Prague Twin

Thursday, October 26, 2006

Housing Stabilizes... Sort of

New home sales surprised to the upside registering a better than expected 1.075 million units sold at an annual rate. The word on the street is that this means a soft landing for the housing sector, and the economy as a whole. They gloss over the fact that homebuilders lowered prices drastically to acheive this, September representing the largest year on year decrease in new home prices in 35 years.

"It is hard to say but it looks like we are in for the soft (economic) landing," said Steven Gallagher, chief U.S. economist at Society Generale in New York. "It is telling me that the worst is over for housing."

Alan Greenspan even came out of nowhere as if he had never left saying...

"Most of the negatives in housing are probably behind us,"


"The fourth quarter should be reasonably good, certainly better than the third quarter."

So after some early morning jitters on Wall Street, markets are up on the day, the Dow looking to set yet another record on the news of a soft landing.

I sense that Greenspan's notable presence is a bit of posturing. When shorting building companies starts to look like a sure thing, the momentum created can be devestating for the industry which would be devestating for the economy. Right now, they are loosing about 10% of their desired revenue which for now, they can handle. The question will become how much do they have to continue to lower prices to keep sales up, or do they have to?

At the end of the day, this is a huge industry, a $250 billion dollar a year industry. That is about the size of the GDP of Sweeden, and only about 35 countries have GDPs in excess of that.

A 10% reduction in prices means about $25 billion dollars off the table. It isn't the end of the world, but it hurts a little.


  • Just how inflated (probably not the right word) is the American economy compared to the rest of the world?

    By Blogger Stephanie, at 1:01 AM  

  • That is the $64 question.

    No one knows. There is a term called "overbought" which is I think what you are trying to get at. This means that so many people have bought into something speculatively that a downturn is likely when these low liquidity buyers leave the market.

    Unfortunately, in equity markets there is no simple way to determine if they are "overbought" or just doing really well.

    International markets are experiencing a similar pattern as the U.S.: sharply rising over the last year.

    By Blogger Praguetwin, at 8:17 AM  

  • So, basicly we have to keep telling ourselves that our houses *really* are worth X amount, or our "London bridges" really will starting falling around our ears. Lovely. The power of positive thinking.

    By Blogger Stephanie, at 9:04 PM  

  • Real estate people will say it's all paper. Fescue, down the street bought his place for $153K in 1983. Fescue is getting up there in years. He figures his place now is heading toward a million dollars, but it may be four or five years before he could sell it for that.

    Meanwhile, he thinks the property has slipped from around $800K back to maybe $750K which is an optimistic estimate. A buyer would probably offer him $700K and expect to get it accepted.

    But Fescue isn't going to sell. Why should he? He figures the softening of the market will turn around in a year or two or three and continue to march upward. That's what a lot of people are doing -- simply not even considering putting their homes on the market unless they really want to get out of the smog and the traffic and move to Arcata or someplace in Oregon.

    By Blogger Newsguy, at 7:29 PM  

  • Stephanie,

    Yes, that is the most sensible policy: doing exactly as Newsguy describes. As long as no one panics, everything will be fine.

    You asked about the economy as a whole originally and then moved to a more specific question regarding the housing market. I think the housing market is overbought. The risk lies in the newer entires to the market that have very little equity in their houses (or none, or negative as the case may be).


    He should not sell, nor will most in his position and this will help float the market: those that are not in a position where they have to sell will now hang on to their properties since they feel that they would be sellling at a "loss" even though their value has quadrupled in 20 years.

    The risk lies with the new entries should interest rates rise, but that risk looks to be mitigating.

    By Blogger Praguetwin, at 7:56 AM  

  • PT,

    "...doing exactly as Newsguy describes..."

    I was simply curious. I have no intention of selling my house. Pretty much ever.

    "You asked about the economy as a whole originally and then moved to a more specific question regarding the housing market."

    I thought your response was in regards to the housing market. The "Unfortunately, in equity markets..." indicated that you were talking about, well, equity markets. Which means to me, things that accrue equity, i.e. real-property and the like.

    "The risk lies in the newer entires to the market that have very little equity in their houses (or none, or negative as the case may be)."

    One contributor that is within my realm of experience, at least in my area, is that the "Joneses" drive is alive and well, even while people are not earning quite as much as would make them feel comfortable. What I mean by that, is that even the few people I know who've been moving down, in actual value, still aren't moving down to what they can actually afford. And, people are trying to take advantage of (what used to be) low interest rates to get into home they really like, but can't afford and/or maintain. There's the "beer before bills" people, and there's the "keepin' up with the Joneses" people, which is more about spending habits than actually affording the home. Then there's the people who have or buy a house, and the OOPS job loss comes into play. However, only the latter is the fault of the economy. The first two is just a product of wanting more than you can have, and getting it anyway -- which is, or so I'm told, encouraged for the sake of the economy.

    Then again, I've never taken an economics class and am limited to my own observations on this issue, which is limited to people in and around my own area, and in my sphere of contact. Not exactly a good "test" base for obtaining unbiased information. But if it is indicative, then the housing issue is more about spending habits and maintaining priorities than about the actual money swirling within the economy.

    By Blogger Stephanie, at 4:37 PM  

  • Stephanie,

    First of all, if you don't plan on selling your house (or pulling out equity and spending it), the housing market means little to you personally.

    When I spoke of "equities" I was refering specifically to stocks.

    But with regards to the housing market and the keeping up with the Joneses mentality, that is certainly part of the problem. A lot of people are overextended and foreclosures are on the rise. I imagine that trend will continue.

    You also mentioned money swirling around, which is precisely what keeps the economy functioning. Since nearly 3/4 of U.S. GDP is based on consumer spending, and since so many consumers have been using the accrued equity on their homes to suppport their spending habbits, a sharp downturn in the value of homes in the U.S. could cause a major drag on the economy as a whole.

    Meanwhile, you will be holding on to your house and securing your future.

    Smart is rarely glamorous.

    By Blogger Praguetwin, at 9:39 PM  

  • I forget where I heard it, but I heard a paraphrased quote that basically said that the basis of the American (or any other capitalist nation) economy is "needing" goods and services that aren't life-or-death necessities, without that drive the economy would fall apart.

    If everyone decided to turn Amish, our economy would crash, but we wouldn't waste as much. If we all spent with reckless abandon, our economy would still probably crash (debt load) and we'd have a lot more waste. It would be nice if everyone could learn the art of moderation.

    By Blogger Stephanie, at 10:09 PM  

  • I'd say Americans spend with reckless abandon.

    There is a negative savings rate, for example. But like you say, this is actually good for the economy.... at least in the near-term.

    By Blogger Praguetwin, at 7:18 AM  

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