Saturday, October 15, 2005

How the boom of 2006 ended (We should have seen it coming)

How the boom of 2006 ended (We should have seen it coming)
By Marshall Loeb, MarketWatch Last Update: 12:00 PM ET Oct. 9, 2005

NEW YORK (MarketWatch) -- Anybody with a bit of imagination, with a feel for the future, can construct a plausible scenario. Like this:

We should have seen it coming.

We were living beyond our means, saving absolutely nothing, spending more than we were earning -- like there was no tomorrow.

Most Americans were doing that. Worse, the government was doing it -- piling deficit upon deficit. And at the end of 2005, the total federal debt per U.S. household was more than $450,000.

But, as it always does, profligacy caught up with us. And the economy, which had been growing at a comfortable 3 to 4% rate for many years, came crashing down last year, in 2006.

How did it happen? What was the trigger? What lessons were to be learned?

The prime cause of the recession that began in 2006 was that, as often happens, the President tried to do too much at once.

Historians know that, for example, Lyndon Johnson brought the economy to perdition in the 1960s and 1970s by not leveling with the American people about the true total cost of the Vietnam war (about $121 billion). Reason: LBJ wanted to pursue both his war and his costly Great Society domestic programs at the same time.

So, too, George Bush tried to pursue his war in Iraq (total cost: more than $200 billion by the end of 2005) and simultaneously to spend $150 billion or more to rebuild the Gulf Coast after the catastrophes of Hurricanes Katrina and Rita.

The consequence was that the federal debt surged from $7.3 trillion in fiscal 2004 to $8.2 trillion in 2006. You don't have to be a card-carrying economist to know that such excessive demand strained the supply of goods and services. That strain, combined with increases in the price of energy, inevitably lifted prices throughout the economy. Inflation reared its ugly head.

To combat it, the Federal Reserve Board raised its discount interest rate in 2006 from 5 percent to 5.5%. As a result, mortgage rates surged, turning the housing boom into the housing bubble, and bringing back memories of the high-tech stock crash of 2000 and 2001.

When housing started down, it took away what UCLA economist Christopher Thornberg had called "this fabulous sense of wealth that homeowners are feeling." No longer feeling house rich, consumers cut back their spending. This hit the economy particularly hard since consumer spending had been one of the main forces driving it.

With both consumer spending and consumer confidence in decline, President Bush's popularity ratings sagged even more, undermining his major second-term initiatives, notably private Social Security accounts and total elimination of the estate tax. Wall Streeters had been counting on those two measures to raise stock prices; when they failed in Congress, the market drooped.
The Republicans went into the elections of 2006 with hefty margins: 55 to 44 in the Senate and 231 to 202 in the House. But, with U.S. troops still mired in Iraq and an unpopular Republican lame duck in the White House, the GOP suffered punishing losses. That, plus the rising budget deficits, killed any hopes for further business tax reductions.

Developments in the global economy only made matters worse for the U.S.

Because it imported far more than it exported, the U.S. switched from being the world's largest creditor nation in 1981 to its largest debtor in 2005.

In that year, China held almost $200 billion of the U.S. debt, Japan held almost $700 billion, and even the OPEC countries held almost $50 billion.

That gave all of them tremendous power over the U.S. If they ever decided to dump some of their mountains of dollars -- either for pure economic reasons or out of political pique -- they could totally destabilize the U.S. economy.

Fears of just that kind of move caused foreign investors to pull part of their funds out of the U.S. investments, weakening markets here.

Meanwhile, the rapid industrialization of China, India and some other developing nations continued to drive up demand for energy, metals and other commodities, thus adding to the price that the U.S. has to pay for them in global markets. Result: more inflation.

So this is the kind of world that the U.S. faces in 2007. And we haven't even mentioned that 32 million Americans are living in poverty and 46 million (including 10 million children) have no medical insurance. Those frightening numbers are growing.

How the nation will climb out from its problems is uncertain, but surely a solution to its economic challenges will include more saving, less spending, greater investment, more fiscal prudence.

We can see that now, just as clearly as we could have foreseen our inevitable problems back in 2005.

Reporter Sarah K. Wulfeck contributed to this article.

Marshall Loeb, former editor of Fortune, Money, and The Columbia Journalism Review, writes "Your Dollars" exclusively for MarketWatch.

Friday, October 14, 2005

Impact of the proposed mortgage interest deduction changes on N.J. real estate

I'd like to discuss the impact on the proposed mortgage interest changes on the local real estate market. I'd prefer more of a discussion format this time, since I'm getting tired of typing up monologues that sound like ranting and raving.

Here are a few reference articles:

"But President Bush's tax-advisory commission is considering a new limit on the deduction: the maximum mortgage the Federal Housing Administration will insure -- $305,900 in Seattle. That amount varies around the country, with a maximum of $312,895 in areas with very high housing costs, such as San Francisco, and a national average of $244,000."

"At a time when the National Association of Realtors estimates the median home price at $268,000, the $1 million maximum on mortgages whose entire interest costs are deductible affects relatively few home buyers nationwide. The story is different in California, where the median is $569,000, according to the California Association of Realtors. ",0,1112971.story?coll=la-home-headlines

"A sudden drop in the ceiling "would reduce home values, mortgage lending and home building at the top end of the housing market," the study's authors acknowledged. Their solution: Phase it in gradually. ",0,3051357.story?coll=ny-business-headlines

"The tax code change would reduce the amount of interest homeowners can deduct on their taxes - a major driver of the local housing market. Currently, one can deduct the interest on mortgages of up to $1 million. The tax panel is looking at lowering that amount to around $300,000, which would leave many homeowners with a larger tax bill and could dampen the housing boom."

"Such a proposal might introduce risk aversion "soon," Hassett said. "Perhaps as soon as Nov. 1," the deadline for Bush's tax advisory panel to submit its recommendations to the Treasury Department."

"That could mean dropping the existing $1 million ceiling on the interest deduction to as low as $172,632, or the FHA's single-family insurance ceiling in low-cost communities. The single-family limit for high cost communities is $312,895. "

I do stand behind reducing the mortgage interest deduction limits to reasonable levels. There is absolutely no reason for the level it's currently set at. This deduction has backfired by helping to push real estate prices higher. Therein lies the problem, the deduction was enacted to help with middle class homeownership, however, by pushing home prices higher, it's had an entirely opposite effect. I wouldn't mind seeing the mortgage interest deduction limited to the primary residence either.

Some of the articles propose possible new caps, let's take a look at those caps in reference to the median home prices/salaries/tax rates across Northern NJ to see where and whom will feel the impact short term, and discuss the possible effects in the long term.

Caveat Emptor,

Wednesday, October 12, 2005

Northern NJ Weekly Inventory Update

Weekly Inventory Update for 10/5/2005 - 10/12/2005


10/5 - 12611 10/12 - 12745

10/5 - 833 10/12 - 852

10/5 - 1918 10/12 - 1934

10/5 - 100 10/12 - 97

10/5 - 2540 10/12 - 2568

10/5 - 1408 10/12 - 1425

10/5 - 1677 10/12 - 1711

10/5 - 1560 10/12 1572

10/5 - 1767 10/12 - 1777

10/5 - 808 10/12 - 809


I had issues with the NJMLS service on 10/5, so my last datapoint is 10/4. Please realize that my figures include an additional day.

10/4 - 5542 10/12 - 5675

10/4 - 4005 10/12 - 4106

10/4 - 381 10/12 - 393

10/4 - 382 10/12 - 382

10/4 - 774 10/12 - 794

(All figures are Residential Single Family, Condos/Townhomes. Multifamily residences are not included in these figures).

I'll let you all draw your own conclusions from the numbers.

Caveat Emptor,

Mortgage Applications Drop Again

Mortgage applications fall

Mortgage applications dropped again this week, down the third week in a row, here are some snippets from the article:

"The Mortgage Bankers Association said its index of mortgage application activity for the week ended October 7 slid 2.6 percent to 694.8 -- its lowest level since mid-April."

"The MBA's purchase mortgage index fell 0.9 percent to 469.5 from prior week's 473.8. The index, considered a timely gauge on U.S. home sales, declined for a fourth consecutive week to its lowest level since May 27."

"The ARM share of activity decreased to 29.5 percent of total applications last week from 29.8 percent the previous week. ARM demand reached a 2005 high of 36.6 percent in late March."

The last quote gave me the shivers, over a quarter of all mortgage applications right now are adjustable rate mortgages. With all the fed talk of pushing short term rates lately, the bond yields have been moving upwards (Greenspans conundrum), and it's only a matter of time before the squeeze forces mortgage rates upwards. I believe we'll see at least a quarter point hike at the next 3 meetings chaired by Mr. Greenspan.

With home prices at stratospheric levels, rate hikes long into the future (I believe we'll see 7% 30yr rates next year), and much tighter bankrupcy laws, it's a wonder why anyone would put themselves into a position like this.

As far as the drop in activity, the measure is nationwide, so take it with a grain of salt, however, it does match with the drop in sales activity many of us have been seeing lately (this is beyond the typical fall/winter decline).


Monday, October 10, 2005

Big Day on the MLS

Particularly active day on the MLS (and the day isn't even over yet). I thought it would be helpful to share with readers that were looking for some more information on listing/seller activity as of late.

New Listings 152
Back on Market 13
Sold 58

More than 100 listings added to the total today, a pretty significant number when you realize its about 0.8% increase in a day. The sales number is pretty telling as well. No doubt inventory is rising when listings are increasing at about double the rate of sales.

Price Changes 145

3 Increases, 4 Corrections, 138 Price Reductions. Compare this with 4-5 months ago when there were very few Price Reductions (and the price change sheet was made up mostly of increases).

For the times they are a-changin'

Caveat Emptor,