Affordable Housing

Housing is more affordable now than it was twenty years ago according to the New York Times article: Twenty Years Later, Buying a House Is Less of a Bite.

Despite a widespread sense that real estate has never been more expensive, families in the vast majority of the country can still buy a house for a smaller share of their income than they could have a generation ago.

A sharp fall in mortgage rates since the early 1980's, a decline in mortgage fees and a rise in incomes have more than made up for rising house prices in almost every place outside of New York, Washington, Miami and along the coast in California. These often-overlooked changes are a major reason that most economists do not expect a broad drop in prices in 2006, even though many once-booming markets on the coasts have started weakening.

The long-term decline in housing costs also helps explain why the homeownership rate remains near a record of almost 69 percent, up from 65 percent a decade ago.

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company.

In high-profile places like New York and Los Angeles, home to many of the people who study and write about real estate, families buying their first home often must spend more than half of their income on mortgage payments, far more than they once did. But the places that have become less affordable over the last generation account for only a quarter of the country's population.

Elsewhere, families tend to spend far less on housing. In Dallas, the share of income needed to buy a typical house has fallen to 13 percent this year, from 14 percent in 1995 and 31 percent in 1980. In Tampa, it has dropped to 21 percent, from 26 percent in 1980. Even in New England, where the soaring prices of the last decades have frustrated many young families, house values have still not reached the heights of the early 1980's, when calculated as a share of income.

"Over 20 years, affordability has definitely improved because interest rates are much lower," said Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economic Research at the University of California, Berkeley. Houses have also grown bigger during that time, he said, so people are getting more for their money.

With many suburban houses now selling for $300,000 and up, young families have a much harder time buying their first home than they did a few years ago. Still, housing has been less expensive this year - as a share of local incomes - than at any point during the 1980's, according to Moody's Economy.com.

Beyond cost, many families who simply could not have bought a house 10 or 20 years ago find themselves able to do so, thanks to changes in the ways banks lend money. In the past, a home buyer often needed to make a down payment equal to 20 percent of a house's value to get a mortgage; today, little or no down payment is common.

The most money that Tim W. Gilbert has ever had in his possession was $15,000, he said, in the form of a check for a job he had done as a carpenter. But he and his wife, Marjorie, were still able to buy a 1936 Cape Cod-style house this year for $176,000 in Poland, about 45 minutes north of Portland.

They took out two mortgages rather than making a down payment and they use Mr. Gilbert's $5,000 or so in pretax monthly income to cover $1,600 in mortgage, tax and insurance payments. Ms. Gilbert, a writer, home schools their daughters, ages 4 and 6. "I paid rent for 18 or 19 years," Mr. Gilbert, 38, said. "We waited years and years. We wanted to make this happen."

The Moody's Economy.com calculations took into account the decline in down payment size in recent years. But even though these lower down payments mean home buyers are taking out loans equal to a larger share of a house's price than in the past, monthly payments have remained reasonable in much of the country.

The sharp fall in mortgage rates - from above 10 percent through most of the 1980's to less than 6 percent in the last few years - is the main reason. Upfront mortgage fees have also dropped to about a third of a percentage point of a loan's value, from 2.5 percent 20 years ago. Computers have made lenders more efficient, and huge pools of global capital have brought more competition to a business that was once largely local.

In a nationwide New York Times/CBS News poll conducted this month, 75 percent of respondents said they thought most families in their community spent a larger share of their income on housing now than in the 1980's. Only 5 percent said the share was smaller.

One possible reason for the perception is that many families have recently taken on mortgage debt to pay for items other than housing. Some have folded higher interest loans, like credit card debt, into their mortgage, said Mark Zandi, chief economist at Moody's Economy.com. Others have used home equity loans to pay for a new car, tuition or even a vacation.

This has caused mortgage payments to rise over the last generation - especially among high-income families, according to Federal Reserve data - for reasons besides the cost of housing.

"When you get affordability stretched so much, all the creative financing in the world can't stop some correction of house prices," Mr. Rosen, the University of California economist, said. "It happened in Hong Kong, Japan and England."

It looks as if it may not happen, though, in most of the United States.

Try this exercise: Walk into any car dealership and tell them you can not afford to buy a new car. They will find a way to make it "affordable" by stretching out the payments from 3 to 5 to even 7 years if they have to so that you can make the monthly payment. Does that really make it affordable?

"People aren't really shopping prices," said Bill Trask, a broker at Coldwell Banker Friends and Neighbors Realty in suburban Portland. "They're shopping payments."

If someone has to take out an interest only loan, a pay option arm, or do other creative financing to make it work, then perhaps that person can not really afford the house. In some locales creative financing accounts for half of new mortgages. Does that make them affordable?

Also let's not confuse affordability with value. Ownership costs vs. rental costs are at staggeringly high ratios in many areas. Can the average person really "afford" to pay 30-50% too much for a house or condo? That's how overpriced some areas are on a cost to rent basis. Can you afford to lose $100,000 on that $400,000 condo if the price drops next year? Somehow that question is not being asked.

Another question to consider that the article neglected to mention is: Can you afford to buy it and heat it and pay property taxes on it and maintain it? Even assuming one could afford the mortgage, those other expenses need to be factored in. What are heating costs and insurance costs and electrical bills and property taxes now compared to 1985? Another thing missing is how much money the median family has left is left over after paying all those things in addition to medical insurance, food, gasoline, entertainment, ect.

Let's consider this pearl of wisdom:
"Beyond cost, many families who simply could not have bought a house 10 or 20 years ago find themselves able to do so, thanks to changes in the ways banks lend money. In the past, a home buyer often needed to make a down payment equal to 20 percent of a house's value to get a mortgage; today, little or no down payment is common."

The idea presented is that loose lending standards make something more affordable. Of course that is preposterous. If someone can not afford to save a down payment, perhaps they can not really afford to make those housing payment either. If a renter can not save money for a down payment with cost of rent at huge discounts to cost to own, how can they afford to make their home mortgage payments? Teaser rates on ARMs do not cut it either. When one goes from renting to buying all kinds of expenses go up. Interest rates can and do fluctuate, and regardless of what anyone says, real estate prices do not always go up.

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company.

Where is that median priced home anyway? Take the medium income then perhaps the typical person can afford the medium home in say Watonga, Oklahoma. Is that where people want to live?

Consider this justification for affordability offered in the article:
One possible reason for the perception is that many families have recently taken on mortgage debt to pay for items other than housing. Some have folded higher interest loans, like credit card debt, into their mortgage, said Mark Zandi, chief economist at Moody's Economy.com. Others have used home equity loans to pay for a new car, tuition or even a vacation.

Let's see... The median person did not have the money to pay off their credit cards, their car, their tuition, or their vacation, but somehow it is all "affordable" if they roll all that short-term debt up into their long-term house payment.

Savings rates are now negative on average, negative 1.6% or so for several months running. That is on average. Many people are obviously saving. For the average to be negative is staggering. What gives? What gives is that debt across the board is sky high and people are having a damn hard time servicing it. OK, so the house is affordable, but no one can afford to heat it or eat or send their kid to the doctor. Decisions decisions. No problem, just do a cash out refi from now until forever because home prices always go up.

Things to consider when discussing affordability

• The negative savings rate
• falling real wages
• credit card debt
• bankruptcies
• delinquencies
• medical expenses
• refis to support consumption
• rising consumer debt
  

If the biggest expense that most people have (housing) is so damn affordable why is consumer debt going through the roof? I guess it's a good thing that housing is affordable because it sure seems no one can afford to pay for anything else.

In stark contrast to the NY Times article above, check out the WSJ article Housing Affordability Hits 14-Year Low.

Housing affordability in October sank to its lowest levels since 1991, according to the National Association of Realtors' Affordability Index, a widely followed measure of the average household's ability to buy a home at current interest rates. In some areas, including New York City, Los Angeles, San Diego, San Francisco and Miami, housing affordability has dropped to levels not seen since the early to mid-1980s, according to mortgage giant Fannie Mae.

Affordability has long been a problem for low-income home buyers. But as home prices have marched steadily higher in recent years, many buyers with healthier incomes also are being squeezed. Declining affordability mainly affects whether first-time home buyers will enter the market, but in some markets people who already own a home are finding it tough to trade up.

There are signs that the growing costs of homeownership are also beginning to take a toll on the housing market. "There's a systematic erosion of affordability," says David Seiders, chief economist of the National Association of Home Builders. That decline is "the main reason ... the market is starting to cool." Mortgage applications fell to an 11-month low last week, the Mortgage Bankers Association reported yesterday, as applications to purchase homes declined.

Housing affordability fell nearly 9% in the third-quarter from the same period a year earlier, according to an analysis prepared for The Wall Street Journal by Moody's Economy.com, a unit of Moody's Corp., which adjusted the NAR Affordability Index for seasonal variations. Affordability dropped by more than 20% in nearly two-dozen markets, including Phoenix and Tucson, Ariz., Spokane, Wash., and Orlando and Lakeland, Fla., according to the study. "You have to go back 25 years to find a decline that is as significant on a percentage basis," says Mark Zandi, chief economist of Moody's Economy.com.

In Tucson, where affordability has fallen 23% over the past year, buyers in all price ranges are feeling the pinch, says Kevin Freadhoff, an agent with Long Realty Co. Mr. Freadhoff says he's currently working with eight couples who would like to buy their first home but have been priced out of the market and a dozen others who already own a home, but are having trouble trading up.

In Seattle, declining affordability is forcing many home buyers to accept longer commutes, says Jane Powers, a broker with Ewing & Clark Inc. It's also fueling price increases in outlying areas such as Bremerton, where affordability has fallen nearly 22% in the past year. And in Bergen County, N.J., where most starter homes are priced above $400,000, "prices have gone up to a point where it's pushing the first-time home buyer out of the market," says Margaret Foudy, manager of the Weichert Realtors office in Tenafly. That creates a "domino effect" as people who already own a home find it tougher to move up, says Ms. Foudy.

In 57 of 379 metro areas nationwide, homes were so expensive in the third quarter that a family earning the median income couldn't afford the median-priced home based on traditional lending standards, according to Moody's Economy.com. Sixteen markets have joined the ranks of unaffordable areas over the past year, according to the analysis.

Another major analysis of affordability, by the National Association of Home Builders and Wells Fargo, shows that just above 43% of all new and existing homes sold in the third-quarter were affordable to families earning the median income. That's the lowest level since the index was first released in 1992 and compares with 50.4% a year ago.

Some factors have helped offset the decline in affordability. Many borrowers have embraced creative mortgage products, such as interest-only loans, mortgages with teaser rates of as low as 1% and "piggyback" loans aimed at buyers who don't have the money for a down payment. In the third quarter, borrowers could boost their purchasing power by 26% by taking out an interest-only mortgage, which allows a home buyer to put off repaying principal for several years, instead of a standard mortgage, according to Moody's Economy.com.

In Tucson, roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market, up from 30% two years ago, says Renee Booker, president of Long Mortgage, the mortgage arm of Long Realty.

In Spokane, where affordability fell more than 28% over the past year, many first-time home buyers are using piggyback loans and 40-year mortgages, which have smaller monthly payments than traditional 30-year mortgages, to get into the market, says Laraine Hunter, a managing broker with John L. Scott Real Estate. "We're getting creative with helping people get into homes," she says.

And renting remains a bargain in many parts of the country. Stephan Vrudny, an engineer who lives in San Diego, sold his three-bedroom condo to an investor in June for $405,000, then rented it back for $1,500 a month. Mr. Vrudny figures the arrangement is saving him $430 a month, even after taking into account the lost mortgage-interest deduction. "We'll be homeowners again when it makes sense again as an investment," says Mr. Vrudny, who had purchased the unit for $345,000 last year.

The bottom line is real wages are declining, bankruptcies are skyrocketing, consumer debt is soaring, and equity extraction from homes is used for routine consumption. This is happening in a "recovery". Something does not add up. In fact many things do not add up. Topping off the list is the idea that housing is now affordable. "There's a systematic erosion of affordability," says David Seiders, chief economist of the National Association of Home Builders. That decline is "the main reason ... the market is starting to cool." The amazing thing there is not what is being said but who is saying it.

Also note that comparing affordability now to the very peak of the interest rate cycle when interest rates were 18% is like calling the Naz at 4000 on the way down a "bargain" because it was 5000 a few months earlier. Just because something was supposedly siller at some other point in time does not mean the current conditions are affordable.

Here is another viewpoint on affordability:
Latest analysis of 299 markets: See how your hometown ranks.

In aggregate, do those markets look affordable?

By the way. I just happen to have a chart laying around. It is a bit outdated but given what has happened in the last couple years one might be able to project what it looks like now.



Gee, now what do you think that looks like now? Four standard deviations above the norm? Five? Notice who put that chart out. If anything one would expect bias to run the other way. What do you think is more accurate? That chart or the NY Times article?

Let's now take a look if there can be any possible distortions in relation to median income.
Consider this obviously made up example:

Assume there is a subdivision with one hundred houses.
Assume everyone paid $250,000 for them.
Assume that 2 households in that subdivision make $80,000.
Assume 48 households make something in excess of $80,000.
Assume the remaining 48 households make close to $20,000.

The median income is $80,000 but 48% of the people in the subdivision have way more than stretched their housing budget to buy that $250,000 home with no money down have they not?

Medians and averages can play tricks. Yes that is a made up example. But is it not possible? Considering that close to 70% of the population owns their own home and given that pay raises have not exactly be equitable or evenly distributed over these past few years, one can only wonder what percentage of people in the median priced home that really can afford to pay that median price. I believe the negative savings rate and rising consumer debt levels answer the question.

One final point: Sub-prime mortgages account for 13.4 percent of all mortgage debt outstanding according to the Mortgage Bankers Association. That is up from 2.1 percent in 1999. Is that a sign of affordability or is that a sign of speculation by lenders as well as marginal buyers all hoping without reason for prices to forever keep going up?

A couple of things have to give, and they will. They are as follows:

1. The discrepancy between rental costs and ownership costs
2. The standard deviations above norm on affordabilities

Not only will those gaps close, the bulk of it, if indeed not all of it, will close by home prices falling as opposed to rising wages. Global wage arbitrage guarantees it. The bubble areas, California, Florida, Massachusetts, Phoenix, Chicago, New York, Minneapolis, and many high population areas will be especially hard hit. The idea that the rest of the country will be spared is laughable. 40-50% of the jobs in this recovery were directly related to real estate. Many of those jobs will vanish in the upcoming consumer led recession and many people will lose their homes over it as well. Just as the downward spiral begins we see silly articles telling us how affordable thing are. I find it all rather amazing.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Happy New Year!

Posts will resume mid next week.

condo conversion plea for help

This housing bubble is really amazing. Every time you think you have seen it all, something new and totally absurd pops up. This plea for help is one of those times.

The San Diego Creative Investors Association is now entering a plea to save condo conversions.

PLEASE!!! Help us save condo conversions

As you all know, condominium conversions provide first-time homebuyers an incredible opportunity to buy into the American Dream in San Diego. Condo conversions also provide investors with incredible opportunities for low cost rentals and quick profits.

However, small interest groups and their tenacious lawyers have laid seige to condo conversions in the City of San Diego. By appealing environmental determinations and now filing lawsuits, these groups have frozen over 100 projects because the City Council is afraid to act. Instead they are putting it off until someone can convince these people to go away.

The problem is, these people have nothing to lose; they aren't going to go away. So, we are circulating an online petition to show City Council just how much support there is for conversions in San Diego. We are relying on level-headed people like you to remind the Council just how much is at stake.

Please, visit the website and sign our petition.

Jobs are at stake, investments are losing value, and the local economy may be hanging on this issue.

Thanks for your support.

Curtis Gabhart
ACI Commercial

Not that ACI commercial has any vested interest in condos, of course.
On the other hand, anyone interested in creating a bigger crash in San Diego just might wish to sign that petition.

Meanwhile National Mortgage News has good news and bad news.

First the good news: it appears the multifamily market could be poised for modest growth in 2006. At a recent forecast press conference, Fannie Mae economist David Berson said that "echo boomers" (the kids of the baby boomers) are now forming new households and will flood the rental market. That's encouraging news for multifamily, which has been relatively weak in recent years. (The New York rental market doesn't count, folks.) The other good news is that purchase money lending should be strong in 2006. Now for the bad news: Fannie thinks residential loan production could decline to just $2.1 trillion in the new year, a 30% decline from the $3 trillion or so that National Mortgage News is forecasting. The biggest question mark for the industry is when, oh when, will the Federal Reserve stop hiking rates -- and when, oh when, will the yield curve get fixed...

A 30% decline in residential loan production huh? That sounds pretty bad. Can modest growth in multifamily make it up? Somehow I doubt it. As for that yield curve: Stop worrying. Greenspan has said "It's different this time". The yield curve no longer means what it used to. It's just another "soft patch".

As a "temporary fix" until things are humming again, the Herald Tribune is reporting Builders cut prices to sell homes

As inventory rises, some in Southwest Florida are also offering cheap financing and free furniture.

Count this among the signs that, even in Southwest Florida's stock of new housing, more than just the weather is cooling: Home builders, big and small, are shaving prices and some are offering free furniture, cash discounts and well-below-market, 30-year fixed-rate mortgages.

High-powered builders in the region acknowledge the trend, though few are willing to talk openly about it.

To counter the softness, in some segments, prices are being slashed, with 10 percent price cuts appearing regularly in listings.

"The market is taking a breath," said Candy Swick, a 27-year veteran of the region's real estate scene.

Since before Thanksgiving, Lennar Homes, the nation's No. 3 home builder, has been running full-page advertisements in Southwest Florida newspapers offering discounts, cheap financing and even free stuff from Rooms to Go.

It's partially a seasonal issue, but it also reflects what many see as an inevitable plateau after the record gains of the last few years.

Tangible signs of discounting have emerged, and while most builders and brokers are loath to talk about them, the statistics on existing single-family homes tell the tale.

The number of unsold Sarasota houses listed for sale has more than tripled from a year ago, local Multiple Listing Service data shows.

In November 2004, it stood at 1,025, but by the end of November 2005 the number had ballooned to 3,525.

At an upscale Sarasota development that he declined to identify, "You couldn't even get onto the waiting list" for the past year, said Re/Max Realtor Jon Whittle.

Today, home builders are calling Whittle with available inventory.

Looks like it's time to add Sarasota to the "well past peak" list.

Check out this Northern Virginia Realtorspeak.

Inventory of available homes is at a five year high. Inventory is expect to dwindle through February. The buyer's market continues, however the dwindling inventory will end the buyers opportunity. Buyer's will have the most negotiating power for the next 6o days before the trend may switch back to a seller's market.

Uh.... Excuse me. Can someone please tell me exactly why a 5 year high in inventory is expected to "dwindle" in the next 60 days? I would also appreciate it if someone would please tell the Virginia MLS association the difference between "buyers" and "buyer's". They seem to be a little confused at the proper syntax.

Regardless of silly spelling errors, one has to laugh at these self serving promotions. Buy now! You only have a 60 day window before it's a sellers market again. Silly me, I thought that we were now in a "permanently high plateau", the perfect market for buyers and sellers from now until eternity as wages catch up with prices and jobs come back from India and China. Meanwhile the stock market will double by 2007 making everyone in the US rich. If you believe that, and many do, you may as well believe that Mish is the Easter Beagle.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Tears in My Beer

It was announced today that the 107-year old Berghoff on Adams in Chicago's Loop will be closing its doors at the end of February.

The Year That Was

A collection of both my and your (via # comments) favorite posts from this page in the year of 2005:

February
:: The Torii at Central Park - Christo and his (potential) influences
:: Universal Tourist - Exhibition at the MCA in Chicago, in two parts
:: Our Surreal World - In photographs
:: Hardblog Tactics - David Shuster and the Twin Towers

March
:: The Holl Truth - Controversey over his Nelson-Atkins design
:: Being Mayne - Background on the Pritzker winner
:: Traditional vs. Progressive in Alaska - More Mayne, plus update

April
:: What's a MoMo? - A distinctive Chicago condo tower
:: Does Chicago Wanna Be NYC? - The rise of sidewalk studios
:: Bad Building Roundup - With more on the 50th anniversary McD's here
:: Whales in Chicago? - Well, a mural of whales

May
:: Fun with Google Aerials - Plus some Renzo Piano sites
:: Stelae! - Peter Eisenman's Holocaust Memorial in Berlin opens
:: WTC = World Trump Center! - The Donald weighs in, pushing to rebuild the Twins

June
:: Art of Golf - Professing my love of golf course design
:: Take 3 - SOM's latest Freedom Tower design unveiled
:: Ess You Are - PS1's summer courtyard

July
:: Meier-palooza - In Long Island and San Diego
:: Peak Oil Recognition - Finally, but to what end?
:: The Space of Light - Dan Flavin in Fort Worth and Chicago
:: Gehry Goes 2d - Frank's appearance on The Simpsons

September
:: Plagiarism Roundup - Architects copying architects
:: Coniglio Gigante! - A giant bunny in Italy

October
:: This Old (Modern) House - The popular TV show tackles Modernism
:: Which Way to Build? - A question for the 21st century
:: Separated at Birth? - A hilarious discussion at Archinect
:: Measuring Design Excellence - Photography and the AIA Chicago Awards
:: 2000' Sisters - The Spire and the Tweezer

November
:: Bob the (Messy) Architect - Robert Venturi at IIT
:: Mount Tindaya - A large-scale art installation in a mountain
:: Door is Ajar - The photogarphy of Gregory Crewdson
:: The Archi-Tourist - Another plug for my latest web endeavor
:: Dubai 46 - The city as seen in Code 46

December
:: 108 North State - Block 37 finally breaks ground
:: Holiday Gift Books - For those waaay last-minute shoppers
:: Hadid Does the Louvre - Just not as much as originally anticipated
:: Best of 05 - Awards and "best of" lists for the year that was

Condo Crazy in Pittsburgh

The Pittsburgh Post-Gazette is reporting developers have gone condo-crazy in Pittsburgh.

OK, is there anyone not already constructing or planning to build condominiums Downtown? I think we see hands of a few Candy-Rama employees and some squatters from beneath the Fort Pitt Bridge, but other than that, there's the PNC developers, the new arena developers, the Lazarus developers, the First Avenue developers, the Union National Bank developers, and probably lofts more -- whoops, lots more -- we're forgetting. They've all gone condo-crazy! All those people from the suburbs who for years viewed Downtown as a bleak, scary place they wanted to be nowhere near?

Developers are planning to build condos at a rate of about 2.3 units for every man, woman and child now living between Aleppo and Zelienople. People must really hate their longtime homes, which is kind of odd considering Pittsburghers are known to stay in the same dwelling longer than residents of any other metropolitan area.

The condo-mania sounds kind of surprising until you realize that, yes, this is just one more party to which Pittsburgh is late in arriving. Scan headlines around the country, and there are plenty of other cities large and small already on the developers' dance card.

From the Providence, R.I., newspaper on Oct. 21: "Condos, condos everywhere."

From Boulder, Colo., on Sept. 13: "Condo boom continues."

From Starkville, Miss., on Aug. 29: "Mississippi State alums, fans fueling condo boom."

Liz Pulliam Weston, a personal finance columnist for MSN Money, thinks the condo market is a bit out of control. She wrote of it being like "the tech-stock bubble," with too many speculators involved attempting to make quick profits. She's talking about "hot" markets like Las Vegas and Miami, rather than dowdy Downtown Pittsburgh, but notes that the rise in condo values nationally has begun slowing down after shooting past that of single-family homes in 2004. Yes, she agrees that some upscale baby boomers becoming empty nesters are willing to pay to avoid shoveling the sidewalk, to have a building fix-it man at their beck and call, and to be within walking distance of a city's cultural center. "But anyone who expects vast numbers of boomers to shift to condos is delusional," Ms. Weston wrote this fall. "Like their parents, 80 percent of whom age in place, most boomers will stay in the houses where they retire. Familiarity, and family ties, will, for most, trump Arizona golf courses and Florida early-bird specials."

Three Questions

1. Who in their right mind thinks Pittsburgh is going to be a hot spot mecca for retiring baby boomers?
2. If not boomers, just who is supposed to be buying these units?
3. What are the lenders backing these projects thinking anyway?

In the end, there will be towers of half-built condos standing in Pittsburgh, Miami, Las-Vegas, Chicago, Denver, Milwaukee, and dozens of other places, as a testament to just how ridiculous this all was.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Monday, Monday

My weekly page update:

Quincha in Rosario, Argentina by Rafael Iglesia.

The updated book feature is Glenn Murcutt: A Singular Architectural Practice, by Haig Beck and Jackie Cooper.

Some unrelated links for your enjoyment:

Aalog
"A simple photoblog for the Architectural Association School of Architecture, in London.".

Women in Architecture
A new forum "where you can share your insight and experiences about women in architecture."

Natural Space
"A site for sustainable architecture and the natural world." (via architechnophilia; added to sidebar under sustainability)

Happy Holidays

Posts will resume Monday.

Home Sales Plunge / Builders Still Confident

Bloomberg is reporting
New Home Sales Fall; Unsold Homes at Record

U.S. new home sales in November fell by the most in 11 years as rising mortgage rates and elevated prices discouraged some buyers, leaving a record number of homes on the market.

Purchases fell 11.3 percent to a 1.245 million annual rate from October's revised 1.404 million pace, which was a record, the Commerce Department said today in Washington. The median price of a new home rose last month to $225,200 from $224,500 a year earlier.

"The housing market is definitely cooling," said Richard Yamarone, chief economist at Argus Research Corp. in New York. This suggests that the October record was the result of last minute purchasers in a rising mortgage rate environment."

U.S. mortgage lenders will trim 10 percent to 15 percent of their record 535,000 employees next year, said Orawin Velz, director of forecasting at the Mortgage Bankers Association. "We're expecting a decline in employment because we expect the volume of originations to decline pretty significantly next year -- 20 percent," he said.

Since 2001, the housing market accounted for 50 percent of U.S. economic growth and more than half of private payroll jobs creation, according to a report in August by Merrill Lynch & Co., the world's largest securities firm.

Hmmm 15% of 535,000 Mortgage Lending jobs is a mere 80,250 jobs lost. That is just mortgage lending. What about plumbers, roofers, appliance manufacturers, etc etc etc?

Bruce Karatz, chief executive officer of KB Home, said speculators began leaving the housing market six months ago. The Los Angeles-based company is the fifth-largest U.S. homebuilder by stock market value.

KB Home's $7 billion backlog is 40 percent higher than it was a year ago, Karatz said in an interview last week. He expects the largest home building companies to gain market share in a more competitive environment and attributes this month's decline in homebuilder confidence -- a 32-month-low -- to worried smaller companies.

"I don't see any drop in confidence" among the largest homebuilders, Karatz said. "There may be some concern among smaller companies that the big builders can make their lives a little tougher in a softening sales environment, and they may be right."

Every housing cycle is the same. There will not be a drop in confidence until some of the players go bust.

Here is my favorite clip from the article:

"The end of the housing boom doesn't mean the end of house appreciation," Ara Hovnanian, chief executive of home builder Hovnanian Enterprises Inc. in Red Bank, New Jersey, said in a Dec. 16 interview. "Instead of going up 20 percent a year, values are more likely to increase by 3 percent to 5 percent, which is normal and healthy. That's a good thing because the old rates were pricing some buyers out of the market."

Let's see if I have this right

1. People were priced out of homes because they were going up 20% a year
2. But houses will be more affordable if they keep going up by another 3-5% a year

With totally twisted logic like that, it's no wonder the builders are still confident.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

A Merry Christmas Wish

A Merry Christmas Wish From Mish

Merry Christmas to the bulls and the bears and those on the fence,
to the inflationists, deflationists, and those that seem dense,
to the drillers and gold bugs both black and yellow,
to the newbeees, wannabees, and those that are mellow,
to the FA'ers, TA'ers, and CANslimmers, too
but if you're none of those Merry Christmas to you too.

Mish

No Worries

Richmond FED president says Rate policy likely in flux.

Short-term U.S. interest rates probably won't reach a plateau and then remain steady as financial markets now predict, the president of the Richmond Federal Reserve Bank said Thursday. Standing before the National Economists Club in Washington, Jeffrey Lacker said that interest rates will likely fluctuate during the economic expansion ahead. It was his second speech in as many days.

"Thus, whenever the current sequence of tightening moves reaches completion, short-term interest rates should not be expected to remain constant for an extended period of time," Lacker said. Lacker did say that rates have been "rising toward a range"consistent with steady growth

Lacker also said it was "too soon to say" whether rates are already in that range

Lacker did say that sustained growth path decisions will be more complex than the Fed simply reaching a coasting point in coming months

Energy prices still pose a risk to core inflation, but the Fed's "well-positioned" to resist inflation pressures should they emerge, Lacker said

"In the immediate aftermath of Hurricanes Katrina and Rita, monetary policymakers naturally have focused on the risk that the attendant energy price increases would 'pass through' to an acceleration in core inflation," Lacker said Inflation-adjusted, or core, inflation has been tame for the last several months, Lacker said

While there wasn't an upsurge in core inflation in September and October and November, he noted that "it is too soon to declare that pass-through risk is entirely behind us." "We've gotten a few good core numbers in the last three months," Lacker said, adding that this has "moderated" his concerns

"But I don't think that risk is entirely behind us yet," he said

In his remarks, Lacker gave a mostly positive reading on the nation's economy, calling the outlook "fairly encouraging." "Growth is on a solid footing, despite this year's run-up in energy prices and the disruptions of a devastating hurricane season," he said. He predicted real gross domestic product will grow at about 3.5% in 2006. Household spending should grow at about the same rate in real terms, he said. Lacker's set to become a voting member of the rate-setting FOMC next year. Like other economists, Lacker expects appreciation in housing prices to flatten in 2006. Aggregate residential investment, he added, will likely stop growing or may even decline

Consumer spending, meanwhile, is likely to be buoyed by what Lacker called "healthy income growth" and a "reasonably strong overall job market." Rita and Katrina had less impact on the overall economy than was initially feared, Lacker said. "The effect of the storms on consumer outlays have turned out to be far more limited than expected, exemplifying the oft-cited resilience of the U.S. economy," he said. But he said monetary policymakers should address energy shocks by focusing on price stability. "Any energy price pass-through to core inflation that is more than marginal and transitory would be unwelcome," he said. So far, he noted, market participants believe core inflation will remain contained. Lacker told the economists in Washington that the yield curve was not a good predictor of future economic trends

Lacker also said he wasn't troubled by the low U.S. personal savings rate, saying he did not put much weight in the statistic

"I think consumption is on a sustainable path," he said

In addition, he said he wasn't worried about a sharp break hitting financial markets as a result of the large U.S. current account deficit.

Let's see:

• Personal savings rate is not a problem
• Consumption is on a sustainable path
• He is not worried about the large U.S. current account deficit
• Interest rates have been rising towards a range consistent with steady growth
• The yield curve is not a good predictor of future economic trends

One more thing he forgot to say: Don't Worry Be Happy.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Leadholder

Wow, this site brought back a lot of memories! The days of laboring over a drafting table and parallel bar, sharpening the lead after every few letters or lines, dipping the tip in that dirty foam thing to get the excess off the tip, switching between leadholders or changing out the lead to go from 2H to 2B to HB and back again. Today's reliance on computers for drafting means the mouse has replaced the leadholder, but at leadholder.com: The Drafting Pencil Museum, it's alive and well. This slightly obsessive page features just about every leadholder, drafting pencil, lead pointer and lead box ever made, as well as historical documents and advertisements, a history of the leadholder and descriptions of its mechanics. Who ever thought a site on this topic would exist, much less be so thorough? If you've ever used one, you need to check it out.

I found some of my old college gear, most of which I still have but haven't picked up in years.


From top to bottom: Staedtler Mars Lumograph 200 holder, Staedtler Mars Lumograph 200 - plastic roll top box, Alvin "Tech" Da De-Lux leadholder, Koh-I-Noor Select-O-Matic II 5614 (with adjustable lead softness indicator!), Staedtler Mars Lumograph 100, and (left to right) Staedtler Lead Pointer 502 & Teledyne Post lead pointer.

(via Design Observer)

Perfect Financial Storm

The Arizona Republic is reporting the Housing boom is no longer a credit lifeline for many in Valley.

Homeowners caught between higher bill payments and flat incomes have been able to tap their rapidly rising home equity to stay afloat or even buy new cars and furniture. Others have been able to refinance using adjustable-rate loans to cut their payments. Those with too much debt have been able to evade foreclosure and bankruptcy, and even pocket some cash, by selling their homes quickly.

The 55 percent run-up in Valley home prices during the past year hurt people trying to buy a home but helped those struggling to keep one. But now, Phoenix's home appreciation rates are leveling off, and it's taking longer for homes to sell.

A growing number of people are so stretched that they are spending more than they earn. Valley homeowners who have already tapped most of their equity can't count on another huge jump in values to get by.

Consumer-credit and housing agencies providing help are starting to get a lot more calls from people who can't afford to make their mortgage payments or even pay their utility bills.

"The Valley's housing appreciation is masking problems in the economy," said Terry Turk, president of Mesa-based Sun American Mortgage.

To afford a house as prices rise, more home buyers have been opting for interest-only and adjustable-rate loans, which keep payments low initially because borrowers aren't paying toward principle. Buyers count on rising equity to save them from the risky loans: They plan to either sell or refinance before the loans adjust and their payments skyrocket.

Almost 45 percent of all homes purchased in metro Phoenix through August were financed with interest-only loans, according to San Francisco-based LoanPerformance, compared with 29 percent nationally. And almost 28 percent of all Valley homeowners who refinanced this year switched to interest-only loans, signaling they wanted to cut their payments. The U.S. rate was 10 percent lower.

Regulators worry the loans could make the housing market more volatile and are cracking down on lenders offering them to people on the bubble financially.

Boom over, costs rising

The rampant run-up in metro Phoenix housing appreciation is over, and prices have even dipped in some areas. At the same time, inflation, interest rates and debt are climbing.

Nationally, credit-card delinquencies have climbed to 5 percent, causing banks and regulators consternation. Many card issuers have upped the minimum required payment from 2.5 percent to 4 percent of the balance. That means the typical family, which has $9,000 in credit-card debt, now must make a minimum monthly payment of $360 instead of $240.

Almost 34 percent of all Arizona homeowners were paying more than the recommended 30 percent of their incomes to cover their mortgages, according to 2004 data from the U.S. Census Bureau. And that figure doesn't take into account the recent boom in home prices and rising interest rates.

Compounding the problem for some are the rising costs on more than one home. A record number of metro Phoenix homeowners tapped equity in their primary residence to invest in houses. At least one of every four houses sold in metro Phoenix this year went to an investor.

Almost half of metro Phoenix's employment growth during the past year came from construction and retail jobs.

Lee McPheters, an economist with ASU and director of the Bank One Economic Outlook Center, said that as home building cools, states that have seen construction hiring booms like Arizona will record job losses.

"It's like the perfect financial storm," said Mike Stephenson of the Phoenix-based credit counseling firm Take Charge America. He estimates the typical Arizona family's monthly household costs are now $500 higher than last year.

Recipe for the Perfect Financial Storm

• Employment Tied to Housing
• Housing Prices Falling
  
• Delinquencies Rising
• Credit Tightening
• Rampant Investor Speculation
• Rising Minimum Payments
• Rising Inventories
• Rising Household Costs
• Interest Only and Pay Option Loans
• Builders Still Building
• Negative Amortization
• Falling Demand for Goods and Services
  

Concern over Nontraditional Mortgage Products by the FED and the Office of the Comptroller of the Currency was noted in this Joint Press Release. A more detailed 42 page PDF on the Proposed Guidance can be found Here. Following are snips from the Press Release:

While innovations in mortgage lending can benefit some consumers, the agencies are concerned that these practices can present unique risks that institutions must appropriately manage. They are also concerned that these products and practices [interest only loans and pay option loans] are being offered to a wider spectrum of borrowers, including subprime borrowers and others who may not otherwise qualify for more traditional mortgage loans or who may not fully understand the associated risks of nontraditional mortgages.

The proposed guidance discusses the importance of carefully managing the potential heightened risk levels created by these loans. Toward that end, management should:

• Assess a borrower's ability to repay the loan, including any balances added through negative amortization, at the fully indexed rate that would apply after the introductory period. The agencies recognize that this requirement differs from underwriting standards at some institutions and are specifically requesting comment on this aspect of the guidance.
• Recognize that certain nontraditional mortgage loans are untested in a stressed environment and warrant strong risk management standards as well as appropriate capital and loan loss reserves.
• Ensure that borrowers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice.
  

Clearly the FED and OCC are now worried about lending practices. That is as it should be. However, they should have been more worried about the rampant increase in money supply they used in foolish attempts to defeat normal business cycles. It was their practices that allowed the housing and credit lending bubbles to get this far out of hand.

When the storm hits full force, the FED will have no one to blame but itself. Batten down the hatches.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Fannie Mae's 2006 Outlook

David W. Berson & Molly Boesel of Fannie Mae have published their Outlook for the Economy, Housing, and Mortgage Finance Markets for 2006. Here are the highlights:

• Housing Has Likely Peaked: Despite a surprising jump in new home sales for October, the housing market likely has peaked.
• Interest Rate Outlook: Rates are projected to rise modestly in 2006, but with short term rates generally up by more than long-term rates. There is a chance that the yield curve could invert next year, which could be a warning sign of slower 2007 economic activity.
• Housing Outlook: As investors continue to scale back activity, home sales should fall in 2006 � slowing the rapid price gains of recent years significantly.
• Mortgage Market Outlook: Originations are projected to drop by more than 25 percent in 2006, while MDO growth slows to a still-strong 8.6 percent.
  

In Fannie Mae's weekly commentary for December 19, 2005
Berson ponders Mortgage delinquencies rise in the third quarter -- special factors or a trend?

According to data just released by the Mortgage Bankers Association (MBA), mortgage delinquency rates climbed by 10 basis points to 4.44 percent in the third quarter -- the highest level in a year. Since peaking in the third quarter of 2001, delinquency rates had been trending downward. Does this increase suggest that the downward trend in mortgage delinquencies is over, or is it simply a blip on the way to even lower rates?

The job market has generally been improving in the past year, and most analysts expect it to continue to expand in 2006, so this should be a positive factor for delinquency rates. Note, however, that delinquency rates have tended to be highest in those states that have had the weakest economic expansions in recent years (Indiana, Ohio, Michigan, etc). Given the record home sales and mortgage refinancings of recent years, the age of the mortgage stock is unusually low -- suggesting that there could be a rise in the delinquencies trend until enough equity is accumulated to offset the risk of negative life events. The rapid home price increases of recent years has reduced the risks of a younger mortgage stock, but now that it appears home price gains are slowing (and perhaps prices will fall in some areas) -- so the young age of the mortgage stock may be riskier. Finally, there has been a surge of borrowing in recent years using riskier mortgage products (including: ARMs, interest-only ARMs, payment option ARMs, limited documentation, investors, and simultaneous second liens). We are especially concerned about the layering of risk, as borrowers have increasingly used mortgage products with more than one of these characteristics.

On balance, we think that these three factors suggest that delinquency rates should edge up a bit in the coming year -- although what happens to home prices could have a significant impact. But there is another factor that helps to explain the third quarter increase in mortgage delinquencies: the impact of the hurricanes on the Gulf Coast states. While the majority of states had a modest rise in delinquency rates in the third quarter (illustrating the interplay of the three factors noted previously), Louisiana, Mississippi, and Alabama all had skyrocketing delinquency rates -- climbing to nearly 25 percent, more than 17 percent, and greater than 7 percent, respectively. These rates could move even higher in the fourth quarter given job losses in those areas. Over time, as job prospects improve, insurance payments are made, and perhaps additional government assistance is delivered, these delinquency rates should decline -- but they are likely to remain elevated for a while.

What are the risks to the above assessment by Fannie Mae?

• Job growth stalls
• Yield curve inverts and with it a recession down the road
• Loan standards tighten
• Payments on loans rise beyond ability of people to pay
• Leverage
• Possibility of price plunge in bubble areas

While Berson attempted to post a balanced view, and I think he did a more than respectable job at outlining the issues, it seems to me that the risk factors are all negative. Right now, in the bubble areas of California, Florida, Arizona, etc., consumers have maintained their lifestyles and spending habits by home equity extraction. Even a modest turndown in home prices can quickly put an end to it. Berson also ignores the sheer numbers of people now totally dependent on housing to make their living. I take big exception to the widely held notion that "the job market will continue to expand" and that will be a "positive factor for delinquency rates".

Just as nearly everyone (including me) seriously underestimated how long this could last and how big the bubble would be blown, people will be underestimating both the duration and depth of the plunge once a serious contraction gets underway.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Images and Words

Some links for ya this fine Tuesday:

:: Beirut: a crossroads in the levant
Archleague's latest Worldview feature that includes the architect of last week's dose and a hell of a lot more. (via Archinect)

:: "America's Worst Catastrophe"
Gray Line Tours does the unthinkable. (via Archinect)

:: Union's Made
Libeskind's design for a condo tower in Union City, New Jersey. (via The Gutter)

:: Frank Gehry in the Simpsons
Looks like the episode finally made it to Australia. A transcription by David Teoh with visuals much sharper than mine.

:: Conceptual Forms
Hiroshi Sugimoto's photographs of plaster models of mathematical algorithms.

:: Javlog
Archinect editor Javier Arbona "shares a few web clippings, flickr findings, del.icio.us tags, occasional rants and raves, gossip and curio around post-urbanism topics." (added to sidebar under blogs::architecture)

Inflation Monster Captured

I am pleased to report the inflation monster has been captured and placed in a jar.

This stunning announcement as well as an accompanying video detailing the highlights was made by the European Central Bank in cooperation with the national central banks of the euro area. Along with the announcement, the ECB has produced an information kit on inflation entitled "Price stability: why is it important for you?" It is targeted at young teenagers and teachers in all the official languages of the European Union.

Here is proof the monster was captured:



The ECB's eight minute video is actually somewhat entertaining so I recommend that everyone click on the above link take a look. Even though it is entertaining, it sure flops as an educational tool unless of course the goal is self serving promotion by the ECB, for the ECB.

Unfortunately the video does not explain that the real source of inflation is printing of money by the central bank itself. Nor does it explain why 2% is such a good inflation target. Finally it does not really explain how prices across the board can be contained by broad brushed practices like setting of short term interest rates.

Those things were not explained simply because they can not be explained.

• Why should inflation be targeted at 2% and not 1% or 3%?
• Why should any inflation be targeted at all?
• Even if it was smart to target prices, can prices really be measured it accurately?
• What do central banks do to overcome lag effects of monetary tightening and loosening?
• Is this just blind faith "we know neutral when we see it"?

The problem of course is targeting prices in the first place. Sometimes money flows into houses and stock and bonds instead of goods and services. Sometimes productivity improvements mask inflation. Sometimes falling commodity prices mask inflation. Of course I am talking about "real inflation" as measured by increases in money supply as opposed to hedonically adjusted price inflation as seen through the eyes of central bankers.

The last paragraph is exactly what made a fool out of Greenspan. In the mid-to-late 1990's, "real inflation" (a rampant increase in money supply), was masked by productivity improvements, falling oil prices, and falling prices of goods from Asia. Greenspan called it a "productivity miracle". It was a "miracle" indeed. Rampant increases in money supply fueled the 2000 stock market bubble and spawned nonsensical talk about "new paradigms". Then in sheer panic "after the bubble pops" adjustments that he likes to make, Greenspan refused to allow a recession run its course. Instead he slashed interest rates to 1%, fueling the biggest housing bubble the world has ever seen. Here we are three short years later now facing a "new paradigm" in housing, with debt levels far worse at both consumer and governmental levels.

Greenspan will soon be gone and Bernanke is next to bat, waiting in the on-deck circle. Like the ECB, Bernanke wants to set price inflation targets of 2%. I have some advice for him: It simply can not work.

With all the hedonic adjustments, with all the nonsense about core inflation vs non-core inflation, with all the imputed economics, with all the understating of medical costs, and with enormous discrepancies between rental costs vs housing ownership costs, there is not a person on this earth that could possibly know 2% price increases if it hit them smack in the face.

Compounding the problem for these so called "inflation fighters" is energy costs. One reason energy costs are rising is peak oil. Another reason oil costs are high is geopolitical tensions. A third reason energy prices are high is supply disruptions. Finally, oil and natural gas demand are relatively inelastic. As prices go up, people more or less have to pay it. To maintain a CPI price target of 2%, central banks might have to raise interest rates to unreasonably high levels if energy prices are included in their measurements. That clearly would be bad policy. The root problem of course is assuming it is wise to target prices rather than money supply in the first place.

The Deflation Monster

I almost forgot to mention that the ECB claims to have �the deflation monster� bottled up as well. I guess we will see but I think they are hopelessly wrong. The ECB points out "deflation monster" problems when in fact deflation is both a blessing as well as the natural state of affairs.

Rising productivity is "price deflationary": more goods are produced faster by fewer people. Prices naturally decline as a result. Look at how few farmers today produce more grain than 100 times as many farmers did not that long ago. Corn prices fell to 1943 levels a couple weeks ago. Is that a problem? For whom? It's only a problem because the US and ECB blow countless billions of dollars every year on price crop supports. It is a total waste of money. Bear in mind that China is actually losing textile jobs. The enquiring mind might be asking: to whom? The answer might be shocking: to no one. Fewer workers are needed to turn out the same amount of goods. That is one of the reason this protectionist talk you hear right now out of Congress is total nonsense. Those jobs simply are not coming back ever. Cranking up money supply in an attempt to create jobs lost by productivity improvements and outsourcing can only result in asset bubbles and/or increased overcapacity. Besides, who does not like lower prices on goods and services?

If deflation is such a good thing, why do central banks fear it?
One answer is because deflation is debt's worst enemy.
If asset prices and wages fall, people can not possibly ever pay back what they owe. Banks and credit card companies don't seem to like that state of affairs. Is that a problem with deflation? No, that is a problem created by a reckless lending, easy credit, and endless cheerleading on CNBC every time consumer spending rises and people sink heavier into debt.

The second answer is because inflation benefits those that receive money first: the government and banks. The former is via automatic tax increases not indexed to inflation (especially property taxes), the latter simply because banks are first in line to receive money from the FED at rates no one else sees. By the time lending standards drop so that the masses have access to credit, the boom is well underway. By the time credit is granted to anyone that can fog a mirror, the boom is nearly over. Those buying assets late in the game will eventually be crushed by those selling assets that got in early. Simply put, inflation eventually becomes a moral hazard.

The Pivot Point

We are now at or close to the pivot point. The pivot point or tipping point if you prefer, is the point at which consumers can not or will not take on any more debt and/or corporations simply are unwilling or unable to extend more credit. I have been writing about various tipping points for some time now and we seem to be hitting those tipping points simultaneously in many areas: jobs, housing, consumer spending, and credit expansion.

The malinvestments of the have-it-now, me too, ownership society is about to be unwound. We are where we are because Central Banks have printed ever expanding amounts of money to prevent normal business cycles, to satisfy politicians wanting to waste more taxpayer money with silly projects, and to foolishly fight deflation. The only thing the Central Banks have accomplished is putting off the inevitable deflationary credit crunch while making it worse along the way.

There are many that think true deflation (decrease in money supply) can not happen under a fiat system. I disagree but perhaps the point is moot. Money supply itself actually never contracted in Japan. Instead, it grew very slowly for quite some time. However, bank credit outstanding contracted for 60 months in a row. Clearly there was a credit contraction. How did money supply still manage to grow? Fiscal deficits were ramped up immensely, roads to nowhere were built, and the Bank of Japan monetized all of it.

In addition, money velocity plummeted. The net effect of the credit contraction on prices was clearly what one would nowadays call "deflationary". Prices across a broad range of assets and goods and services fell. Indeed, practically everything fell but government bonds. People were amazed at the alleged "bond bubble" as well as the Zero Interest Rate Policy (ZIRP) of the BOJ. However, a 1% interest rate on a 10-year bond makes sense when prices fall 2.5% annually. The real yield is obviously far higher than 1%. Perhaps a practical way to think of deflation under a FIAT system is the destruction of credit/debt that exceeds growth in money supply.

Regardless of social and economic differences I fully expect the US to follow in the footsteps of Japan. Although a central bank might be able to sustain a certain amount of inflation by resorting to extreme measures, it can not stop a credit contraction in the private sector. Nor will a central bank bail out consumers at the expense of themselves and other creditors. The FED like the BOJ will stop short of destroying themselves and their power.

At some point, most likely tied to a property bubble implosion, consumers will refuse to take on more debt and/or banks will refuse to lend consumers credit as the value of assets behind the loans plunge. Consumer bankruptcies will soar as various credit bubbles implode. Furthermore, in a world awash in overcapacity there will be no reason for corporations to borrow. That is why the Bank of Japan failed to defeat deflation and that is why Bernanke will fail as well.

In due time I suspect we will find out that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will fail its intended purpose.

We have already seen massive bankruptcy filings to beat the October filing deadline. That is one such consequence. Given there is now a "means test" based on median family income, I just wonder if the way around that test is for someone to manage to lose their job. If so, that will only increase the size and number of writeoffs during the established credit counseling and waiting periods.

One of the complaints by the US and others against Japan in their long battle with deflation was Japan's refusal to write off bad banking sector loans. The US "solution" to that problem was to pass legislation designed to make people debt slaves forever. I am convinced that legislation will backfire in ways we have not yet begun to understand.

The problem by now should be obvious. Central Banks are attempting to do the impossible as well as the unwise. Arguably the best thing that could happen would be for the Central Banks to abolish themselves. Since that is not about to happen for many reasons, let's instead turn to more practical solutions for "stability".

Instead of trying to achieve "price stability" which as we noted is something that can neither be achieved nor measured, how about shooting for "money supply stability" instead?

1. Central banks should refuse to monetize government spending and trade deficits
2. Central banks should let the market set interest rates
3. Central banks should embark on a campaign of tightening reserves requirements over time to rein in fractional reserve lending
   

Life would be so much simpler if Central Banks everywhere would stop trying to micromanage both prices and economic cycles. Quite simply, they are trying to achieve nirvana when nirvana can not possibly be measured, nor can nirvana be achieved in the first place with the policies they have in place.

Yes we will still have economic cycles if Central Banks do those things, but the cycle peaks and valleys would not be as exaggerated as they are now. It seems as if we have learned nothing from the great depression or the more recent experience by Japan. I fear we may get a second chance.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Monday, Monday

My weekly page update:

Onishi Hall in Onishi, Japan by Kazuyo Sejima & Associates.

The updated book feature is Quonset Hut: Metal Living in a Modern Age, edited by Julie Decker and Chris Chiei.

Some unrelated links for your enjoyment:

Update! Zaha's Dazzling Non-Winner
Look like Zaha Hadid won't see her design for the Department of Islamic Art at the Louvre I posted about be built; Mario Bellini and Rudy Ricciotti will get that honor. From the comments, about half of you will be glad...though I can't say for sure after seeing the winning scheme. Thanks Javier.

Building the Times
The two-year construction of Renzo Piano's New York Times Building at Eighth Avenue and 41st Street, as documented by Annie Leibovitz. (via The Gutter)

2005 - another fantastic year for architects!
From the fine folks at SPA. (via Archinect)

Shanghai Housing Bust

China Daily is reporting Shanghai housing boom turning to bust.

Young banker Yan Lei toured the tree-lined gardens, sculptures and fountains of Baoland East Garden, a new Shanghai apartment complex, but he did not buy, deciding instead to hold out for lower prices.

"Home prices in Shanghai have begun to fall, so why hurry to buy now?" said 30-year-old Yan. "The environment is ideal; the prices aren't," he added.

China's most expensive property market has been deflating since June, when new taxes aimed at speculators halted a six-year boom during which prices almost tripled. The slide may deepen as developers increase supply and demand wanes in a city where a typical new apartment costs more than 50 times the average annual income.

"Property prices in Shanghai have risen out of the reach of ordinary citizens," said Qiu Zhicheng, an analyst at Xiangcai Securities Co, who forecast prices will drop 10 per cent in the coming year. "It was only a matter of time until prices fell."

Home prices dropped by 7.9 per cent between June and October, according to the city government's Shanghai Home Index, which has not reported a more recent figure. The index more than doubled between December 1999 and May.

Slowing demand has prompted some developers to offer perks such as free plane tickets and air conditioners, while others are guaranteeing refunds in the event of further price declines a tactic used by Hong Kong developers after 1997, when the city's real estate prices slumped by 60 per cent.

"Home prices in Shanghai have begun to fall, so why hurry to buy now?"

Substitute your favorite bubble city for Shanghai and they will be saying the same thing all across America soon. Global liquidity seems to be drying up.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Doha Success?

The six day Doha round of WTO trade talks in Hong Kong just ended.

At the last minute some compromises were accepted preventing a total collapse of the talks. At the heart of the matter is the position of the US and EU who want more access to selling products and services in third world countries, but third world countries want the US and EU and others to end agricultural subsidies first. The target date set by Brazil, India, Venezuela, and many African countries was 2010. Heading into the final hours, the talks nearly collapsed over that date but a last minute compromise was accepted to stretch the date out to 2013.

Bear in mind this "agreement" has yet to be ratified by the US Senate and should that fail, talks would have to start all over. The following articles should give everyone an idea of just how cantankerous the negotiations were as well as what the remaining roadblocks are. Here is a synopsis of what really happened:

As late as Saturday December 17 2005, Peter Mandelson, Europe's trade commissioner, was saying World trade negotiations are going backwards

Trade ministers from 149 countries were last night bracing themselves for failure in Hong Kong after admitting that four days of intense and bitter wrangling had made only minimal progress in breaking the deadlock in global liberalisation talks.

Peter Mandelson, Europe's trade commissioner, said the negotiations were going backwards in key areas. Brazil's trade minister, Celso Amorin, rejected Europe's argument that developing countries should make concessions on industrial tariffs in return for better market access to the west's heavily protected agricultural markets. "The EU and the US are asking us to pay to stop them doing what they shouldn't be doing," he said.

"It is hard to see where progress can be achieved in Hong Kong if the talks continue in this direction," Mr Mandelson said. "The level of ambition, if anything, is going backwards.

Fresh splits emerged over services, where developing countries are demanding the current proposals for liberalisation be watered down. There were reports last night that Venezuela had threatened to walk out of the meeting - bringing the talks to an end - unless the services text was amended. Mr. Mandelson said the EU could not accept attempts to water down what he considered an already weak text.

Fake Food Aid

That the talks were going so poorly should not have been surprising given Mandelson's remarks hammering the US on "fake" food aid.

The opening day of the high-profile trade summit in Hong Kong got off to a disastrous start yesterday. A bitter war of words broke out between Europe, the US and the United Nations, and demonstrators wrought havoc inside and outside the convention centre.

Peter Mandelson, the EU's trade chief, triggered a row when he branded the US food aid programme, which delivers American produce to needy countries, as "fake" aid designed to help US farmers rather than the world's poor.

According to this article in Forbes

The European Commission (EU) said it is pressing for changes to the draft agreement relating to agriculture, services and non-agricultural issues, before the final text is released tomorrow at the end of the World Trade Organization conference here.

The EU has been pressing the US, Canada, Australia and New Zealand to cut their domestic support for their farming sectors.

On agriculture, Mandelson said the draft declaration should also recognize the required 'effective policy reform' on domestic support, instead of merely referring to the level of cuts in the subsidies being provided by certain governments to their farming sectors.

The EU has been pressing the US, Canada, Australia and New Zealand to cut their domestic support for their farming sectors.

I had to read that last sentence at least twice. Why is the EU is complaining about US and Canadian farm subsidies, even accusing the US of handing out "Fake Food Aid", when France is both the biggest supporter of agricultural tariffs as well as the biggest roadblock to settling the dispute?

Australia and New Zealand Subsidies?

Signaling out Australia and New Zealand is also mind boggling in that those countries simply have no agricultural subsidies or tariffs according to the Courrier Mail News article Europe fails to bust AWB monopoly .

Agriculture and Fisheries Minister Peter McGuaran last night described as "hamfisted" EU attempts to dismantle Australia's single desk wheat export arrangement. Responding to claims the EU nations made at the latest round of world trade talks in Hong Kong, Mr McGuaran described their efforts as deceptive and designed to divert attention from real reform.

The pressure on Australia to promote a wheat export business rival to the grower-controlled monopoly, AWB, comes on top of the recent United Nations bribes scandal where an Australian exporter was accused of paying bribes to associates of former Iraqi dictator Saddam Hussein.

US wheat firms, anxious to gain footholds in Middle East trade, have been tireless in seeking to undermine Australia's reputation in the region.

Last night, as the EU countries sought to exploit the anti-Australia campaign run by the Americans, Mr McGuaran and AWB chairman Brendan Stewart hit back. Mr Stewart said the EU was targeting the single desk because the Europeans could not find any other Australian activities to use to leverage their position in trade negotiations.

"They only claim it's price distorting because they want to knock it down. AWB received no government subsidies, underwriting or insurance," Mr Stewart added, noting that "they really don't want to deal with the key issues." Mr McGuaran said AWB's commercial competitors had made numerous attempts to abolish Australia's export monopoly.

"None have succeeded for the simple reason that the single desk is not in breach of WTO guidelines," Mr McGuaran said, declaring that the single desk would remain, so long as the majority of growers continued to support the arrangement. According to the minister 80 per cent of Australian wheat growers want the single desk marketing system which operates on commercial terms, without taxpayer subsidies, to continue.

"This is because it is the best way to do business," Mr McGuaran said.

Harmy on the Motley Fool responded to the above articles by saying:

The amazing thing to me is the lengths the EU and the US will go to in order to divert attention from their own bloated, inefficient agricultural industries. US wheat farmers are subsidised to the hilt and yet they still cannot compete with unsubsidised Australian wheat. EU barley and wheat farmers receive huge subsidies to grow grain on unsuitable land, more subsidies for fertilisers, more for chemical sprays, yet more for transport and still more in the form of export subsidies to dump it.

New Zealand is also completely unsubsidised, has no tariffs and receives zip government assistance and yet can produce dairy products which it ships around the world to successfully compete with subsidised countries so much so that the US and the EU have to erect barriers in the form of tariffs and quotas to prevent entry.

For every subsidy, quota or tariff the dumb taxpayer pays billions and thinks that they are getting a good deal. About the only thing which makes me laugh is the way the Chinese buy up all the cheap subsidised food generously paid for by the US taxpayer in order to feed its own citizens and who then go to work making cheap cotton clothing for the US which is also subsidised by the US taxpayer.

The system is nuts.

Indeed Harmy, the system is nuts, but the goal of the US and EU seems to be to prolong the agony as long as possible.

Back in November, France threatened to torpedo a deal if the WTO called into question the bloc's agricultural policy.

France may veto a global trade deal if no agreement can be reached on farm tariffs, the country's trade minister said in an interview published on Saturday.

"The threat of a veto is real if we are beyond what is acceptable," Christine Lagarde told French daily Liberation.

"But I hope that we will not have to use that weapon."

President Jacques Chirac warned European Union leaders last month he was ready to torpedo a World Trade Organisation (WTO) deal if it called into question the bloc's Common Agricultural Policy (CAP), of which France is the biggest beneficiary.

Just hours before the talks closed Bloomberg was reporting WTO Negotiators Pan Revised Proposals on Farm Aid.

Dec. 18 (Bloomberg) -- Trade negotiators, embroiled in their final hours of negotiations in Hong Kong, criticized a proposal calling for speedier cuts in payments to U.S. cotton farmers and dates for ending European Union farm-export aid.

Yesterday's draft compromise by Director-General Pascal Lamy of the World Trade Organization sets an end date for farm-export subsidies of either 2010 or five years after an agreement comes into force, now scheduled for 2008. The EU has resisted attaching a date. The draft also calls on the U.S. to begin slashing cotton subsidies earlier than other farm aid.

The 2010 date is "an absolute red line, as it falls squarely outside my mandate," EU Trade Commissioner Peter Mandelson told negotiators, according to a copy of his speaking note.

In Washington today lawmakers criticized the proposed compromise saying it requires the U.S. cut subsidies and tariffs without demanding the same of India, Brazil and other developing nations.

"I seriously doubt that any agreement with this imbalance will be acceptable to the Congress," Senate Finance Committee Chairman Charles Grassley said in a statement. "For a final agreement all countries have to contribute, or there just won't be a Doha Round agreement to implement."

Four West African countries have pushed the U.S. to slash its subsidies to cotton farmers within the next year, a move U.S. Trade Representative Rob Portman called politically unfeasible. Choguel Maiga, Mali's trade minister, said the text on cotton is "a step forward compared with two years ago. The rules of the game have been fixed by subsidies."

U.S. Trade Representative Rob Portman said the key step forward he expected this week is a deal on how to abolish duties on products from the world's poorest nations, such as Rwanda, Zambia and Cambodia. Lamy proposed phasing in that duty-free access and allowing the U.S., Japan and the EU to exempt some products from unfettered access over that time.

That's inadequate, said Zambian Trade Minister Dipak Patel, who represents the WTO's 32 poorest nations. "We will not be part of any attempt to disguise failure," he said in a statement to negotiators.

U.S. textile makers complain that such a move would enable Bangladesh and Cambodia, which together exported more than $3.5 billion of textiles and apparel to the U.S. last year, to flood the U.S. market with their products. It might also anger farm groups such as sugar growers, they say.

"This proposal would not make it through Congress," said Cass Johnson, president of the National Council of Textile Organizations in Washington. "With this text they are creating the perfect coalition to kill off the Doha Round."

In the early hours today Hong Kong riot police began arresting about 900 South Korean anti-trade activists after using teargas to quell the most violent protests since the city returned to Chinese rule.

Korean farmers and unionists were marched 15 at a time through a cordon of riot police onto buses, ending a 12-hour protest that spurred the biggest ever mobilization of security forces on the island. About 2,000 riot police earlier surrounded activists 250 meters from where the trade ministers were meeting.

South Korean activists, who say the WTO would force them out of business because it would lower tariffs on rice imports, have vowed to halt the WTO meeting. On Dec. 16 they sprayed slogans on the wall of the U.S. Consulate and stormed a building housing their own diplomatic envoy. Police used pepper spray and batons to repel demonstrators after protests turned violent yesterday.

The talks have concluded and Reuters is now reporting World trade deal survives stormy Hong Kong talks.

Ministers from 149 states saved long-running global trade talks from collapse on Sunday with an interim deal to end farm export subsidies by 2013 and open rich-country markets a bit wider to the world's poorest nations.

Ministers expressed relief that they had averted a repeat of failed conferences in Seattle in 1999 and in Cancun in 2003.

But they described the Hong Kong pact as disappointing and said it would be tough to wrap up the talks on time by the end of 2006, after which U.S. President George W. Bush may lose his Congressional authority to negotiate trade deals.

"In a week of disappointments, this is no small prize," said European Union Trade Commissioner Peter Mandelson. "It is not enough to make this meeting a true success. But it is enough to save it from failure."

"BETRAYAL"

Big-hitters among developing nations, led by Brazil and India, gave their nod to the draft but voiced their frustration over the EU's refusal to agree on 2010 as the cut-off date for export support.

"I think the EU owes one to the developing countries. We showed a real will to negotiate and we didn't feel it was the same from the other side," Argentine Trade Minister Alfredo Chiaradia told reporters.

The agreement will bring the elimination of export subsidies for cotton in 2006. It will also quicken the pace at which Washington dismantles subsidies enjoyed by U.S. cotton producers, which African nations say are ruining their economies.

On trade in manufactured goods, the accord fell short of U.S. and European hopes for greater access to poor nations' markets.

But non-governmental organisations, which campaign on behalf of developing countries, branded the Hong Kong talks yet another victory for the rich world.

"This is a profoundly disappointing text and a betrayal of development promises by rich countries whose interests have prevailed yet again," relief agency Oxfam said in a statement.

One key element of the plan -- an offer of duty-free, quota-free access for imports from the 49 poorest nations of the world -- was watered down because of U.S. and Japanese reluctance to accept unbridled trade in goods such as textiles and rice.

"It's a shame the richest countries in the WTO outside Europe could not go the extra mile for the world's poorest countries," Mandelson said.

British Trade Secretary Alan Johnson said it was "thoroughly disappointing" that 3 percent of goods from the poorest countries, amounting to 250-300 tariff lines, had been exempted from the scheme.

Outside the conference centre, thousands of demonstrators chanting "Down, down WTO" marched peacefully through Hong Kong. But there was no repeat of Saturday's fierce fighting with riot police in which more than 140 people were injured.

The bottom line:
While the trade talks did not collapse in complete failure, they certainly were no real success either. It also remains to be seen if the US senate will ratify the final agreements of if they will be torpedoed over something as stupid as cotton subsidies. Perhaps in spite of the rhetoric, cotton was the one thing the US was willing to give in on in this round of talks. As best as I can tell the US and EU did not give in on much of anything else.

The US, France, Brazil, and Venezuela all seem to have torpedoes locked and loaded. It's hard to say who may fire the first one. Regardless, it will still take another 8 years before farm subsidies are eliminated, and that is if everything goes well. Don't hold your breath. Defeat can still be snatched from the jaws of victory.

I have a suspicious feeling that whatever "success" these talks may have produced will be undone by Congress when the US economy takes a slide in the upcoming consumer led recession.

One more critical point: Trade wars and protectionism are hallmarks of deflationary times. Does anyone remember Smoot-Hawley?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Media Creates Bubble Theory

A Santa Cruz Sentinel article claims the housing bubble theory was created by the media to play off our fears.

Nationally, the media plays on consumers' fears in order to keep the attention of listeners and readers. The real-estate housing-bubble theory has given the media a topic that excites. Renters are excited about a possible bursting of the bubble in a sort of perverse way in that they do not feel sorry for homeowners, and they see a radical drop in prices as an opportunity to get into a home themselves. Homeowners are excited because they fear they may lose some of their wealth.

Unemployment is low and job growth is strong. The majority of those that buy homes in Santa Cruz work in the Bay Area, where there are jobs that pay well. The reason that Santa Cruz pops up as one of the least affordable areas in the country is because those statistics are based on what jobs pay here versus what homes cost here.

In reality, homes are more expensive in Marin, San Francisco, San Mateo, Carmel, Santa Barbara and other coastal areas in southern California than they are here. When it comes to coastal California, it is hard to beat Santa Cruz for weather, being environmentally friendly and a relative lack of congestion when compared to these other areas.

To top it off the leading edge of the baby boomer generation will be turning 60 next year. They will be retiring, they will be cashing in on equity to buy a second home or an investment home and they will be tapping equity to provide funds for their kids to buy homes.

While there will be some steam released from our hot housing market, there will be no popping bubble here.

What name is at the bottom of that article?
Peter Boutell is a mortgage consultant with a local mortgage company. Send questions to 'Lending A Hand,' 1535 Seabright Ave., Santa Cruz, CA 95062

No bubble in Santa Cruz huh?
Where does the California Association of Realtors place Santa Cruz on the affordability scale?

Following is a section of the California Housing Affordability Index from August 2005. I doubt things have changed dramatically since then.

The percentage of households in California able to afford a median-priced home stood at 16 percent in June, a 2 percentage-point decrease compared with the same period a year ago when the Index was at 18 percent, according to a report released today by the California Association of REALTORS� (C.A.R.). The June Housing Affordability Index (HAI) was unchanged from May, when it also stood at 16 percent.

Leading the Way...� in California real estate for 100 years, the California Association of REALTORS� (www.car.org) is one of the largest state trade organizations in the United States, with more than 170,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

                    C.A.R. HOUSING AFFORDABILITY INDEX
                    Jun-05      May-05     Jun-04

California                16          16         18
California - Condos       21          22         26
Santa Cruz                10          11         16
Marin                     10          12         13
San Francisco              9           8         10
Santa Barbara County       7           6         10
San Mateo                 12          11         14
United States             48          51         53

For starters it seems that Mr. Boutell is flat out wrong about Santa Cruz being more affordable than Marin and San Mateo (at least according to the latest numbers I could find). Furthermore it is more than ridiculous to suggest there will be no bubble popping in Santa Cruz simply because there are bigger bubbles elsewhere. With the Santa Cruz housing affordability index at 10% and the entire state at 16% it should be quite obvious to anyone there are housing bubbles all over California. Of course that doesn't mean the bubble can't get bigger, but given anecdotal evidence of housing slowdowns in San Diego, Washington DC, Phoenix, Boston and many other places it should be obvious that the overall bubble is popping or about to. It's only a matter of time before it hits Santa Cruz too.

At any rate, there is nothing quite like a bundle of self-serving "blame the media" nonsense for a housing slowdown is there?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/