More K-R Moments: Housing Realities and More States of Denial
Well the Markets have bounced up three days in a row, at the last minute and on some fantastic (and the emphasis is on the "fantasy" part) news that Ambac was going to be rescued, save it's rating and, today, that IBM is buying back $15B. Given that Ambac apparantly has several '00s of $Bs in exposure a $3B rescue doen't seem like it saves the day. As for IBM it throws off so much cash that what else is it going to do ? It's not growing the company in either revenue or profitability after all. A tightly run ship who's financial health is beyond impeccable so it won't need those funds when the crap really hits the fan but we still have to wonder if that's the best use of it.
Meanwhile back in the real world the economic news is unremittingly bad and accleratingly worse from inflation to Housing. Here's an interesting interview by Barrons/WSJ with Robert Shiller which we strongly urge you to watch. Below the line you'll find both some other charts that put what he's saying in context (courtesy of our e-colleague CalculatedRisk of course) plus some collected readings.
Schiller had a lot of simply fascinating things to say about both how bad it is and how much worse it's likely to get, in that low-key and restrained academic fashion that makes it hard for the intervier get soundbites. But this one really....really tried. We counted at least four major times where the question is what our lawyer friends call leading, i.e. a setup, telling the interviewee what the expected comment is. The first setup which we couldn't believe it was so distortionate was asking whether we werent' seeing price declines slow or stop. What Shiller replied was a) in fact the rate of decline was accelerating as b) people's psychology and expectations come more into line with reality. And c) that all he hoped for was that not that they'd stop declining but that the rate would stabilize or slow. He went on to add d) that housing was way overbuilt, the peak was like nothing we'd seen since '51 (remember WW2, vets and the VHA ?). And as a consequence e) we likely had a long way to go since this boom had been going on since the early '90s and would have as far to run down. Now stop and think about all that for a moment, a K-R Moment as in Kubler-Ross. You know denial, anger, acceptece. These days I'd settle for getting as far as anger since everybody keeps looping back to denial.
If this is the thinking on the street you know why were're trapped in a sideways market looking for the Messiah of the 2nd Half Recovery to come save us while the news just keeps going on. In the sense that bad news is being ignored and teensy, tiny little pieces of good news push up the market you'd have to say that it's all priced in, right ? Of course what's priced in is not the realities that some of us see all around us though.
Now our friends over at CalculatedRisk have their own appreciation of how things are going. In
particular they just put up some interesting charts on housing inventories and inventory seasonal patterns which we've combined here with another of his charts on the Case-Shiller housing prices on a YOY basis. Which you'll please notice are a) negative and b) sharply sloped downward; that's Shiller's downward acceleration thing you know. The other thing you need to know is that the inventory patternas are normalized so each year starts at a 100 where that 100 is based on the prior year's end. Housing inventories are normally pulled off in the Winter and put back on as the sales season starts up. What you see is two things. First in '06 and '07 built up relatively far more than in previous years. And this year is starting with an even larger uptick.
Just to set the stage we'll also re-post (posted here) an earlier composite chart we borrowed from
CR that lays out the strategic BigPicture so you can get a better idea of what it all means. The first part shows the relationship between New Home Sales and recession. It also makes very clear Shiller's comment about the length of the boom and the abberational size of the boom. The 2nd part shows ResInvest as a % of GDP with CR filling in an extrapolation. Now IOHO that's conversative since it doesn't capture the need to work off all the excess inventories that have been built up. In other words the downturn here could be as unique and large as the bubble;in fact shouldn't it be ? The 3rd part shows how long after downturns bottom it takes for prices to reach their floors and start creeping up again. Given that we're really just seeing the pscyhological adjustments begin that suggests we've got a very long way to go.
As far as we can tell NONE of these realities are reflected in the consiousness of more than 90% of the commentators yet there they are in about as simple a graphical form as you can get. Talk about getting stuck in denial !
READINGS
S&P/Case-Shiller Home Prices Fell 9.1% in December Home prices in 20 U.S. metropolitan areas fell in December by the most on record, reflecting the deepening housing recession, a private survey showed today. The S&P/Case-Shiller home-price index dropped 9.1 percent from a year earlier, after a 7.7 percent decrease in November. Nationwide, home prices fell 8.9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of record keeping. Prices may fall further as would-be buyers hold out for bargains and foreclosures add to the glut of unsold properties, extending the worst housing slump in a quarter century. Shrinking home values and credit restrictions threaten to reduce consumer spending and push the economy into a recession. ``Home prices are headed lower,'' Michael Moran, chief economist at Daiwa Securities America Inc. in New York, said before the report. ``With demand soft and inventories still high, there will be pressure on prices to keep declining.'' December's drop was the 12th monthly decline in a row and the biggest since the group began keeping year-over-year records in 2001.
- Existing Home Sales and the Economy Existing home sales fell 0.4% in January to its lowest level in a decade but still better than expected. Dean Barber, of the Barber Financial Group, and CNBCs Rick Santelli and Diana Olick share their insight. January Existing Home Sales, More credit costs seen weighing on banks, brokers.
· Home Foreclosures in U.S. Surged 90% in January After Mortgage Rates Reset Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages. Repossessions rose 90 percent to 45,327 last month from the same period a year ago, RealtyTrac Inc. said today in a statement. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.