FOMC Rally

CNBC was chirping all day on the post FOMC rally. Most of it was attributed to a "softening" in the statement by the Fed leaving the way for a pause. Let's see if we can spot that "softening". The last two FOMC statements are below and I bolded some differences.

May 10th FOMC Statement

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

June 29th FOMC Statement

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

As much as I try, I see little difference between these statements. Now doubt some that are perfectly fluent in "Fed Speak" will disagree but the biggest differences that I can spot are the following sentences (all from the statement on June 29th). "Economic growth is moderating", "Readings on core inflation have been elevated in recent months", and "high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."

It seems that one can make a case that the Fed is even more concerned about inflation now as compared to last month. Is a moderating economy with commodity prices having a potential to sustain inflation a good thing? On that note the telepathic question lines are now open. Hmmmm. I am being flooded with the same question repeatedly. "Ok Mish, so why did the market rally?" The answer in a nutshell is that it was ready to. I doubt it had anything to do with anything the Fed said. Ask yourself, would the rally been any bigger if the Fed paused? Would the market have rallied if the Fed did 50 basis points and signaled a pause? Was the market going to drop if the Fed left the language exactly the same? The odds are that the market rallied because it was deeply oversold and selling pressure simply dried up. In short, Bernanke should get no more blame for the May selloff than he gets credit for today's rally: none.

The first thing people need to realize is that the Fed is not really in control of interest rate policy. Like it or not, this is a global economy and the Fed can not dictate world policy or the reactions of its policy decisions to the world. Borrowers simply do not get to dictate terms to lenders. We are at a point where the market (both here and abroad) may force Bernanke to hike far more than he wants to. In fact, I suspect it already has.

I found it interesting that there were nearly identical comments expressed on both Silicon Investor and the Motley FOOL (by multiple people) stating "Bernanke got the reaction that he wanted". My immediate reaction was "Oh Really?". I find it hard to believe that Bernanke wanted a sharp rally in copper, gold, oil, and a bunch of "riskloves" plowing back into carry trades they were rattled out of in the last couple weeks. Unless things fall to pieces in a hurry, look forward to hike number 18 in August. By the time the Fed actually pauses it is likely to be "sell the news event" as the economy will then be clearly and significantly deteriorating.

A recession now is sealed in the books and Bernanke will take the blame. Yes he and Greenspan deserve 100% of the blame for this mess but it will be for the exact opposite reason that most will attribute the recession to.

Peter Schiff discussed this idea today in The Reality of Stagflation.

Now that the Fed has raised rates to 5.25%, and has left the door open for future increases, the overriding concern is that over-tightening will tip the economy into recession. However, given the state of our imbalanced economy, a recession is not only inevitable, but absolutely necessary, and will occur no matter what the Fed does. Furthermore, the coming recession will not come about because the Fed went too far, but because it did not go far enough.

The U.S. economy suffers from extreme economic imbalances that must be resolved. The longer they persist, the more difficult and painful their ultimate resolution will be. The imbalances result primarily from an excess of consumption and borrowing, and insufficient savings and production, and can only be resolved by less of the former and more of the latter.

When the recession occurs it will not be the result of the recent run of Fed rate hikes, but the irresponsible manner in which it lowered them, and kept them low, in the first place.

If Bernanke tries to borrow from Greenspan�s playbook and attempts to prevent or mitigate the severity of the coming recession, the excess liquidity will not simply move into another asset class, as it did from stocks to real estate, but into real stuff, such as commodities and consumer goods. As far as the Fed is concerned, it has now reached a monetary divide where all roads lead to stagflation.

That is certainly a well written article but Mish readers know I hate that last sentence. All roads simply do NOT lead to stagflation. However all roads do lead to "something undesirable". I prefer to use the term "Economic Zugzwang" to describe the situation Bernanke is in.

I was listening to Bloomberg today (typically I only listen on FOMC days or if some other major news is happening), and one of the bulls was harping how he "just does not get it". He thought stocks should be way, way higher. As evidence he was pointing out record numbers of mergers and acquisitions and leveraged buyouts. "We have not seen this kind of activity since 2000" he said. I almost burst out laughing. "This was supposed to be an argument FOR a rally?" I wondered. Yes, indeed we are seeing the same kind of speculation as we saw in 2000. The Finacial Times is reporting Volume of IPOs hits $100bn in first half
A record number of billion-dollar deals pushed the size of the global market for initial public offerings in the first half of the year to more than $100bn � second only to the first half of 2000 at the height of the dotcom boom.

Some of the biggest deals were priced in the second quarter, before the recent downturn. For the first six months of the year, the volume of IPOs jumped 56 per cent to $102.2bn, from $65.4bn over the same period in 2005, according to figures from Dealogic.

The talking head on Bloomberg asked "What is it they know that the average investor does not?". My reply would be "They probably know about as much as they did in 2000", which is to get those IPOs on the market while suckers are willing to pay inflated prices for them.

At any rate, this is exactly the kind of mentality the Fed is fighting right now. Corporations are going into debt to buy back shares, we are back in merger mania, IPO mania, and "riskloves" are plowing back into carry trades on any excuse.

Then again perhaps I am giving the Fed way too much credit. They certainly do not deserve much (if any) credit. But neither does anyone commenting about merger activity and comparing it to 2000 without seeing the obvious irony of the comparison.

Let's consider a more rational analysis. On June 9th Paul Kasriel at the Northern Trust wrote The More Things Change, The More They Stay The Same.

As this is being written, the yield on the 10-year Treasury note is 5% - the same as the FOMC�s fed funds rate target. Over the past 50 years or so, this spread has averaged approximately 90 basis points. And, coincidentally, a spread of 90 basis points has been associated with real GDP growth of about 3-1/2%.

As this spread went below 90 basis points in this cycle, the conventional wisdom was that �it was different this time.� This also was the conventional wisdom back in early 2000 when the spread breached the 90 basis point barrier. Little did the consensus know back in early 2000 that the U.S. economy was sliding toward a recession.

But wait a minute. How can we be talking about below potential economic growth when the latest real GDP data (Q1:2006) show annualized growth of 5.3%? As we have written, GDP is a terrific coincident indicator, but a lousy leading indicator. In this linked commentary, we pointed out that after real GDP grew at 6.4% in Q2:2000, it did not reach 3% or higher growth again until Q2:2003 � three years later! As things now stand, we see real GDP growth running at 2-1/2% over the remaining three quarters of this year � assuming the FOMC gets one more 25 basis point rate hike out of its system on June 29.

We want to close with a word about stagflation. We would not characterize the current U.S. economic environment as one of stagflation. Rather, what we are observing today is a typical response to a progressively more restrictive monetary policy. That is, growth in aggregate demand is slowing as that lagging indicator, price inflation, continues to rise for a bit. The stagflation of the 1970s was accompanied by sharply rising unit labor cost growth. As the chart below shows, this is not the case today.

Unit Labor Chart
Highlights in blue and red added by Mish



That chart together with the negative savings rate shows the stress the average person is facing. Real wages are falling yet costs are rising everywhere. The one source of jobs is housing and housing is faltering. Yet as long as money is willing to plow into risk at the slightest provocation (like today), Bernanke may have no choice other than to keep hiking.

VIX

Let's look at this rally from the point of view of the VIX.



The VIX is almost but not quite back to the level the S&P 500 was at when the trouble all started. Yet the index is nearly 50 points lower. Is this a good thing? I guess it remains to be seen but the number of big up days immediately reversed (and vice versa) does not seem to be healthy market action to me.

Meanwhile Big Ben's Musical Band keeps cranking out hit after hit. As long as the market is going to react like this to hikes, he is likely to be forced to keep playing "Those Rate Hike Tunes". Last month people thought Bernanke was playing Taps but today the same message sounded more like Reveille. The reality is nothing much has changed except that interest rates are now another 25 basis points higher, the yield curve has inverted for the second time in six months, housing has stalled, and the recession of 2007 is looming ever larger.

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

Ryland Leaks

On June 1st a Class Action Lawsuit Against Ryland Homes in Florida was certified by an arbitor.

An arbitrator has certified a class action against national homebuilder Ryland Homes, including approximately 6,000 homes Ryland built across Florida since January 2000, for plaintiffs who claim serious leakage issues during summer storms.

Estimates to fix the leaks are expensive and Ryland's efforts to address the leakage problems are unsatisfactory, the plaintiffs say.

The plaintiffs allege houses Ryland built won't keep water out during rainstorms, although often there is no apparent source for the leaks. Water simply appears on the baseboards of exterior walls.

More than 70 owners of Ryland-built homes are listed as parties to the case and also say they represent "all others similarly situated."

Various engineers have proposed ways to fix the leaks, the homeowners say. Even the cheapest of those suggested repairs would cost thousands of dollars per house.

More than 100 homeowners complained to Ryland through mid-2004 about leaks during summer storms. During the 2004 hurricane season, the problem reached epic proportions, the homeowners say.

Ryland - which has acknowledged having more complaints than any other builder in the Orlando area - fielded more than 1,000 calls in August and September 2004. Still, many homes continue to leak, despite limited repairs provided by Ryland, the homeowners allege.

The plaintiffs in the arbitration asked Ryland to fix the leaks in their houses in the fall of 2004. When Ryland refused, they hired Frank Rapprich, an Orlando lawyer. Rapprich sent legal demands to Ryland, and the company again refused to fix the leaks.

I have two Questions for would be Ryland Homes Buyers.

1. Why should anyone want to buy a home from someone who will not fix major problems?
2. Why should anyone want to buy a home in the first place from a builders having large numbers of problems, even IF those problems were taken care of?

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

Musical Chairs

I was recently asked if I saw anything whatsoever that suggested lenders are tightening at all in the face of declining collateral and rising debt service pressures on their customers.

The answer to that question is a resounding no. In fact the latest data shows the opposite: credit standards are still getting easier and businesses are still trying to expand or capture market share regardless of the consequences down the road.

Bank Lending Survey

According to the April 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices

• On net, 12 percent of domestic institutions indicated that they had eased standards on business loans to large and middle-market firms.
• About 60 percent of domestic respondents, a notably larger net fraction than in the previous survey, reported that they had trimmed spreads of loan rates over their cost of funds for such firms.
• Almost 40 percent of domestic institutions, again a larger net fraction than in the January survey, indicated that they had reduced the costs of credit lines over the past three months.
• About one-fifth of domestic banks, noted that they had increased the maximum maturity of C&I loans or credit lines that they were willing to extend to their business borrowers.
• For C&I loans to small firms, 7 percent of domestic respondents noted that they had eased lending standards in the April survey.
• On balance, almost 50 percent of respondents indicated that they had narrowed spreads of loan rates over their cost of funds
• About 30 percent of respondents reported having reduced the cost of credit lines over the same period.
• Most respondents reporting easing of their lending standards cited more aggressive competition as an important reason for having done so.

Perhaps lending standards have changed given the market downdraft in equity markets in May but I doubt it. Note that housing starts were up this month even though inventories are skyrocketing and buyer traffic is back at 1990 levels. "Have Funding Will Build" seems to be the homebuilder motto of the day.

Housing Starts

Here is another angle on housing starts:
Bloomberg is reporting Copper Rises After U.S. Housing Starts Gain More-Than-Expected.

Copper in London and Shanghai rose after home construction rebounded in the U.S. last month, spurring optimism for sustained demand in the world's second- biggest user of the metal.

Housing starts rose a greater-than-expected 5 percent to an annual rate of 1.957 million, the Commerce Department said yesterday in Washington. The average U.S. home contains about 400 pounds (181.4 kilograms) of copper wire and pipes, according to the New York-based Copper Development Association.

"Prior to these numbers, there was some concern that the U.S. property market was cooling, but the announcement showed that is not the case," Cai Luoyi, a metals analyst at China International Futures (Shanghai) Co., said by phone.

So there was "some concern" about US housing but I see that one month of data removes all that concern. By any chance is Cai Luoyi the replacement for the rogue trader that cost China $200 million by shorting copper futures last year?

Flashback to November 25th. The Washington Post reported Losses on Copper Futures Have Leadership Spinning?

Fast forward to today:

There are now record numbers of unsold homes on the market. There were 565,000 new and 3.4 million existing residences for sale in April according to the National Association of Realtors and the Commerce Department. That is a lot of supply and home builders keep adding to it every month at a far faster pace than sales.

Danielle DiMartino writing for the Dallas Morning News is asking Which builders will be left standing?

After I had mulled over the troubling 5 percent rise in May housing starts, a brilliantly simple explanation hit my inbox.

"Builders with no starts are 'unemployed,' " wrote James Bandy of Dallas, "and they will never be voluntarily unemployed."

Mr. Bandy said he recalls Texas in the mid-1980s well enough to recognize the sequel to the high-stakes game of musical chairs.

Given that we all know how the game ends, it's hard to see why so many builders continue to be willing participants. Yet they play on.

In case you've missed the most massive buildup since the Cold War, inventories of new and existing homes are at the highest levels ever recorded. Combine existing and new construction and you get a cool 4 million unsold units.

With this much supply, you'd think starts would be down by more than 3.8 percent from January's 33-year high.

Wouldn't it be smarter to show a bit of restraint and shelter what profit margins do remain? It's not as if retaining sales volumes to keep up appearances is still a legitimate excuse. Wall Street long ago pummeled homebuilder stocks.

In fact, the meltdown in share prices has freed homebuilders to shift their focus back to profits. Rather than pile on more incentives to stanch plummeting demand, those with an eye on survival could simply cancel, or at least postpone, groundbreakings.

It's painfully apparent that, somewhere along the way, the industry abandoned concern for its customers' long-term well-being.

Maybe builders just don't appreciate how critical a role they play. Oversupply is but one issue when viewed in isolation � as is the risk to the labor market, as is the threat to the banking system.

Add them together, though, and we're not talking child's play. We're talking about a seriously brutal session of musical chairs.

One has to laugh about that musical chairs analogy but it goes beyond homebuilding into every aspect of this financial economy totally dependent on ever increasing amounts of risk. Not only are more and more players struggling to get into the game (with no additional chairs being added) those already in it are struggling to increase leverage.

AmeriCredit Expansion

Please consider AmeriCredit Plans Lending Expansion.

AmeriCredit Corp., which makes auto loans to consumers with risky or limited credit histories, plans to make more loans through additional car dealers, to a wider variety of consumers.

But by expanding into an economic landscape marked by concerns about inflation, rising interest rates and tightening credit, the company may be preparing to swim against the current.

The Fort Worth, Texas-based lender is in the early phases of a multidimensional expansion plan to grow the company's $10.38 billion auto loan portfolio 10 percent to 15 percent annually by moving into new geographic regions, making new kinds of loans, offering fresh types of products and approving loans to consumers with credit the company had previously considered too pristine.

The company is also expanding geographically and considering direct-to-consumer loans and some other products within auto finance, such as warranties. The idea to is to become a "full-spectrum, one-stop shop" for auto dealers, Chief Operating Officer Preston Miller said at the conference.

AmeriCredit executives say credit measures such as defaults and loan write-offs are at their safest levels in years, meaning the company can wade into deeper waters without hurting profits.

AmeriCredit executives say credit measures such as defaults and loan write-offs are at their safest levels in years, meaning the company can wade into deeper waters without hurting profits.

"Unless you can draw some correlation between those types of events and what is going to happen to the consumer's job, we really don't see that that would have a direct impact on our portfolio," Choate said. "Our view is that they would continue to make their car payment in order to get to their job."

"If they're getting their paycheck, they're going to use it to pay their car bill," Brendler said. "That typically is a very powerful motivator."

Excuse me but didn't AmeriCredit practically go bankrupt in the last downturn?
Here is a weekly chart to consider.



The above chart suggests AmeriCredit had a near brush with death. I seem to recall some of its competitors actually going under. Somehow they seemed to snag the last chair before Greenspan flooded the economy with dollars bailing out the near dead. Yet now with a Fed merrily hiking away, jobs data weakening, real wages falling (and more so for AmeriCredit customers than the average) somehow AmeriCredit thinks this is the ideal time to expand.

Perhaps AmeriCredit is emboldened by the fact they managed to find a chair the last time the music stopped but I have my doubts about the next game when chairs will be yanked left and right.

Let's look at one more interesting article from Danielle DiMartino. This one is called Not feeling at home with risk.

Three weeks ago the portfolio manager at Pacific Investment Management Co. sold his house and moved into an apartment with his wife. Though his wife wasn't exactly happy with the move, his sense is "she will look back on our sale and view it as a good one."

Curiously, Mr. Kiesel's specialty is corporate bonds, which he says have given him a unique perspective on the U.S. housing market.

"Rising home prices have been the key driver of U.S. economic growth, which in turn has played a major role in the tightening of corporate bond spreads," Mr. Kiesel said.

Many of these companies are buying back their stock, which weakens bondholders' cash cushion on the balance sheet. "In this environment, bondholders should be demanding covenant protection as well as higher spreads on homebuilder bonds."

Because housing has driven the economy for so long, the slowdown will bring, among other things, tighter lending standards, less willingness to take risk, lower asset price appreciation outside housing, less liquid financial markets and rising volatility.

"At that point, 'For Sale' will not just be a sign you see in front of your neighbor's yard," Mr. Kiesel added. "Investors may also put a 'For Sale' sign on risk assets as well."

Judging from the huge swings we've seen in emerging markets, stocks and commodities in recent weeks, big institutional investors have already started to shift away from risk, something that carries deeper implications for bondholders.

Junk bond spreads are widening, the Fed is still hiking, housing inventory is soaring, but builders are still building, companies are still wasting cash on share buybacks at inflated prices, and credit standards amazingly are still headed lower. It's not readily apparent right now but I suspect there will be a severe shortage of chairs when Bernanke's Big Band stops the rate hike music.

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

Home Inspections

There are two ways builders can pass home inspections.

1. Build quality homes to code
2. Hire their own inspectors
   

Following is an email from a building inspector for the city of Ft. Meyers, forwarded to me by Mike Morgan.

Hi Mike, I am a building inspector for the City of Ft Myers. We try to do a good inspection job on the big builders but our hands are tied when the builder hires a private inspection firm to do all of their inspections. State Statutes 553.791 (please read) was passed to help the big guys because they feel they do not get a timely inspection from the local jurisdiction. My opinion is the inspectors or inspection firm works directly for the builder. The reason for this e-mail is, did the contractor rely on local jurisdiction or a private inspection firm. You also refer to a home inspector hired by the owner which is another opinion. Hopefully everyone is using the FBC.

Mish note: FBC stands for Florida Building Code.
There you have it. If Florida homebuilders say their houses pass inspections exactly how does that prove a thing?

Following are two email updates from Morgan, both on inspections.

Hello Everyone,

Two updates regarding Lennar. A well respected South Florida architect has completed his inspection of one of the new homes Lennar built in Martin�s Crossing. Confirming our own inspectors concerns, the architect found dozens of defects and building code violations. In fact, he found a variety of issues our engineering inspector did not even look at. The architect was amazed that our County Officials issued a Certificate of Occupancy. We are going to find out who is responsible for issuing these COs and why, and what is going on here. The dirty laundry will be aired. Lennar�s defective home issues are multiplying daily. Moving forward we will be contacting County Officials in all areas throughout the State of Florida where Lennar is building or has plans to build.

The second issue in this update, is something we were not aware of until we received the email below from an Investigator working for a prominent law firm. The RESPA violations referenced below involve Federal law, and the US Government comes down very hard on RESPA violations. Obviously, something has changed at Lennar during the last few years. At least here in Florida, Lennar is facing serious issues in regards to the defective homes they have built, sold to clients, and represented to County Officials, not to mention the Federal RESPA issues.

Regards,

Mike

RESPA stands for Real Estate Settlement Procedures Act.

RESPA is about closing costs and settlement procedures. RESPA requires that consumers receive disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD.

Here is the Email Morgan received on RESPA violations:

I am an investigator with the law firm of ****************** a very well-known consumer rights law firm in *****. You can check out our website at www.**********

We are currently investigating the possibility that Lennar Homes may be violating the Real Estate Settlement Procedures Act (RESPA) by inducing customers to utilize a particular title company through the offer of discounts in home sales prices.

I saw your website regarding problems with Lennar homes. If your clients were induced to use a particular title company, they may have been victims of this federal violation.

I would be very much interested in speaking with you at a time and place that would be convenient to you. Please contact me at ******** or email me at ******** and I will be happy to answer any questions you might have.

Thank you and I look forward to talking with you.

I do not know one way or other if Lennar or other homebuilders are violating RESPA but we do know that it is being researched.

Here is a second Email from Mike Morgan:

To demonstrate the complete disregard for �doing the right thing,� think about this. One of my clients has a Lennar home ready for closing. I told Lennar that I was afraid this home would come back with a failing inspection report, so I suggested Lennar consider this option: An agent came to me with a contract on the home, willing to buy it from my client with a simultaneous closing. I warned Lennar that if the home came back with a failing report, there would be no possible way for my client to sell the home to the new buyer. I suggested to Lennar that they return my client�s deposit, and sell the home directly to the other agent�s client. Lennar refused. We inspected the home. It was littered with code violations and building defects. In fact, even after Lennar called us in for a re-inspection, insisting they fixed everything . . . the home failed the second report miserably. And I mean miserably. Now Lennar has pissed off another one of my client�s and they are trying to force her to close on the defective home. Lennar�s troubles are just beginning, as more and more County Officials realize Lennar has been building defective homes.

I spoke with Morgan on the phone today and he was describing a phone call he just received from a person under contract to buy a home in Newport Isles (A Lennar development in Port St. Lucie). The buyer wisely decided to have it inspected first. The inspection report turned up over 100 defects and code violations. We are both itching to get our hands on that report, but mid-conversation the caller had second thoughts about making it public for fear it would jeopardize his odds of getting out of the contract.

It will be interesting to see how Lennar handles this. One possible option would be to let the buyer out of the contract, refunding the down payment, but requiring some sort of non-disclosure agreement protecting the seller from adverse publicity. This contact was not one of Morgan's direct clients so we may not find out the end of this sad story. However, if we can obtain a copy of the inspection report, I will gladly post the details.

Yesterday in Foreclosures Rise I was trying to figure out exactly what dollar amount of mortgages would have their rates reset and when. I had two numbers: $1 trillion and $2.5 trillion. Both are correct it turns out. Jack McCabe was kind enough to respond to my question with this breakdown.

2006 - $500 billion adjusts first time
2007 - $1 trillion adjusts first time
2008 - $1 trillion adjusts first time

Total: $2.5 trillion - first time adjustments
Data was from MBA earlier this year.

Bad inspections, dwindling cash, and Bernanke hiking away as rates are resetting are all going to wreck havoc. The foreclosure party has only just begun.

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

Foreclosures Rise

May U.S. Foreclosure Stats from RealtyTrac:

• In May, 92,746 homes were in foreclosure, up 2% from April, and 28% higher than the foreclosure activity in May 2005.
• Five states represented 48% of all foreclosures in the country. Those five states represent 31% of the nation�s total households.
• For the sixth consecutive month, Texas had the highest foreclosure total (15.6% of total).
• Florida was the second highest contributor of foreclosures in the country in May (9.6%), while California (9.4%), Illinois(6.9%) and Georgia (6.2%) rounded out the top five.
  

The Herald Tribune reported back in January Clock is running down on 'cheap' mortgages.

Starting in 2006 and accelerating into 2007, as much as $2.5 trillion worth of the fancy mortgages called "hybrids" are coming to the end of the free-lunch part of the deal.

Economists are still trying to put numbers on this reset factor, particularly when it comes to the riskiest home loans, referred to as "sub-prime."

"We don't have enough data to know how big a problem this will be," said David Berson, chief economist at Fannie Mae, the nation's largest mortgage packager.

Making matters worse, it is the the sub-prime lenders issuing the most adjustable-rate mortgages. With those who participate in the survey, 80 percent of their loans were ARMs compared to 55 percent in the broader market.

Surprisingly, there is little data that is publicly available on that subject. The best resource is a study conducted in the spring [Spring 2005] by Fannie Mae, a federally chartered corporation that buys mortgages after lenders have issued them. Fannie Mae looked at 2002-2004 loan data to determine what portion of the existing loan pool would be "adjusted," and when.

Fewer than 10 percent of the conventional conforming loans will reset in 2006-2007, but nearly two-thirds of sub-prime loans will. That is because a large portion of the sub-prime loans are two-year adjustables, says Berson, the Fannie Mae chief economist.

The rising foreclosure rate no doubt reflects some of those rate resets but it is going to become progressively worse as the year progresses. Also consider the fact that home prices are now starting to fall. Foreclosure that were avoidable in rising markets by selling one's home can not be avoided as soon as someone is underwater.

Chron.Com is reporting Foreclosure troubles ahead.

The average rate on a 30-year, fixed-rate loan in May was 6.60 percent compared with 5.63 percent on a one-year ARM, according to Freddie Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate.

This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the bankers association. Monthly payments will leap too, many beyond what homeowners can afford.

The average rate on a 30-year, fixed-rate loan in May was 6.60 percent compared with 5.63 percent on a one-year ARM, according to Freddie Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate.

This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the bankers association. Monthly payments will leap too, many beyond what homeowners can afford.

Last year, foreclosures hit a historical low nationwide at about 50,000. But that number has more than doubled since then, according to Foreclosure.com.

And delinquency rates appear to be rising as well. While delinquency rates fell for most types of loans from the fourth quarter of 2005 because of a stronger economy, delinquencies for both prime and subprime ARM loans increased year-over-year in the first quarter, according to statistics from the Mortgage Bankers Association.

But as the housing market slows, experts expect foreclosures to skyrocket in those areas that have experienced the highest appreciation rate � like California, Florida, Virginia and Washington, D.C.

"There is a direct correlation between foreclosure sales and market activity," said James Gaines, a research economist at The Real Estate Center at Texas A&M University. "If the rate of appreciation is not there, then there is an increase in foreclosure sales."

Gaines pointed out that although California's default notices are rising by the thousands, actual foreclosure sales remain in the hundreds. Because of California's still-active housing market, homeowners there can sell their properties before going into foreclosure.

On the flip side, in less active markets like Texas and Georgia, homeowners can't find a buyer in time and are forced into foreclosure.

But as the housing cools in these once hot markets at the same time that ARMs reset, many homeowners may be unable to dump their properties before going into foreclosure, Gaines predicts.

The above article is the second one that I read today citing $1 trillion in rate resets by 2007. Both articles attributed the number to the Mortgage Bankers Association. I do not know where the $2.5 trillion cited by the Herald Tribune comes from. The difference between those numbers is huge but regardless we are already seeing the expected rise in foreclosures.

In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate. Do the math. Someone on a three year ARM from 2003 or 2004 on 3.76 rate that adjusts for the first time in 2006-2007 is going to see their mortgage interest payments jump by 74%. For some, even a 20% hike is going to be a disaster.

May Home Sales Numbers were released today.

U.S. MAY NEW HOME SALES UP 4.6% TO 1.23 million VS 1.15 million EXPECTED
U.S. NEW HOME SALES down 5.9% in past 12 months
U.S. April NEW HOME SALES revised lower to 1.180 million

Calculated Risk has a very nice set of charts on the above numbers.

One must use caution in interpreting the above sales data. The data does not include cancellations yet cancellations have been skyrocketing at many homebuilders lately. In addition we have been seeing housing inventory numbers go up month after month. More and more people �want out�. It simply is not possible at these prices. This will just add to price pressures down the line. For now, local economies are still being supported by all this construction activity but when it ends, the jobs will go with it. Add it all up and talk of a "soft landing" is pure nonsense. Let's see where we land first, and then we can talk about how soft it was.

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

Gettin' Hitched

Posts will resume around the 4th of July.

Update 07.03: Thanks for all the wonderful comments!

The wedding went off better than I ever could have expected. The photo below is by our friend Frank, who also has a great shot of the tree Karen and I are getting married under, in the courtyard of the Smart Museum on the University of Chicago campus.



And here's a cool shot of Karen and her Dad walking down the aisle, by another friend, Don.

Martin County to Lennar: Fix the problems, or get out and don't come back

The Palm Beach post is reporting Martin officials rap Lennar over homeowner gripes.

STUART � After weeks of hearing homeowners complain about mold, leaky roofing tiles and shoddy workmanship, Martin County officials have had enough.

The county has told a national home builder to prove its homes meet county standards, fix the problems, or get out and don't come back.

"These horror stories just keep getting worse," said County Commission Chairman Susan Valliere after residents complained Tuesday of problems with homes built by the Miami-based Lennar Corp. "This is really getting upsetting."

Mike Morgan, a Stuart real estate agent, has been complaining to the commission for weeks about faulty electrical wiring, stucco wall and roof problems caused by shoddy building on Lennar's homes in the Martin's Crossing subdivision on Kanner Highway. On Tuesday, Morgan brought the five homeowners to the commission meeting and said he plans to bring 20 to the next meeting to voice their complaints.

"It's been a nightmare," said Rick Scimeca, who said his house has had problems with leaking roof tiles. Scimeca also said his neighbor had a plumbing leak that caused mildew inside her walls. "It's a brand-new house. These things shouldn't happen."

County Building Official Larry Massing met with Lennar officials on Tuesday about the homeowners allegations. Massing said he is requiring the company to inspect the homes with him present and to send him all its reports on roofing tiles, stucco and electrical wiring used in the homes. The county will require Lennar to do more inspections later.

"If I feel Lennar is not doing everything necessary, you'll be the first to know," Massing told the commissioners.

Mark Sustana, general counsel for Lennar, said the company has agreed to have Massing, an inspector hired by Lennar and a private inspector check the electrical wiring on several randomly selected homes at the same time on Friday.

But commissioners were so upset by the homeowner complaints that they suggested going further, such as banning Lennar from building new homes in the county.

"If their workmanship is shoddy, maybe we shouldn't allow them to work here," said Commissioner Michael DiTerlizzi.

Commissioner Sarah Heard also suggested shutting down Lennar's Martin County projects.

"I've heard enough," Heard said. "I think we should suspend operations out there and have them solely focus on bringing houses up to code."

Commissioner Lee Weberman said that if it turns out Lennar's workmanship is poor, he would support revoking its license to do business in the county.

By the way, I briefly spoke with Mike Morgan today and the intent is to take this forward, county by county. If that happens Lennar's problems have just begun.

With thanks to Highfructose on the Motley Fool here are Lennar's cash positions for the Febuary quarter endings from 2002-2006

Quarters ending February; cash in 000

2006 112,030
2005 509,068
2004 545,522
2003 500,227
2002 483,573

Got a little cash flow problem have we?
Sure seems like it to me.
I suspect this is not just a Lennar problem either.
All along many homebuilders have been meeting earnings targets by buying back shares at bloated prices. If cash flow problems have finally started to matter, then look for that "buyback support" to drop dramatically.

In the interest of fair disclosure I am not currently short Lennar or for that matter any other homebuilder. For technical reasons I played for a bounce that did not happen and have watched all of them just keep on sinking. Besides I was mainly short WCI anyway (not Lennar). My interest is in fair reporting and if Lennar wants to answer some questions and give me their point of view I will post it. Of course I reserve the right to buy or short Lennar at any time but I do not want anyone to think I am picking on Lennar or any other homebuilder because I am an "evil short".

Let me say however that "shorts" or "bad reporting" are not Lennar's big problem. The problem with homebuilders in general was overexpansion and greed and poor quality. It happens every cycle. Builders build because that's what they do.

They will keep building until they go broke. Many continued to buy land at insane prices (or options on land at insane prices), and are now struggling to get rid of it. A private company can close shop and scale down, but a public company builds until it goes bust (with the CEO cashing out stock options all the way down).

Given that none of the public companies pay dividends there was never any reason other than the greater fool theory to own any of them anyway. Seriously think about that. In fact, think about that in general as opposed to a statement about homebuilders. After the final crash takes place the companies remaining will probably all be paying huge dividends. That will be the time to look for growth, not now.

In the meantime please consider this silly question: Are Sickly Newspaper Revenues Behind Attacks On The Real Estate Industry?

Newspaper advertising doesn't work, according to many Realtors, so they've been putting their advertising dollars elsewhere, creating a slow drain on the revenues of newspapers across the country. Could falling revenues be behind recent large-scale newspaper editorial attacks on the real estate industry?

"From personal experience, I never get phone calls from classified ads on real estate for sale. It is a waste of money so I quit it," says Realtor Bill Barnes, Lake Havasu City, Arizona. "What works is an MLS listing. And 85 percent of homes sell through Realtors. It's free to a potential buyer, and buyers want to have an experienced person handle their transaction."

In recent months, the number of negative stories against the real estate industry has been staggering. From real estate commissions to the alleged real estate bubble to high home prices, the media has steadily given residential real estate, its practitioners, and its investors a hard time.

What's the reason behind the negative focus on residential real estate? Some believe it could be a power play to get more agents and/or for-sale-by-owners to buy ads since many former customers say they no longer buy ads, and they realize newspapers aren't their friends.

Recently, Tribune Company (owner of The Los Angeles Times and Chicago Tribune, among others) acquired ForSaleByOwner.com, causing many agents to assume that newspapers are drawing their line in the sand -- against agents. Tribune is also part of a cartel that owns Classified Ventures which recently purchased HomeGain, a company that "matches" homebuyers and sellers with agents willing to compete using their commissions.

Says Denver, Colorado, broker Judith Clausen, "I stopped advertising in newspapers about two years ago. I figured they were after us."

If ever I saw a bunch of self serving, bury your head in the sand, collection of total nonsense that was it.

It make me want to scream "Look you morons just what is it you do not understand about this housing bubble? Real wages are falling, prices relative to wages are four to five standard deviations above the norm (a good indication of a bubble), and you complain about reporting that for the most part has been favorable. Now please crawl back under your rock, listen to your top cheerleader Lereah (who will be totally disgraced before all is said and done), ignore the quality problems at Lennar and other places as if they do not exist, and go on pretending you are an ostrich".

That's what I want to say but the ostriches have their collective heads so deeply buried in the sand they could not possibly hear me no matter how loudly I scream.

The Chicago Tribune is part of a "cartel" against the industry. What a bunch of total nonsense. A note to ostriches everywhere: Your misery has just started. Wait until the MLS system collapses which it should and will do because of market forces, not because of an evil cartel.

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

Prominent homebuilders failing to pay subcontractors

The Arizona Republic is reporting Firm is failing to pay its carpenters. A closer look at the article shows that subcontractors are not paying workers because the subs are not being paid by the homebuilders. Let's take a look:

More than 100 workers at a Scottsdale construction framing company haven't been paid in several weeks, and that has Latino community advocates concerned that some employers are taking advantage of workers.

Veemac Framing Corp., a subcontractor for some of the Valley's top home builders, acknowledged that it has not paid the workers, who are owed three to five weeks of back pay.

Company officials blamed a financial dispute with two home builders and a third company that is hindering its cash flow. Veemac said it would pay the workers as soon as the dispute is worked out.

"We don't want to see this become contagious," said Alfredo Guti�rrez, a talk show host at Radio Campesina and former state legislator, who has taken up the workers' cause. "If you're in business, you're in business. Your first obligation is to pay your workers."

John Vergopia, Veemac's chairman and chief executive officer, referred questions to a company attorney.

The attorney, Greg Eagleburger, said the company plans to pay the workers as soon as it negotiates payment from two of its customers, U.S. Home and Richmond American Homes.

"It's only a delay," he said. "As soon as we are paid by our customers, we will continue to pay our workers, who we feel are the best."

The firm does subcontracting for some of the Valley's largest home builders, including Toll Brothers and U.S. Home, which is owned by Lennar Corp.

Several Veemac workers said they don't plan to return to the company and just want their money.

"We worked for promises," said Arturo Botello, a foreman who said he is owed five weeks of back pay. "They kept telling us they would pay us, so we kept showing up."

Others said they were unsure whether they would continue working, although most said they had stopped working for the company two weeks ago.

Botello added that he was not reimbursed for gas he put in company trucks nor for water and ice he bought his crews.

Under state law, employers are required to pay employees at least twice a month. But the State Labor Department has no ability to levy penalties if employers don't comply. It can only refer cases to prosecuting agencies.

Well how about that? It seems a subsidiary of Lennar is not paying its bills. If this is a quality or performance issue then it reflects on the quality of Lennar homes. On the other hand if this is a cash flow issue it speaks for bigger issues with the homebuilder itself. Without knowing how U.S. Home is structured it is entirely possible that Lennar is financially sheltered from responsibility but if they play that card, what would it say for the integrity of Lennar? With all of Lennar's other problems, including the lawsuit against Mike Morgan, I am somewhat surprised they would let something like this get out of hand.

The other company mentioned in the Arizona Republic article was Richmond American Homes.

MDC, whose subsidiaries build homes under the name "Richmond American Homes," is one of the largest homebuilders in the United States. The Company also provides mortgage financing, primarily for MDC's homebuyers, through its wholly owned subsidiary HomeAmerican Mortgage Corporation. MDC is a major regional homebuilder with a significant presence in some of the country's best housing markets. The Company is the largest homebuilder in Colorado; among the top five homebuilders in Northern Virginia, suburban Maryland, Jacksonville, Phoenix, Tucson, Las Vegas and Salt Lake City; and among the top ten homebuilders in Northern California and Southern California. MDC also has established operating divisions in West Florida, Philadelphia/Delaware Valley, Chicago, Dallas/Fort Worth and Houston.

Looking at that profile we see Richmond American Homes is the largest homebuilder is the biggest homebuilder in the state with the most foreclosures (Colorado), and we see extensive operations in many other bubble areas.

I have two questions for MDC and Lennar:

1. Are you having a little cash flow problem?
2. How much did you overpay for land or options in Phoenix, Las Vegas, and California?

By the way, is there such a thing as a "little cash flow problem"?

I will be on Charles Goyette Show 1100am KFNX News Talk Radio tomorrow at 6:00 AM (Pacific Time)to talk about various nonpayment issues such as this one, as well as Litigation Nightmare & Heartbreak Hotel.

You may also wish to tune into Wednesday's podcast on HoweStreet about Heartbreak Hotel, gold, the stock market, international housing and other things.

Jack McCabe of McCabe Research & Consulting will be on CNBC this Thursday evening at 8:00 PM Eastern to discuss housing in Florida. It seems things are starting to get quite interesting.

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

Litigation Nightmare & Heartbreak Hotel

I recently called Jack McCabe of McCabe Research & Consulting for an update on Florida housing. McCabe told me he is now bracing for a "Litigation Nightmare" over the next several years in the wake of the housing bust. Following are some of the items we discussed.

Litigation Items

1. Buyers suing developers for non-performance
2. Developers suing speculators for flipping properties in violation of contracts
3. Subcontractors suing developers for non-payment
4. Subcontractors suing general contractors for non-payment
5. Class action lawsuits against single family homebuilders and condo developers for faulty roofing, HVAC, electrical, and plumbing systems
6. Lawsuits against inspectors for not catching code violations
7. Condo boards and individual homeowners suing developers for shoddy work
8. Lawsuits against appraisers for inflated values
9. Lawsuits against banks when project fundings are halted
10. Lawsuits over completed condo units being substantially different in size, interior finishings, and quality than how they were represented pre-construction
11. Lawsuits by anyone and everyone against anyone and everyone over various fraud allegations
12. Of course we can�t forget countersuits by anyone and everyone against anyone and everyone over anything and everything

I think those 12 points pretty much sums it all up.

McCabe is telling me that speculators have totally vanished from the market which of course means there has been an enormous shift in the supply vs. demand ratio. To make matters worse, there are �approximately 25,000 condo units currently under construction in Miami-Dade County alone. Another 25,000 condo units have received building permits and about 50,000 more units have been announced.�

Financing has now dried up, but those 25,000 units under construction will likely be completed along with 75%-80% of the units with valid building permits. The vast majority of unapproved but announced projects will be cancelled. Even so, �the completion of 75,000 units or so could make for a 5-10 year supply of condos at a normal sales rates, and sales rates are far below normal.�

In addition, McCabe is expecting to see a "sharp increase" in prosecutions for mortgage and real estate fraud as well. Indeed bubbles have a way of exposing all kinds of fraud that people happily ignored as long as prices were rising. When the party ends, the lawsuits begin (and you can quote me on that one). We saw the same thing when the dot-com bubble burst. We will see it again over housing. �We are going to find a tremendous amount of abuses associated with this boom and the fallout will not be in the millions of dollars either. It will be in the billions�.

It's Not Just Florida

�What is happening in Florida, can and will happen in other markets such as Washington, DC, Las Vegas, San Diego, Phoenix and many other bubble markets with rising inventory.� said McCabe.

I am sure of that and I am sure McCabe is correct about the "Litigation Nightmare" as well.

Foreclosures Jump

In another nightmare of sorts, the Associated Press is reporting Foreclosures May Jump As ARMs Reset.

As more hybrid adjustable rate mortgages adjust upward and housing prices dip, many Americans can't refinance out of this squeeze. They are finding themselves trapped in too-high monthly payments, and some face foreclosures.

In the last several years, millions of Americans took equity out of their houses and refinanced when interest rates were at historical lows and housing prices were at record highs.

Many of them chose to refinance into hybrid ARMs that lenders were aggressively pushing. ARMs, which featured a low introductory interest rate that resets upward after a set period of time, were easier to qualify for than traditional fixed-rate loans.

ARMs are now starting to fall by the wayside as the difference in interest rates narrows. The average rate on a 30-year fixed rate loan in May was 6.60 percent compared to 5.63 percent on a one-year ARM, according to Freddie Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate.

This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the MBA. Monthly payments will leap too, many beyond what homeowners can afford.

"ARMs are a ticking time bomb," said Brad Geisen, president and chief executive of property tracker Foreclosure.com. "Through 2006 and 2007, I'm pretty sure we'll see a high volume of foreclosures."

Last year, foreclosures hit a historical low nationwide at about 50,000. But that number has more than doubled since then, according to Foreclosure.com.

And delinquency rates appear to be rising, as well. While delinquency rates fell for most types of loans from the fourth quarter of 2005 because of a stronger economy, delinquencies for both prime and subprime ARM loans increased year-over-year in the first quarter, according to the MBA.

A Mish Sing Along

Notice that the ARM time bomb is just now going off. The explosion will be over three times as big in 2007 with over one trillion dollars in loans resetting to much higher rates. Yet merrily we roll along with more and more rate hikes. On that note please sing along with Ben.



NAHB Sales Data

The National Association of Homebuilders released new data for 2006 on June 19th. Following are two charts from that release with colored highlights in red added by me.





Those charts show we are clearly rolling downhill as opposed to "merrily o'er the deep blue sea", but don't blame me I am just singing along with Bernanke.

Homebuilder Sentiment

Speaking on homebuilder sentiment NAHB President David Pressly and homebuilder from Statesville, North Carolina had this to say: �Looking at today�s numbers, it�s important to keep one thing in perspective. The HMI is a measure of builder sentiment � and attitudes may vary by a greater degree than actual market activity.�

Clearly David Pressly is singing a different tune.
Sales are falling off a cliff and traffic is back to 1990 levels. Talk about Denial.
Hmmm. That title sounds right but let's face it. Those lyrics totally suck.

With traffic crashing, inventories soaring, holding costs jumping, Bernanke hiking, rates resetting, and an economy slowing, it is very unlikely that stubborn sellers can hold on for their price much longer. Indeed some unfortunate KBH renters have had to return their "hotel keys" much sooner than expected. We now switch from David Pressly to Elvis Presley. What a difference in quality.

Heartbreak Hotel

The Denver Post is reporting Heartbreak along Mockingbird Lane .

Margie Ibarra worried about paying $160,500 for half a duplex. She knew she was buying it with no money down and a pair of home loans, one carrying a double-digit interest rate.

But she dreamed of spending her life on a peaceful street at the edge of Brighton - and of owning 710 Mockingbird Lane free and clear when she retired.

Instead, two years after she moved in, she lost the first home she ever bought to a foreclosure.

"I took the keys with me. I made sure the door was locked and the windows were shut. I cried when I was leaving. I loved my little townhouse," she said.

These are troubled times on Mockingbird Lane.

Mockingbird Lane curls beside a floodplain on the eastern bank of the South Platte River, land Brighton initially zoned for manufactured housing. Then a national builder, KB Home, showed up with a grander vision in the late 1990s: a community of 556 affordable homes along streets named for songbirds and waterfowl.

On Mockingbird Lane, many who moved into homes designed for first-time buyers put little or no money down. KB offered easy financing. So did other lenders.

Jim Spray, a Colorado mortgage broker who battled predatory lending practices, and his wife, Linda, a Realtor, reviewed foreclosures on Mockingbird Lane and Street at the request of The Denver Post.

They say they saw minimal down payments, and also refinancing loans, that left homeowners owing more than their homes were worth.

At foreclosure, some buyers owed $20,000 to $30,000 more than their original purchase price. "That's a killer," Linda Spray said.

Jim Spray hopes the new law will help.

But he worries what will happen when existing loans, especially "these 80-20s with no money down," kick into their adjustable- rate phases.

"We could well see another spike in foreclosures," he said. "It's nowhere near over."

In six years, lenders have foreclosed on 59 homes at Welby Hill, a condominium complex near Thornton, and 50 homes at View Point Condominiums in Thornton. On Mockingbird Lane and nearby streets where foreclosures are rampant, the homes are duplexes.

Since 1995, Adams County foreclosures have grown nearly eightfold, reaching a record 3,281 last year. This year the county is on pace to exceed 4,000.

Every one lands on the desk of Jeannie Reeser, the Adams County public trustee, who spends her days signing foreclosure papers.

"I want to be No. 1 in something different," she said. "There's a tragedy in every one of these files. I've had grown men cry on my shoulders, and there's nothing I can do."

On Mockingbird Lane and Mockingbird Street, records of 23 foreclosures - all of which were half a duplex - around a two- block loop show Ibarra's financing terms were not so unusual.

"I ended up getting a divorce, and I couldn't afford my house anymore," said Danielle Williams, who had two boys, a girl and no income after her husband moved out. She lost her home at 785 Mockingbird St. one year after they bought it.

Marilyn Sisti, the first of two homeowners foreclosed at 727 Mockingbird St., said she had a high-interest mortgage loan and lost her job. Her variable interest rate started at 10.4 percent and could have surpassed 16 percent.

Ernesto Rodriguez, who lost the house at 722 Mockingbird Lane, said he simply couldn't keep up with $1,400-a-month payments. He realized, too late, what a high price he paid: $161,900 for a house auctioned at $130,000 and later sold for $145,000.

KB Home representatives talked of a fishing lake "and a little swim beach," Langan recalled. They promised to fix any problems she found. They made borrowing easy. The builder had its own mortgage branch.

"So you don't even have to find a lender," she said they told her. "We'll take care of that."

She bought half a duplex in 2000 for $136,000. She said she put $6,000 down for the home, at 801 Mockingbird St., and borrowed the rest from KB Home's mortgage arm, which later sold the loan.

From the day she moved in, she said, her brand-new home had problems. Windows leaked. A drain spout laid a sheet of ice on her sidewalk. In her bedroom, she could hear the couple on the other side using the bathroom. They told her they could hear her snore.

"It was like living together," she said. "I could hear more than I ever wanted to hear."

Tom Dory, another resident who may sell, shares their concern.

"It's not going to be easy to dump," he said of the home he bought six years ago. "My son's a real estate agent. He even told me that. These things don't move very well."

The big question now on my mind is this: Is the above situation more like Heartbreak Hotel or Hotel California? I am discarding Mockingbird Hill for obvious reasons. Before voting please consider the following.

In Hotel California "You can check out any time you like but you can never leave".
In Hotel KBH on Mockingbird Lane "You can check in any time you like but you can never stay".

While singing along with Big Ben's Band please cast your ballots.
Write-Ins are allowed.

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

Evolving Skyline

Found this image over at Chicagoist, showing Chicago with buildings now under construction or proposed inserted into the city's skyline. Many more images and views are in the Chicago Model Thread at SkyscraperCity.



Makes me think that this view won't ever really happen, because even if the proposed buildings are built, there'll probably be more towers under construction with their tower cranes dotting the skyline. Especially in times of progress, the city is never complete, it's always evolving.

Home Builder Reviews

It is hard to get a descriptive title into a short line. I am not giving home builder reviews, but rather asking for them. More specifically, Mike Morgan at MorganFlorida is asking for them. The following is from Morgan.

Our new website was launched today: Builder Reviews

We will be adding to this site �daily.� Right now, my two assistants and I are overwhelmed with the number of responses we have received. I need a few days to catch up, but watch this site for up to the minute information about Lennar homes throughout the United States.

Last week we were contacted by a national class action litigation firm. Yesterday we were contacted by an insurance industry executive. The insurance industry executive found us. That�s six months ahead of schedule for my plans. Our goal is to stop the builders that are getting away with selling defective homes. The only ones with the resources needed to fight the builders, are the insurance executives. You�re going to see some very amazing things over the next two years.

What will a national builder say on a conference call, when the insurance industry refuses to insure their homes?

We�re moving forward with plans to take a Lennar home apart. We will be using an internationally recognized forensic engineering company, and every phase of the process will be documented by an investigative reporter for national broadcast. Stay tuned.

Mike

Here is a snip from Morgan's new website.

Southern California � I bought a home from Lennar at the end of October 2005. Since then it has been a living hell. Multiple water leaks and months to repair because they are too busy building other homes next door. They used green lumber that results in severely bowed walls, ceilings, doorways. So bad they moved me out for 2 weeks (me, wife, and 3 little girls-- oh yea 3800 in food and lodging that I had to front) they could try and fix it. When they opened the walls up to try and square things up they realized the entire house was sub standard work with studs that were split, twisted, bashed, splintered, uneven, moldy, and even broken in truss areas. They rushed to cover things back up as fast as possible, lied to my face about the repair to the framework. They have damaged my front yard concrete work, damaged my wood floors, terrible job even on the 2nd and 3rd attempts to correct. Now their answer is to move me out again, and again, until things are ok with me. Nearly 8 months later and I have yet to enjoy a finished product. Windows don't close right, my garage door literally crunched like a beer can under it's own operation, I have cracks in the foundation, stucco cracks like spider webs, etc. I am sending the photos I have, they are not much but surely capture the "un-workman like" fashion that these corner cutters produced. (Received from Lennar Home Owner - Posted June 20, 2006)

Mike Morgan encourages you to send your Lennar (and other homebuilder) experiences both good and bad to Reviews@BuilderReviews.org. Note: this post from Morgan is the perfect lead in to something I have been working on with Jack McCabe of McCabe Research & Consulting on litigations. Class actions lawsuits are just the beginning of a "Litigation Nightmare". Please stay tuned.

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

Handrail Memorial

A new plan for the WTC Memorial has been unveiled, according to The New York Times. This plan is the first of probably many rounds of value engineering, in this case spurred by a cost estimate of approximately $1 billion for the memorial. This design comes in at about half that, though Tropolism points out the twisted arithmetic.

One of the biggest changes to the design is technically one of the smallest. Confused? Take a look at these images:


L-R: Before and After

The only apparent change is that the floating handrail has become a solid cap for the parapet wall overlooking the waterfalls and voids below. But if we take a closer look, we see the function of this cap:



Yes, now the names of the dead that were previously etched into the walls below grade, adjacent to the waterfalls, are inscribed into this continuous railing atop the parapet wall. To me this does a few (not good) things: 1. It diminishes the role of the subterranean spaces to a visitor's center, galleries, and places for respite; 2. It diminishes the meaning of presenting the names of the dead via a "two birds with one stone" gesture; and 3. It makes the names an oversight for many visitors who will go to the edge to lean over and look at the waterfalls below (note how they didn't even change the woman in the rendering to reflect the functional change of this piece; she's not looking at the names, but the water below).

Driven mainly by construction exec. Frank Sciame, the full report on the redesign is available in PDF form on LMDC's web page.

A Critic and a Chemist

Who knew?



Just kidding. Actually, it's B.Kamins Chemist, as in Ben Kamins. Looks like Blair Kamin doesn't lead a double life as a skin-care guru after all.

Flationed Out

I have been pondering the word "stagflation". Judging from the stock boards I post on, a vast majority seems to think we are in it or headed for it. What exactly does stagflation mean anyway?

Let's take a look at two definitions and a comment from dictionary.com.

1. "Sluggish economic growth coupled with a high rate of inflation and unemployment."
2. "A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation."
3. "Investopedia Commentary: Stagflation occurs when the economy isn't growing but prices are - not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., the effects of inflation were considerably made worse because of this stagnation."

From above context, stagflation seems to be based on rising prices (instead of an expansion of credit), and furthermore the term seems to imply that rising prices are bad only in context of the "stag".

An Austrian View of "Flation"

Inflation - Expansion of money and credit
Deflation - Contraction of money and credit
Disinflation - Expansion of money and credit but at a declining pace
Hyperinflation - Rapid rise in inflation accompanied by a complete loss of confidence in currency

In Austrian terms I find little use for such a term.
Where exactly does it fit in?

Several days ago I sent an article that called for "stagflation" to a good friend of mine who posts under the name "Trotsky" on Kitco. We had not discussed that term before but knowing his Austrian leanings, his answer did not surprise me at all. It is as follows. Note: he does not capitalize his sentences and this is a verbatim quote.

what immediately comes to mind is that the term was coined with a Keynesian mindset - as if it were a new phenomenon that sort of 'just happens' without a sensible explanation at hand. at the time of the 1970's K-summer economists had been conditioned to associate economic downturns with deflation - the inflationary recession of the early 1920's was long forgotten. when suddenly recession coincided with the effects of the concurrent inflationary monetary policy becoming highly visible something happened that wasn't supposed to happen. so they thought it required a new term - 'stagflation' equaling recession cum inflation, the supposedly 'unnatural' state of affairs. obviously once you define inflation correctly (expansion of the fiat money supply) such a term makes no sense. especially considering that the Keynesian (as well as monetarist i might add) recipe for 'combating economic downturns' consists of deficit spending cum monetization, i.e. printing lots of money, as a matter of course!. perversely, application of this recipe leads only to bigger failures (proven by EVERY major application of it, including imo the most recent one, which only created yet another surge in malinvestment, namely the housing bubble).

the only reason why at times the inflation seemingly 'works' and at other times doesn't, is that the initial conditions, as defined by the K-seasons vary. imo there are two aspects that play a role - the state of the pool of real funding (if it is shrinking, no amount of monetary pumping can even create the illusion of a new boom - that's Japan from '89 onward) and the size of the private sector debt extant at the conclusion of the last boom.

note that the term 'boom' is actually a negative term, or should be. during the boom, which is itself a result of lax monetary policy , capital is malinvested and the economy's production structure damaged/distorted. the bust is the economy's attempt at RECTIFYING the mistakes of the boom by liquidating malinvested capital and redirecting those resources to their optimal use (usually that entails the realization that assumptions about future demand were simply wrong, as they are based on the illusion created by the credit expansion).

anyway, the rarer condition of deflation as we understand it in the context of the fiat system is simply a credit contraction so massive that it overwhelms the countervailing attempts of the CB to inflate. one must not forget the credit was largely created from thin air - in a deflation it simply goes back there.

in any event, ultimately 'stagflation' does not describe anything really...even though we know what it is meant to describe. simply put, it's the type of bust where the usual inflationary policy is noticed by everybody because prices and wages start to rise everywhere (because the debtberg is still able to expand further).

An Austrian Debate

Actually I think the origin is probably far simpler. Someone wanted to talk about "stagnation" and accidentally said "stagflation" or perhaps said "stagflation" purposely trying to be cute. In any case, the word stuck but as Trotsky pointed out, the word makes no real sense from an Austrian point of view, yet it is only from the Austrian point of view that I wish to debate anyone on inflation.

That last sentence is key and it has caused a lot of frustration recently. In addition, I keep responding to the same questions over and over again from emails and replies to blogs, many from people that do not know (or refuse to accept) what inflation is. In other cases people are just now finding my blog and just happen to be asking a question I have addressed elsewhere a dozen times. Here are some of the typical questions:

"Mish doesn't the rise in the price of oil prove you are wrong?"
"Mish you still haven't explained how we can have a falling US$ and deflation"
"Mish the US is not Japan"
"Mish how is your favorable view of gold consistent with deflation"?
"Mish isn't it about time for you to throw in the towel?"
"Mish inflation is our past present and future"
and so on and so forth with no one adding anything to the debate.

One of the problems I face is that people want to be a part of the debate, even though they refuse to accept the terms of the debate. Austrians in general would accept the "Flation" definitions above (or something reasonably close) others do not. Unless parties agree on definitions, however, there can be no meaningful debate. People keep telling me I am wrong when they do not agree to the terms of the debate.

Following are three people whom I believe do agree with those "Flation" terms as defined above.

1. Marc Faber
2. Steve Saville
3. Robert Blumen

Note that I said they agree with those definitions. All of them disagree with my position. Taking the other side of a debate with Faber is dangerous, but we agree on far more things than we disagree about. Faber also admits deflation is possible (even if unlikely). Most inflationists will not even grant that.

Anyway I want to thank Robert Blumen for his piece MUST BERNANKE CHOOSE DEFLATION? simply because he not only agrees with the terms of debate but he also made a serious effort to understand what I am saying. Hardly anyone else has bothered to try. If you are new to this discussion not only do I ask you to read Blumen's article but to click on all the embedded links in his post and read those too. Unless you do that, you can not understand what I am saying or why.

Blumen disagrees with my position but there is nothing wrong with that. Should unanimous opinion ever form on something economically related I confidently predict we would all be wrong and probably sooner rather than later.

Questions Answered

I will reply later to his rebuttal, but for now I want to address some of those questions above.

Q: "Mish doesn't the dramatic rise in the price of oil prove you are wrong?"
A: No, the price of oil could be rising for many reasons and perhaps much of that price is related to peak oil, dwindling supplies, and geopolitical concerns rather than directly related to monetary expansion. One can not know for sure what causes any price increase and that is a key reason why attempting to define inflation by looking at prices is dead wrong. It simply can not be done. At any rate, prices rise and fall for many reasons so one simply can not look at prices to decide if there is inflation. My views on deflation are forward looking and in response to an expected credit collapse in housing. For now I freely admit there is inflation as credit and money supply are still expanding, but note that it is possible for oil prices to keep rising, perhaps dramatically, even during deflation on account of peak oil.

Q: "Mish you still haven't explained how we can have a falling US$ and deflation"
A: I have not explained how because a falling dollar is not part of the equation. Inflation is an expansion on money and credit. Rest assured there was inflation when the US$ index hit an all time of 120. Rest assured the US dollar can sink even in a contraction of money and credit. I am not saying the dollar will fall I am saying it could fall. More than likely the dollar will at hold its own. If it falls I have many reasons why it is unlikely to crash (any time soon). For starters it has already collapsed in just a few short years. Everyone thought the Euro was trash a few short years ago, now everyone seems to be a euro bull. That said, I do think the dollar could crash much later on down the road after debt is wiped clean. A dollar crash will probably occur after everyone gives up on it. In the meantime I expect savings will rise and in a worldwide economic debacle there will be safety in US treasuries. Note too that many other fiat currencies look just as bad from where we are now. Ideas about hyperinflation with a housing bust and loss of jobs and a worldwide economic bust seem rather silly to me. You are free to disagree of course. For a more complete discussion on the US dollar please consider Is the US dollar toast?

Q: "Mish the US is not Japan and besides Japan really did not have deflation anyway"
A: I never said the U.S. was Japan. And yes, there are big differences. In fact, I have outlined many of those differences between the Japan and the U.S. Some factors, such as demographics, favor the U.S. for avoiding deflation versus Japan. Other factors, most notably consumer debt, are a bigger problem here. Even though we are not Japan, I expect the deflation experience here will be quite similar. Part of that was addressed in Inflation: What the Heck Is It? And as for those who proclaim "Japan is a nation of savers" while the U.S. is not: That fact will actually make the snapback to the mean all the more vicious and the deflation cycle that much worse. The U.S. was once a nation of savers, and will likely be again.

Q: "Mish how is your favorable view of gold consistent with deflation"?
A: This question is really simple. If one view gold as money it will be hoarded in deflationary times. Housing and equities will both plunge relative to gold even if gold just manages to stay flat against the US dollar value. That is the key idea. I believe that gold will more than hold its own but there are no guarantees.

Q: "Mish isn't it about time for you to throw in the deflation towel?"
A: On the verge of victory? No chance. One of the conditions required for my deflation scenario to unfold was a housing bust, a loss of jobs and income, and rising bankruptcies. Housing is just starting to bust and eventually that will affect jobs and income. The scenario is just now finally starting to play out.

Q: "Mish inflation is our past present and future"
A: Spoken like a person that has not studied history. Yes 3/4th of the time those believing in inflation will be correct. K-Cycles are long cycles, lasting up to 80 years in length. By the time a deflationary winter is upon us, most people have known nothing but inflation all their lives. That is why no one sees deflation as a possibility. Memories of 1930 are long, long gone. Note too that length makes timing it a problem. In a 60-80 year cycle pinpointing the start is not that easy to do. If housing is the "bubble of last resort" as I believe it to be, we can be in a world of hurt over the next seven years or more.

Those questions and similar ones keep coming up again and again and again.
I thought I would address them all in one place and of course everyone is free to disagree with my conclusions. That said, one can not have a rational discussion unless one agrees to definitions and I choose to accept Austrian monetary definitions. In that regard, stagflation is simply not the answer to the "Flation" debate. It has too much to do with "stag" and too little to do with �flation� from my point of view.

Mish Addendum:
I started writing the above last Thursday. No sooner do I finish writing the article, (but right before posting it) a good friend of mine going by the name "Chispas" on Silicon Investor sent me a link to a Forbes article entitled It's Not Stagflation...

What are they doing reading my mind? Or can it be vice versa? Regardless, let's briefly consider If It's Not Stagflation...

It's not stagflation, but no one can seem to agree on the new term for an economy in which growth is slowing while inflation is rising, such as it is today.

Could it be "fearflation," a term that means it's all just fear rather than actual inflation that's driving the current economy? Maybe it's "bubblenomics," as the U.S. seems to be stuck in a bubble of higher prices, growing unemployment, high housing prices and a falling dollar. Then again, it could be "transflation," the cycle of high gas prices leading to higher inflation. Or how about "moderflation," a slowing down accompanied by inflation?

Of course if Bernanke is to be believed, it's not inflation we need to fear but expectations of inflation. So maybe we should describe the current economy as "Fedflation."

Eleven terms were submitted to Forbes to describe the current economy. Click on the above link to see them. YES I agree with Forbes that it's NOT stagflation (at least someone agrees with me) but NO we do not need another term for it. With that thought in mind I changed the title of this article from "Stagflation Anyone?" to the above title because quite frankly I am "Flationed Out".

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

Beazer Teaser

Here it is folks: The Beazer Teaser.



They call it the "Big Red" sale because you will be big in the red within a year after buying. Check out the teaser rates on these loans.



Beazer does not even have the decency to hold that rate for three years. Heck they did not even hold it for two years.

Anyone that needs 1.875 to qualify for a loan is a sucker who is probably going to regret buying in one short year. For that matter anyone that can not afford 6% probably has no business buying.

These kinds of programs are one of the reasons why foreclosure rates and bankruptcies are sky rocketing.

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

Monday, Monday

My weekly page update:

Seewurfel in Zurich, Switzerland by Camenzid Evolution.

The updated book feature is The Visual Display of Quantitative Information, by Edward R. Tufte.

Some unrelated links for your enjoyment:

Lift, the London International Festival of Theatre
"a progressive international theatre festival engaging audiences and participants with the work of international and UK artists and which raises consciousness of contemporary issues relevant to our daily lives. Lift is a biennial festival supported with a series of year-round trailblazing events," its latest and current one being The Lift New Parliament, "a portable and transportable structure with a programme of events and activities curated by an international team of artists and producers who will be engaging with local communities on the issues that matter to us all in the 21st century."

Portland Art and Portland Architecture
Two great resources on everybody's favorite progressive West Coast city.

Blair Kamin visits Minneapolis and writes about three new buildings by Jean Nouvel, Cesar Pelli, and Michael Graves.