The Bounce in the Housing Market,
Interest rates and the Economy
September 18, 2009
Science is a
first-rate piece of furniture for a man's upper chamber, if
it has common sense on the ground floor. Oliver
Wendell Holmes 1809-1894, American Author, Wit,
Poet
Stories such
as the one listed below are going to increase in the months
to come; indeed since that story came out in June, we have
seen articles of a similar nature advocating that real
estate has put in a bottom and that its time to buy. At
some point even the most sceptical will feel inclined to
believe that the housing sector has put in a bottom.
For June,
the Realtors group said its pending home sales index rose
3.6 percent to 94.6, from an upwardly revised reading of
91.3 in May. The last time there were five consecutive
monthly gains was July 2003. The results were far better
than analysts expected. Economists surveyed by Thomson
Reuters expected the index to come in at 91.2. The report
tracks signed contracts to purchase previously owned homes
and is considered a barometer for future home sales.
Typically there is a one- to two- month lag between a sales
contract and a completed deal. The jump in pending home
sales coincides with other positive trends in the
residential real estate market.
For the
first time in five years, home resales have risen for three
months in a row, increasing almost 4 percent in June. Low
prices, attractive mortgage rates and a first-time
homebuyer’s tax credit of up to $8,000 have kick-started
sales. "Because housing is so affordable in today's market,
job security and the first-time buyer tax credit are bigger
factors in influencing home sales," said Lawrence Yun, the
Realtors group's chief economist, in a statement. Also
Tuesday, homebuilder D.R. Horton Inc. said its fiscal
third-quarter losses shrank from the year-ago period, as it
took smaller charges against the falling values of its land
and unsold homes. Yun said he expects existing home sales to
gradually rise over the balance of the year, with conditions
varying around the country.
Full Story
Under normal
conditions, we would also be inclined to believe that the
housing sector has put in a bottom. However, conditions are
far from normal, and we would like nothing more than to see
the housing sector put in a long term bottom as soon as
possible. In life what one wants and what one gets are
always different, and as such there are too many factors
that suggest a sustainable bottom cannot take hold now.
Some reasons behind the increase demand for homes
-
First time home buyers are being offered a credit of 8,000
which is fully tax deductible on the purchase of their
first home.
-
Many individuals felt priced out of the market for the
last few years and now that prices have fallen
considerably they feel that they are getting a bargain.
-
To add to the allure of buying a house, low interest rates
are being promoted and when combined with the above
factors it can make for a very convincing story.
Regardless of
the rosy picture so many experts are now painting, the
factors that provide the foundation for a strong economy and
in turn a strong housing sector are not there:
Unemployment
numbers continue to rise. In addition the number of
individuals who have been looking for a job in excess of 6
months continues to rise.
Salaries are
not increasing or keeping up with inflation (do not believe
the fake numbers that are put out, all one has to do is look
at the cost of many necessities to see that inflationary
forces are alive).
Even the post
office is now ready to take drastic measures to cut down
expenses (possibly closing up to 1000 branches). Almost
every state in the US is facing rather large budget
deficits, IRS tax receipts are down and while many companies
are not firing as many employees as they were a few months
ago, they are not aggressively hiring either.
Thus it is
hard to imagine how this sector can make a strong come back
if the Job market is sour. People spend money when they make
money, but if they are not making as much or not making any,
then going out and making a large purchase such as home is
not an option. Let's not forget that most banks have now
placed restrictions on how new loans are approved; gone are
the days when you could just walk in and all you had to say
was “ I want to buy a home” and then scratch your name on
the contract and walk out with an approval. The trading
desks of many large banks are now accounting for over 50% of
their revenue; this illustrates that banks do not think the
real estate sector is going to make a come back soon for
they would rather risk playing the market than lend money to
the consumer.
The one year
housing index chart looks very bullish and if one looks just
at this chart one would think that the good times are here
to stay. From its low in March the index is up almost 100%,
by any measure that is a stunning rally. It is now running
into resistance and based on the current pattern it will
most likely overcome this resistance after a few attempts.
The 3 year
chart, however is very revealing and the rally does not look
quite as impressive as it does in the 1 year chart. It is
still trading a long way of its highs in the 250 plus
ranges. We are not trying to throw cold water onto the
scene and spoil the party. We would like nothing better
than to join the party but cannot find any long term reasons
to do so. The housing index could rally significantly
higher from its current levels and the long term outlook
would still remain bearish. If it manages to trade past 120
for 5 days In a row, the next target becomes 150; a weekly
break past 150 and it could trade as high as 180 before
resuming its long term downward trend.
The deficits
are simply too high and the U.S. instead of putting the
money, they print to good use (if there is such a thing as
they don't really own the money in the 1st place), the
government is instead spending money at an unsustainable
rate. One does not rehabilitate a drunk by substituting
cheap beer for expensive cognac; the only way to
rehabilitate this chap is to cut his supply of booze and
offer him treatment. The U.S. seems to think that the
answer to our debt problems is taking on more debt.
Let's assume
for some strange reason (one that we have missed or cannot
locate) the real estate market actually recovers and starts
a new long term up trend. The massive amount of money the
Fed is creating is going to result in foreigners demanding
significantly higher rates for the risks they are taking in
purchasing US debt. The national deficit is at a stunning
11.68 trillion and rising. The year is not even over, and
we have already added 1.4 trillion dollars to it, next year,
we are going to add a minimum of another 1.2 trillion
dollars and that's assuming things don't get worse. These
figures do not include unfunded liabilities such as Social
security, which is set to run out of money by 2029. The
debt has continued to increase at an average rate of 3.96
billion dollars every single day since Sept 2007; the
keyword is average for clearly we are running well above
average this year.
Initial
projections now are for the deficit to increase by an
additional 9.3 trillion in 10 years; at the rate we are
going, it's going to occur at a much faster pace. Soon
annual deficits will account for 4% of the overall economy;
a figure that history has proven to be unsustainable. In
less than 10 years the total deficit will most likely exceed
82% of the overall economy and from there it there would be
very little time left before the US crumbles. The big
question going forward is how are we going to be able to pay
the interest on this deficit, plus all the other unfunded
programs that need capital, the biggest of which is Social
security without going bankrupt?
Since 1969
Congress has spent more money than its income and people
wonder why the average Americans spends more than he makes;
the leaders are saying its okay to do so. Now for the
kicker, the interest paid on the national debt is the third
largest expense in the Federal budget. Defence is still the
number one but one wonders how long it will hold this
position. In 2006 interest payments totalled 405 billion,
for 2007, they came in at 429 billion, for 2008 the figure
was 451 billion and as of June 2009, total interest payment
are 320 billion dollars. In comparison the budget at NASA
is 14 billion, the education budget is 61 billion and Dept
of transportation has a budget of 56 billion only. It
makes one wonder what the government is thinking. One would
think that congress would start spending less but as each
year passes, they spend more. We are soon going to arrive
at a point where the interest payment alone will exceed 1
trillion dollars; many nations’ economies do not even
account for half of this amount, and yet they remain
solvent. The US with the world’s largest economy cannot live
within its means. Given the current rate at which the US is
printing money, the unthinkable might just become a reality.
The U.S might be pushed into bankruptcy. History is a
wonderful subject, it provides a clear guideline of not only
what was done but will occur again. History always repeats
itself.
The U.S. has two options, declare bankruptcy, or start to
implement massive budget cuts and raises taxes; there are no
other options. The cuts will have to be huge for they will
wait until the end to implement them; every administration
wants to look good and simply passes the buck to the next
administration.
We do not
know how the things will unfold exactly, but any person with
simple common sense understands that something will have to
give otherwise the whole system will fall apart. The debt is
now 11.68 trillion, in a few years it will hit 15 trillion,
and in less than 10 years it could be well over 19 trillion.
Overseas investors are already questioning the logic of
investing in a nation that has no regard for its currency
whatsoever; how long will they continue to buy this debt
when interest rates are so low? They are going to start
screaming for higher rates and as the US creates more money,
they will demand even higher rates and so a vicious cycle
will unfold. Rates could eventually hit the 20-25 percent
mark.
This is why
we find it very hard to believe that the real estate sector
has put in a long term bottom, for the top players are doing
everything in their power to debase the US currency. Real
Estate does not perform well in a high interest rate
environment.
Conclusion
The housing
sector and the financial sectors are the back bones of this
country's economy and if both are still in trouble, it
becomes very hard to make a good argument for a long term
bounce in the real estate sector. This does not mean that
the real estate sector cannot experience a pretty strong
bounce in the short term time frames, but it does mean that
this bounce is not sustainable.
The interest
payments on our national debt are staggering and anyone with
a bit of common sense can see that this trend is not
sustainable. The government bickers when it has provide
extra funding to local programs but they have no problems
almost spending close to half a trillion dollars annually on
the interest that is due on our national debt.
The world at
large has entered into the phase of extremes; the situation
is either very good or very bad. Look when the markets were
crashing early this year they crashed hard, when they
started to rally, they mounted an incredibly strong rally.
There is no in between stage; the same trend is pushed to
the limit until it is completely unsustainable and the
correction or the move upwards is usually extremely
explosive. These movements are reflective of the world we
will live in today.
http://www.incrediblecharts.com/tradingdiary/2009-03-20_economy.php
Fed funds
rate is trading at multi decade lows; this market has been
in a bear market for almost 27 years. This is a very very
long time and thus once a new trend starts, one can expect
it to last for a very long time; it’s just a matter of time
before this market experiences a trend change as it is now
trading at a very extreme point. Extreme conditions never
last forever. From a long term perspective, one has to
start preparing for a high interest rate environment.
The bond
market has rallied towards super bubble proportions, and it
is therefore, destined to mount an equally strong
correction. A foretaste of what lies in store was seen this
Jan when the bond market mounted a very strong correction.
From its high to its recent low in the middle of June the
bond market experienced a 20% correction. This is a very
large move considering that it took place in just a span of
6 months.
Interest
rates will probably test their lows once more and bonds, on
the other hand will test their highs one more time before
putting in a multi year top formation. Interest rates are at
historic lows, and as such they cannot stay at these levels
forever, especially when the Fed is printing new money at a
mind boggling rate.
Additional negative developments
Consumers cut
down debt levels by a whopping 21.6 billion in July; this
amounts to annual decline of 10%. Economists were expecting
credit to drop by 4 billion. For an economy that only
expands when more debt is taken on (76% of our GDP is based
on consumer spending) the long term growth prospects appear
to be rather dim.
The story
below also highlights how this economic down turn is
affecting the entire world. Under normal conditions such a
massive drop in real estate prices coupled with a weak
dollar would attract droves of overseas investors but
instead the opposite has occurred.
Interest
in U.S. real estate by international buyers declined due to
the worldwide recession and severe credit crunch, according
to the 2009 National Association of Realtors® Profile of
International Home Buying Activity.
The share
of Realtor® clientele who are foreign buyers is smaller than
in previous years, but among those purchasing nearly half
paid all cash – bypassing the mortgage process. Twenty-three
percent of survey respondents served at least one
international client in the 12-month period between the end
of May 2008 and the end of May 2009, down from 26 percent in
the 2008 study. During this period an estimated 154,000
homes were sold to foreign nationals, which is down from
approximately 170,000 international transactions during the
previous 12 months.
Full Story
Finally, a
very funny thing occurred in Zimbabwe before hyperinflation
struck that nation. Individuals started to purchase
treasuries driving yields (interest rates) lower and then
out of no where they were hit with inflationary forces which
later morphed into hyperinflation. Is not the exact same
thing taking place in the United States? From Nov to Dec 08,
individuals poured money into the bond market even though
their rate of return when adjusted when adjusted for
inflation was zero at best and negative at worst. History
sadly always repeats itself. In 1980 one Zimbabwe dollar
was roughly equivalent to one US dollar; today it takes
almost 6 trillion Zimbabwe dollars to buy 1 USD.
No market can remain in a bullish or a bearish phase
forever; at some point, the trend will change. Investors who
are still holding onto adjustable rate mortgages or who have
fixed rate mortgages that were obtained at much higher rates
should re finance and lock in these low rates now. If you
can sell for a profit or break even, then your best bet
would be to get out now as prices are destined to fall much
more in the years to come.
Use Strong
pull backs in the Gold, Silver and Palladium markets to add
to your bullion positions. Individuals willing to take on a
bit more risk can purchase a basket of stocks connected to
the commodity's sector; use strong pull backs to open up new
positions or add to your current ones.
One pound of
learning requires ten pounds of common sense to apply it.
Persian Proverbs - Sayings of Persian Origin
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