalculatedRisk on 12/20/2010 02:16:00 PM

From Mark Schweitzer and Scott Shane at the Cleveland Fed: The Effect of Falling Home Prices on Small Business Borrowing

The researchers analyze small business borrowing, and note that homes equity borrowing is an “important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances.”

Here is their conclusion:

Everyone agrees that small business borrowing declined during in the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.

While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses.

Of course, not all small businesses have been equally affected by the decline in home prices. While many small business owners use residential real estate to finance businesses, not all do. Those more likely do so to include companies in the real estate and construction industries, those located in the states with the largest increases in home prices during the boom, younger and smaller businesses, companies with lesser financial prospects, and those not planning to borrow from banks. These patterns are also evident in the data sources we examined.

The link between home prices and small business credit poses important challenges for policy makers seeking to improve small business owners’ access to credit. The solution is far more complicated than telling bankers to lend more or reducing the regulatory constraints that may have caused them to cut back on their lending to small companies. Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing. Neither of those alternatives falls into the category of easy and quick solutions.

There is no easy replacement for this source of borrowing.


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