According to the latest S&P/Case-Shiller 20-City Home Price Index prices fell 13.3 percent year-over-year in July 2009, less than the expected decline of 14.2 percent. It is the smallest decline since February 2008 and it takes the index to the highest reading since January 2009 as it rose 1.61 percent month-over-month. At 144.23, the index is down 30 percent from the all time high in July 2006.
The following cities top the list of regional peak decliners: Las Vegas at -54.82 percent, Phoenix at -53.10 percent, Miami at -47.57 percent, Detroit at -44.71 percent and San Francisco at -40.99 percent.
Although the stabilization in home prices is certainly welcome, the reasons behind the apparent stabilization include the $8,000 first-time homebuyer tax credit which expires on December 1, 2009, and the fact that on a seasonal basis, June and July tend to be the strongest months for home sales.
In almost every case of positive economic data that has driven the incredible stock market rally, we find the same underlying factor: government spending. Now, what seems like a lifetime ago, but was really only about 10 or 11 months prior, this author wrote an argument in favor of government spending in the midst of the credit crisis to replace lost private sector, especially consumer, spending. The idea behind the concept of loose monetary policy and quantitative easing is to prevent a panic like those of 1907 (which is why we have the Federal Reserve today) and the Great Depression (the genesis of almost all banking and securities laws).
Averting a global panic has been accomplished, and the recovery in the stock market is not unexpected for that reason. However, the recent return to extreme risk-taking in the markets is completely unwarranted and likely driven by the belief that the government will bailout the stock market by spending to boost every economic sector. In order for the market valuation to hold up over time, private sector spending would have to return to its pre-credit crisis levels, which means more borrowing and no saving. That is not going to happen, as the savings rate has recently popped above 4 percent and should continue to climb up towards 8 percent, which, in the long run, is healthy for the economy.
The government cannot spend indefinitely to keep the stock market happy. Moreover, in a report released in June, the Bank for International Settlements (BIS) noted there is a “significant risk” that monetary and fiscal stimulus will lead only to “a temporary pickup in growth, followed by a protracted stagnation.” The BIS further stated, “The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetary policy will translate into growth in the broader monetary and credit aggregates.” That will “lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle,” this BIS said. In addition to the risk of stoking inflation, the unprecedented policies “may be insufficient to put the economy on the path to recovery,” the BIS warned.
One key to consumer spending is housing. People tend to feel wealthy when their houses gain in price, and to the contrary, people feel poorer when their houses decline in value—a phenomenon known as the “wealth effect.” So, to repeat, unless the federal government is going to permanently subsidize housing (there are bills in Congress to extend the homebuyer tax credit, but they are meeting with resistance over concern about the fiscal deficit) it is questionable as to whether the housing recovery is real. Peter Boockvar writes “With an expected pick up in foreclosures, continued compression in higher end home prices and the uncertain fate of the tax credit, we’ll see if the improvements in pricing can continue in the face of this. The worst of the financial crisis will end when home prices stop going down, and I don’t believe we’ve seen the worst of the price declines in this cycle notwithstanding the recent government induced bounce.”
In a recent speech, Federal Reserve Bank of Dallas President Richard Fisher artfully sums up the current dynamic:
The Federal Reserve has been buying over seventy percent of the new mortgage originations in the MBS market — a process that has lowered mortgage rates and increased the availability of credit at affordable rates to a large swath of the market. The FOMC [Federal Open Market Committee of the Federal Reserve] has announced its intention to slow its rate of mortgage acquisitions, in the hope that private funding will begin to emerge. And the market for the purchase of new homes has also been helped tremendously by an $8,000 credit for new home buyers.
Of course, there is some concern that the hope for a housing rebound could succumb to the headwinds experienced earlier if the efforts of fiscal and monetary authorities are allowed expire. Yet, that said, there is, in my opinion, a limit to the life support that can be provided by either the Federal Reserve on the monetary front or the Congress on the fiscal front. The market for housing will not become truly robust until market forces replace the prostheses of government support. We have thus indicated to the marketplace that, for our part, the FOMC expects we will complete the execution of our $1.25 trillion intervention in the mortgage backed securities market by the end of the first quarter of next year.
In sum, do not bet the farm on equities—the two are inextricably linked.
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Gregg D. Killoren
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A Look Behind the Improvement in Housing Prices
According to the latest S&P/Case-Shiller 20-City Home Price Index prices fell 13.3 percent year-over-year in July 2009, less than the expected decline of 14.2 percent. It is the smallest decline since February 2008 and it takes the index to the highest reading since January 2009 as it rose 1.61 percent month-over-month. At 144.23, the index is down 30 percent from the all time high in July 2006.
The following cities top the list of regional peak decliners: Las Vegas at -54.82 percent, Phoenix at -53.10 percent, Miami at -47.57 percent, Detroit at -44.71 percent and San Francisco at -40.99 percent.
Although the stabilization in home prices is certainly welcome, the reasons behind the apparent stabilization include the $8,000 first-time homebuyer tax credit which expires on December 1, 2009, and the fact that on a seasonal basis, June and July tend to be the strongest months for home sales.
In almost every case of positive economic data that has driven the incredible stock market rally, we find the same underlying factor: government spending. Now, what seems like a lifetime ago, but was really only about 10 or 11 months prior, this author wrote an argument in favor of government spending in the midst of the credit crisis to replace lost private sector, especially consumer, spending. The idea behind the concept of loose monetary policy and quantitative easing is to prevent a panic like those of 1907 (which is why we have the Federal Reserve today) and the Great Depression (the genesis of almost all banking and securities laws).
Averting a global panic has been accomplished, and the recovery in the stock market is not unexpected for that reason. However, the recent return to extreme risk-taking in the markets is completely unwarranted and likely driven by the belief that the government will bailout the stock market by spending to boost every economic sector. In order for the market valuation to hold up over time, private sector spending would have to return to its pre-credit crisis levels, which means more borrowing and no saving. That is not going to happen, as the savings rate has recently popped above 4 percent and should continue to climb up towards 8 percent, which, in the long run, is healthy for the economy.
The government cannot spend indefinitely to keep the stock market happy. Moreover, in a report released in June, the Bank for International Settlements (BIS) noted there is a “significant risk” that monetary and fiscal stimulus will lead only to “a temporary pickup in growth, followed by a protracted stagnation.” The BIS further stated, “The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetary policy will translate into growth in the broader monetary and credit aggregates.” That will “lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle,” this BIS said. In addition to the risk of stoking inflation, the unprecedented policies “may be insufficient to put the economy on the path to recovery,” the BIS warned.
One key to consumer spending is housing. People tend to feel wealthy when their houses gain in price, and to the contrary, people feel poorer when their houses decline in value—a phenomenon known as the “wealth effect.” So, to repeat, unless the federal government is going to permanently subsidize housing (there are bills in Congress to extend the homebuyer tax credit, but they are meeting with resistance over concern about the fiscal deficit) it is questionable as to whether the housing recovery is real. Peter Boockvar writes “With an expected pick up in foreclosures, continued compression in higher end home prices and the uncertain fate of the tax credit, we’ll see if the improvements in pricing can continue in the face of this. The worst of the financial crisis will end when home prices stop going down, and I don’t believe we’ve seen the worst of the price declines in this cycle notwithstanding the recent government induced bounce.”
In a recent speech, Federal Reserve Bank of Dallas President Richard Fisher artfully sums up the current dynamic:
In sum, do not bet the farm on equities—the two are inextricably linked.
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