From David Leonhardt at the NY Times: As Home Prices Drop Low Enough, a Committed Renter Decides to Buy

The case for renting has been simple enough. House prices rose so high in the first half of this decade that you could often get more for your money by renting. You could also avoid having a large part of your net worth tied up in a speculative bubble.

All this time, I have been a renter myself, … [but] the housing market has, obviously, changed quite a bit since our last move, in 2005.
…
This month, we found a house that we really liked, and we made an offer. It was accepted.

I’m still not sure how good our timing was. Based on the backlog of houses on the market, I fully expect that our new house will be worth less in six months than it is today. …

In fact, if you’re now renting — almost anywhere — and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way.

But it’s O.K. with me if our timing wasn’t perfect.

Leonhardt isn’t buying for appreciation, and he realizes the price will probably still decline further. He is buying because prices have fallen enough that the intangibles of homeownership (as he and his wife value them) outweigh the extra costs of owning a home compared to renting.

The article also has an interactive rent vs. buy tool with a number of options.

Categories: Uncategorized
No Comments »

According to the Census Bureau report, New Home Sales in April were at a seasonally adjusted annual rate of 526 thousand. Sales for March were revised down to 509 thousand.

Click on graph for larger image.

Sales of new one-family houses in April 2008 were at a seasonally adjusted annual rate of 526,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.3 percent above the revised March rate of 509,000, but is 42.0 percent below the April 2007 estimate of 907,000.

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

New home sales in April were the lowest April since 1991. This is what we call Cliff Diving!

The second graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns for 2008. This is the lowest sales for April since the recession of ‘91.

As the graph indicates, the spring selling season has never really started.

And one more long term graph - this one for New Home Months of Supply.

“Months of supply” is at 10.6 months; the highest level since 1981. Note that this doesn’t include cancellations, but that was true for the earlier periods too.

The all time high for Months of Supply was 11.6 months in April 1980.

Once again, the current recession is “probable” and hasn’t been declared by NBER.

And on inventory:

The seasonally adjusted estimate of new houses for sale at the end of April was 456,000. This represents a supply of 10.6 months at the current sales rate.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are near record levels. Actual New Home inventories are probably much higher than reported - my estimate is just under 100K higher.

Still, the 456,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.

This is another very weak report for New Home sales.

Categories: Uncategorized
No Comments »

Note: It is not my intention to embarrass Mr. Kudlow, rather to simply show why his analysis was wrong (typical of many back in 2005) - and why the “housing bears” were correct.

Back in June 2005, Larry Kudlow wrote: The Housing Bears Are Wrong Again

“If [the housing bears] had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years.”

*******************

Click on graph for larger image.

This graph shows housing starts from 1970 to the present. Kudlow’s claim that housing starts “haven’t changed much” and “hovered around 1.5 million to 1.75 million per year” was not quite accurate. Housing starts did average 1.59 million per year from 1970 through 2005, but there was a wide variation in starts.

Then Kudlow goes on to state:

“During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences.”

According to the Census Bureau’s Housing and Homeownership data, the number of occupied housing units increased from 63.6 million in 1970 to 108.2 million in 2005, or about 44.6 million.

Looking at the same Census data, we can see that total housing units increased from 69.8 million in 1970, to 123.9 million in 2005, or about 54.1 million during that same period. We can obtain a similar number by adding the total starts from 1970 through 2005, about 57 million starts.

Some of these housing units are second homes, but why is it “plain to see” that demand for homes had “outstripped” supply? There were significantly more housing units built (57 million starts) during this period than new households formed (44.6 million) in the U.S.!

Perhaps Kudlow, when looking at those peaks of housing starts in the ’70s and early ’80s, was fooled into thinking that the recent peak in activity wasn’t extraordinary, especially since the U.S. population is growing. This was an inaccurate view.

The second graph shows the trend of people per household (and people per total housing units) in the United States since 1950. Before the period shown on this graph there was a long steady down trend in the number of people per household.

Note: the dashed lines indicates estimates based on the decennial Census for 1950 and 1960.

Starting in the late ’60s there was a rapid decrease in the number of persons per household until about the late ‘80. This was primarily due to the “baby boom” generation forming new households en masse.

It was during this period - of rapid decline in persons per household - that the peaks in housing starts occurred. Many of those starts, especially in the ’70s, were for apartments. Even if there had been no increase in the U.S. population, the U.S. would have needed approximately 27% more housing units at the end of this period just to accommodate the change in demographics (persons per household).

Now look at the period since 1988, the persons per household has remained flat. The increase in 2002 was due to revisions, and isn’t an actual shift in demographics.

Here is a simple formula for housing starts (assuming no excess inventory):

Housing Starts = f(population growth) + f(change in household size) + demolitions.

f(change in household size) was an important component of housing demand in the ’70s and early ’80s. In recent years, f(change in household size) = zero.

So, unless Kudlow is arguing for a significant further reduction in housing size, he shouldn’t have been comparing starts in recent years to starts in the ’70s and ’80s.

And finally, Kudlow should have been looking at the rampant speculation in 2005, both with flippers and homebuyers using excessive leverage. That is what defines a bubble, and that is what I focused on in April 2005: Housing: Speculation is the Key.

Categories: Uncategorized
No Comments »

From the AP: Vallejo files for bankruptcy to deal with budget shortfall

The city of Vallejo has filed for bankruptcy protection …

The San Francisco Bay area suburb of about 120,000 residents is the largest California city to declare bankruptcy.

Mayor Osby Davis says the city’s attorneys filed papers seeking Chapter 9 bankruptcy protection in federal court in Sacramento on Friday.

This was expected. The question is: Is Vallejo unique, or will a number of other cities file bankruptcy?

Categories: Uncategorized
No Comments »

My annual budget-friendly trips have become a highlight of, well, my life. During the past few years I’ve traveled on the cheap to California several times, to Washington and Oregon and to Ireland, to name a few. I early await trip-planning season every year. And every year, I book a reward ticket on American and use my credit card rewards to keep the cost of most trips around $1,000 for a week-long expedition.

But have you tried booking flights lately? It’s out of control! I’d spend the cost of my entire annual trip on airfare alone. The cost of flying to the Pacific coast has doubled since the last time I flew there, and now my miles are ridiculously difficult to redeem. We were considering a trip to Belize, but the flights cost an arm and a leg. I checked a few other destinations and the costs and mile redemptions are nuts…

This is a vacation crisis, people!

I feel blindsided. I mean, I know the cost of gas is bad, but what happened to Southwest’s cheap flights? I guess I haven’t been following the effects of airline consolidation and the high prices of gas haven’t really hit me yet either(don’t laugh, I don’t drive).

So what’s a girl to do this summer? I was really relying on cheap airfare for the summer. I need some suggestions for a good August destination with outdoor adventures stat! I’m thinking now I should just try to go to the boundary waters in Minnesota or do something in the Midwest. Which kind of sucks because I really love meeting people from all over, learning about the history and culture of new regions and GETTING FAR AWAY with my long vacation time.

SOS!

Categories: Uncategorized
No Comments »

From the American Institute of Architects: Architecture Billings Index Remains Weak

Click on graph for larger image.

After sinking to its lowest level ever in March, indicating a rapid slowdown in billings at U.S. architecture firms, the Architecture Billings Index (ABI) rose slightly in April. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the April ABI rating was 45.5, up from the historic low mark of 39.7 in March (any score above 50 indicates an increase in billings). The inquiries for new projects score was 53.9.

The key here is that the index fell off a cliff in early 2008, and that there is “an approximate nine to twelve month lag time between architecture billings and construction spending”. We should expect weaker non-residential structure investment throughout 2008.

Categories: Uncategorized
No Comments »

Periodically I wonder how my life would have been different if, instead of becoming a heartless banker whose only concern is the bottom line, not human lives, I had devoted my career to something socially redeeming, like education of the young. Then I read the WSJ:

Some school districts, hoping to control costs and prevent overcrowding, are intensifying efforts to make sure students actually live where they are registered.

Districts from Florida to California are hiring private investigators, creating anonymous tip lines and imposing penalties when they believe people have registered at false addresses. The measures often are spurred by parents who feel they pay a premium in property taxes to get their children into good schools.

One reason for the crackdown is the rise in home foreclosures, which may prod parents into faking addresses to keep their children at their current schools, some in the field say.

“Foreclosure rates are up. Displacement is up. People are becoming homeless,” says William Beitler, a private investigator specializing in address verification for school districts in the Chicago area. Mr. Beitler says he has contracts with 32 districts, up from 23 last year, and his caseload has increased to 7,000 from 3,000. He claims he will save districts a total of $12.2 million next year through removing students.

I take it those parents who are spurring the school districts to hire PIs and open up snitch tip lines aren’t also grieving.

Categories: Uncategorized
No Comments »

For those of you who missed this…

New York Times: Your Money
Five Basics for Building a Solid Financial Future

Categories: Uncategorized
No Comments »

From Bloomberg: CIFG Guaranty’s Bond Insurer Ratings Cut to Junk (hat tip DD49)

CIFG Guaranty, the bond insurer that lost its AAA ratings in March, was downgraded to below investment grade by Moody’s Investors Service, which said the company may become insolvent.

The ratings were cut seven levels to Ba2, two steps below investment grade, from A1 to reflect “the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements,” Moody’s said in a statement.
…
“CIFG demonstrates the cliff-like nature of these events,” said Thomas Priore, chief executive officer of hedge fund Institutional Credit Partners LLC in New York. “Depending on the language in the credit-default swap, it can set off a chain of events that creates a complete unwind of the company.”

From AAA to Junk in two months! Yeah, I’d call that Cliff Diving.

Categories: Uncategorized
No Comments »

Last week–I think it was last week–CR asked me at one point if I were going to write anything about Freddie’s financials and the FAS 157 Uproar and I remember saying that our blog colleague Accrued Interest had just that day remarked that he might well write about the subject. I therefore fervently hoped he would do so, and I could just link to it, which would save me the trouble of having to have my own opinion.

So he finally got around to it. Go read it. It’s well worth your time.

Categories: Uncategorized
No Comments »