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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (21426)	1/15/2005 1:09:20 PM
From: NOW	Read Replies (1) \| Respond to of 116555

a few questions Russ: the buyers like investors group: how do you calculate 10%? I think it is higher anecdotally, but sort of a blend "I would live in this houose if prices dont rise anymore, but i will sell it if i can make a buck" mentality rules here in Hawaii. Bad weather could be a factor, but who is to say that it behaves as a temporary factor even after the bad weather is gone? Finally, prices simply have to stop rising for the game to end dont you think?

To: russwinter who wrote (21426)	1/15/2005 1:32:56 PM
From: mishedlo	Read Replies (3) \| Respond to of 116555

Let me throw a big important question out, see what you and others think? What do you think the sudden drop in the purchase index (and refi) is about? Here's the avg. interest rate in the last three weeks of Nov: 30 years 5.68%, ARMS 4.02%. The purchase index (all seasonally adjusted) was 475, and refi index was 2234. For the first two weeks in Jan it was 5.69% on the 30, and 4.17% on the ARMs. Next Wed's rate ought to be a bit higher on the ARM. So a slight rate increase and yet the purchase index fell to an avg of 405, and the refi to 1711. Is it because of bad weather in Calf, or is that a dog ate the homework excuse? Of course if housing prices keep going up, then the real cost even with no significant rate increase, prices out more marginal buyers. So we may be at the point where every little bp increase has a large marginal effect, unless housing prices weaken? And if housing prices weaken, will that remove more marginal buyers like the "investor group" that's 10% of the market. Message 20952808; First off that was a nice post on your board on speculation in Portland. No doubt that is another major market area that has peaked IMO. As for the sudden drop in purchases and refis.... I believe we talked about this before. At one time I suggested this boom would end by exhaustion whether or not rates went up or not. That idea did not seem seem to go over very well. However, you should be able to clearly see from the great chart that Lee put together, that long term rates have not really done squat since June but the bottom fell out of the housing numbers in november anyway. marketswing.com Existing home sales were big in Dec but those are more lagging than starts and new home sales. In the period that starts plunged, was the weather really that bad across the whole of the US? It has been bad lately (in CA) but was it bad in November when the data first plunged? Rates have most assuredly gone up (looking back to summer 2003 and spring 2004) and perhaps housing will no longer be attractive unless and until we see those numbers again. Will lower rates be enough to turn refis around? I doubt it. IMO housing prices are beginning to fall. IF that assumption is correct then refis will remain low even if (IMO WHEN) interest rates head back to where they were. The reason for this assumption is simple: If home prices drop there will be little equity to extract and credit lending standards will surely rise as well. Now let's discuss sales. OK weather is bad in CA. However, I do not think it is bad everywhere in the country. Blaming CA weather for a national drop in new starts and sales seems silly, especially when you see markets like Portland and Florida and Arizona going gangbusters right now. What we are seeing IMO is rotation to areas that have not yet boomed and perhaps homebuilders are running out of attractive areas at attractive land prices. Alternatively, we simply have EXHAUSTION! 70% of the US "owns" (using the word very loosely) their own home. How many more buyers can their possibly be? Who does not have a home (that wants one) and can afford one? There are plenty of people, especially in big cities, that simply want to rent and/or do not make enough money to ever be able to afford a house. Who is left to buy after this expansion? Now on top of all of that we have had interest rates rises (especially for those ARM buyers at the lows). Not as much as you thought necessary to slow this monster down, but perhaps enough to splash a little more cold water on the coals. I think it is likely that exhaustion alone accounts for the drop in sales (what potential buyers are left can not afford a house even IF they want one) as discussed above. That said, there has to be at least some marginal buyers squeezed out here on the basis of this rise, but it is hard to say just how significant it is. In terms of refis, however it is very significant. Home owners had two huge chances to refi at very low rates and most did in one of the two booms we already had. Refis seem dead even IF new starts pick back up. We also have the bebaucle at FNM to discuss. It looks as if serious effort was made to rein in FNM (better late than never?). If we see a tightening of credit standards it is light out Charley. The credit expansion is still booming at the sub-primes etc, but that is small in comparison to the amt of money created out of thin air by FNM in the housing boom. In a housing boom, I expect to start seeing defaults pick up substantially. Now let's add in those 29,000 job cuts coming at Bank One and BAC that we talked about, throw in an unknown number at Wachovia, look at all the job cuts I have been posting (6K at peoplesoft, etc etc etc) and think about the impact that even a slowing of home construction will have on trade jobs, transportation jobs, carpet sales, grass seed, etc. Carry it one further and look at all the Home Depots and Walmarts that were being built in areas where new subdivisons went up. Subtract that expansion of goods, services, store inventory stocking, and jobs from the mix and what do you have? You have a bust. A MAJOR Bust. That bust is 100% guaranteed as soon as housing stalls. Where are jobs going to come from if store expansion and housing both collapse at the same time as bank and software mergers are tossing people on to the scrap heap of life? Not to worry say the "blue sky" economists that never see a problem until it is over: Corporate lending will pick up where consumer lending drops. They want to borrow to expand as consumer spending drops like a rock? Yeah right! Of course you realize I am getting back to my deflationary arguments again but IMO they are powerful. Tell me again how credit is supposed to expand in the environment I just laid out. Who will be lending and who will be borrowing if we get the housing bust that both of us seem to think is coming? That housing bust seems to be coming even as LT rates are low. People expect long term rates to soar while this economy is contracting in the face of 1.25 bps in hikes that did not even change the 10 yr rate at all over the course of 2004? Sorry. I do not buy it. As I posted to Lee, everyone missed the real treasury play: shorting 1 and 2 year notes not the 10 and 30 year notes. The contracion in yield spreads is already hinting recession. I think recession hits long before the curve inverts. Mish

To: russwinter who wrote (21426)	1/15/2005 1:57:30 PM
From: mishedlo	Read Replies (2) \| Respond to of 116555

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To: russwinter who wrote (21426)	1/15/2005 3:01:19 PM
From: Elroy Jetson	Respond to of 116555

Home sales have definitely slowed down for both New and Existing homes. As the inventory of existing homes is no longer exhausted before the end of the year, sales in November were higher than they were previously. For this reason existing home sales were reported to be "higher" in November - well not exactly. Message 20896895 When Existing home sales are released for December I'm sure they'll show the same trend, which will once again be pitched as "an increase" by David Lereah. As for New home sales, every builder I talk to tells the same story. The quality of potential buyers has declined since last May and became markedly worse since September. Potential buyers fail to show up for appointments, are more anxious, have lower credit ratings, and have much higher cancellation rates after signing the contract. We are running out of buyers. .

To: russwinter who wrote (21426)	1/16/2005 1:00:23 PM
From: Haim R. Branisteanu	Read Replies (3) \| Respond to of 116555

There are few things that have changed over the last several years which many ignore due to the intensive confetti printing by most CB’s to avoid recession. What happened in the big picture is the hollowing of the manufacturing base of the “industrialized nations” who converted into service industries and manufacturing of “financial derivatives” which were bought also in big part by those countries who started to be the “new industrialized nations” who actually manufacture the various “widgets” we need. Due to the lack of need of heavy investments in industry and the printing of money to avoid a deep adjustment recession a phenomena, which I found that few talked about happen. Less production of widgets generated more layoffs, recession and low inflation due to lack of demand. Printing money in the “industrialized days” brought about inflation and currency depreciation. What actually happen was that the shift to the service industry were investments to generate a workplace are a small fraction from the cost in real manufacturing avoided the pressure on interest rates as funds were ample. Further the growing pool of pension funds and annuities generated by itself a new self-sustaining “industry” and heighten the money velocity in the market were every intermediary takes a cut on the expense of the “real pension / compensation of recipients in the future - actually societies deferred the payment of the loans taken form recipients to pay for those financial alchemist who produce nothing except to purloin their salaries from the savings of others.This stolen money is part of the reson higher prices and more demand in housing. - after all it is "free" money. On the other hand as manufacturing moved to low pay countries even with the exceptional growth in money supply the “added value” to manufacturing goods remained the same only costing a fraction form let say doing the same thing in Europe or North America – and by thus keeping inflation in check in the developed nation at the expense of high inflation in the low cost countries. Another factor that added to the low prices of widgets was computerization and automation which are nearing their full potential whereby, substantial improvement in computing or automation will add very little to lower widgets cost (think about word processing – how much faster is a document created today with double computing power?). OK and what that has to do with housing ? Well it has to do a lot as interest rates remained low at huge increases in money supply, inflation tame on the expense of coming years, service wages increasing on the expense of the future compensation of savers which enabled payment of ever higher mortgage payments for bigger homes. Further the spurt in new born survival rate and substantial population growth in developing countries put a further buffer on wages but fueled the demand for shelter world wide. In a way it is a great world wide ponzi scheme who no one keeps checks and balances with loans for present consumption and pay back not in the foreseeable future. The signs of this scheme coming to an end is reflected in certain but not all commodity prices which commodities we actually need and are not easy replaceable, like crude oil, industrial metals coal and the like – next we will see the price of water going up and as a follow up crops who need irrigation. The process may take several years do make a real dent in buying power and inflation but the collapse would be inevitable if stringent measure will not be taken immediately – which I speculate they will not. IMHO the most important task at hand is forcefully lower the birth rate around the world and the printing of money. Well it is much more to add to that but will stop for now, one thing is for sure the future will not be as rosy as many anticipate and the what people call today money will prove to be what it is color printed confetti or worthless electronic bytes stored on computers as money to be exchange in worthless confetti..