March 2010 Update of THE GREAT DEPRESSION of DEBT
February 28, 2010 by wbrussee
HOUSING
As I stated in my January, 2010 update, , “Housing is going to be the leader in the next downward step in the economy.” Recent data support this. The National Association of Realtors says sales of previously occupied homes fell 7.2 percent in January, after plunging 16.7% in December. The Commerce Department reported that new home sales dropped 11.2 percent last month to the lowest monthly sales level on records going back nearly a half century.
Even the home sales that are occurring are problematic. Nationally, more than a quarter of buyers last month paid cash, reflecting a surge of investors buying low-priced foreclosures, the Realtors group said.
Home prices are going down! First American CoreLogic’s LoanPerformance Home Price Index, Zillow’s Home Index, and even the 20-city Case-Shiller Index, all show home prices dropping, with recent data showing about a 0.2% drop per month. When inflation is included, houses are dropping in real price at about a 5% annualized rate.
Using Zillow data adjusted for inflation, home prices must drop another 17% to get down to their 2000 level. So at the current rate, it will take over three years for housing to hit their inflation-adjusted level. That takes us to 2013.
There is a 7.8 month supply of available houses at the current sales pace, up from a recent low of 6.5 months in November. The Census Bureau recently counted a staggering 18.8 million vacant homes in the U.S. The fact that almost 15% of the nation’s housing is vacant suggests a huge housing oversupply, which should continue to depress prices.
Foreclosures continue to rise. The percentage of homeowners 60 or more days late in mortgage payments hit another record during the last three months of 2009. For the fourth quarter, 6.89 percent of mortgage payments were 60 or more days past due, according to credit reporting agency TransUnion. The previous record delinquency rate was 6.25 percent in the third quarter of 2009. The latest report marked the 12th consecutive quarter that delinquency rates have risen from the previous year.
Many homeowners still have adjustable rate mortgages written in late 2006 or early 2007 which are due to reset to higher rates in coming months. That could drive foreclosures even higher, especially in areas where home prices have fallen to the point where values are lower than mortgages. And First American CoreLogic reported that 24% of all homes with mortgages were underwater as of the end of 2009.
Standard & Poor’s predicts the nation is about to see a deluge of new foreclosures. They blame the “shadow inventory” – nearly 1.8 million homes that are on the road to foreclosure but for all kinds of reasons haven’t gotten there yet. Per an article “The Coming Foreclosure Flood” by Alyssa Katz, “just counting the homeowners who are currently behind on their mortgages, along with the existing number of foreclosures for sale, at the current pace it will take nearly three years to sell all the foreclosures out there. That doesn’t include all the borrowers who haven’t fallen behind yet but are going to, because of unemployment or because their Option ARM payments are spiking up or because they just decide to stop paying.”
HIGHER INFLATION COMING SOON?
Foreign demand for U.S. Treasury securities fell by the largest amount on record in December, with China reducing its holdings by $34.2 billion. If this trend continues, it could force our government to pay higher interest rates on Treasuries, increasing future debt and driving up our deficit. Or, which I believe is more likely, it could cause our government to increase the printing of money, which decreases the need for countries to buy our Treasuries and increases the likelihood of inflation, causing the real value of current debts to decline.
WHAT IS IT ABOUT PRESIDENTS?
First, President Bush said that Iraq had to PROVE that it didn’t have weapons of mass destruction, or we were going to war. Goodness, Canada can’t prove that it doesn’t have WMDs! And President Bush made funding for the war off-budget, like it really didn’t count! Now President Obama has stated unequivocally that the steps his administration has taken make a second depression “impossible!”
Apparently President Obama is convinced that the economy has turned. The problem is that key measurements on the economy have been wrong, misleading, or very temporary. Housing prices appeared to be rising because of an error in the methodology used in the popular Case-Shiller Index (which is now showing that home prices are indeed dropping). Housing sales were being artificially (and temporarily) boosted by a stimulus program for first-time home buyers. The recent drop in monthly unemployment numbers was likely caused by an error in the government’s seasonal adjustment. And the positive GDP numbers were primarily caused by the replenishing of inventories and stimulus effects.
Okay, I know what comes next. President Obama will say that Bush left him a bigger mess than he thought, and the Republicans will continue to say that the stimulus was ineffective and what we need is more tax breaks for the wealthy and large corporations.
THE STOCK MARKET
The Price/Dividend (P/D) ratio for the S&P 500 is now 56. The current P/D of 56 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market. At current dividends, the market will have to drop 54% to get down to its median P/D and drop 69% to get to my own entry target P/D.
Do not interpret the P/D ratio as a predictor of the direction of the economy. It is a historical unemotional measure that I believe reflects whether the market is overpriced. The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.
Here is where I get my P/D ratios. indexarb.com. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.
As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information. Intelligent people can, and do, disagree.
Warren
wbrussee.wordpress.com |
