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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (28041)	3/7/2005 9:37:36 PM
From: ild	Read Replies (2) \| Respond to of 110194

Berson's Weekly Commentary March 7, 2005 Home prices: are we closer to a decline fanniemae.com Prices change as demand and supply move relative to each other, and housing is no different in this regard than other goods and services. If the demand for housing rises relative to the supply, then prices rise -- and if supply rises relative to demand (usually because of a fall in demand), then prices decline. In recent years, home price gains (OFEHO home price index) have been extremely strong -- climbing by 10.8 percent in 2004 (the strongest pace since 1979) and by 8.4 percent annually over the past five years. Meanwhile, inflation (core personal consumption expenditure price index) has climbed by only 1.6 percent annually since 1999 and income has risen by 4.1 percent annually. The divergence between home price increases on the one hand and inflation and income growth on the other has led some to presume that a home price "bubble" has occurred, and that home prices are poised to decline. Fortunately, episodes of significant home price declines (regionally, since there have been no periods of national home price declines since at least the early 1950s) tend to be relatively rare, and when they have occurred they have been associated with economic declines that have caused the job market to weaken. In these periods, the decline in job growth and reduction in income gains have sharply reduced housing demand -- pulling home prices down. Given record housing demand in recent years and continued constraints on new supply, it is no surprise that home price gains have been outsized. But what are the risks of home price declines in the next year? If sharp declines in the job situation are the key determinants of regional price declines, then we need to identify those areas that are most at risk of rising unemployment rates. Most analysts, however, expect national unemployment rates to decline over the coming year -- even if only modestly. And regionally, while there may be some parts of the country in which economic activity is relatively flat, there is little expectation of significant additional regional weakness. Does that mean that we are out of the woods in terms of the risk of home price declines? Unfortunately no, because the investor share of home purchases has risen sharply over the recent past -- adding significantly to housing demand. In previous reports, we have discussed data from the firm Loan Performance that show the investor share of home purchase mortgages rose sharply over the course of 2004 (from roughly 6 percent to more than 9 percent nationally) -- and with that share climbing to nearly 30 percent in some markets. Because those data come from self-reporting on the part of the mortgagee, there is a risk that the figures could be lower than the actual investor share if some investors aren't reporting the use of the property accurately. As such, the Loan Performance data should be viewed as a lower bound. A recent study by the National Association of Realtors (NAR) may give some additional insight into the magnitude of investor demand. The NAR study suggests that 23 percent of all homes purchase in 2004 were for investment. In addition, a recent article in the Wall Street Journal discussed a private investment fund that purchased single-family rental housing in large numbers, primarily for the capital gains such properties could generate. Since the supply of vacant 1-unit homes for rent has risen steadily for the past 10 years, and reached an all-time high in the fourth quarter of 2004, it reinforces the article's suggestion that investors in rental properties are concentrating on price gains rather than rental income. These recent releases indicate that the investor share of home sales might be significantly higher than previously estimated. Could this be a problem for housing demand and a potential instigator of home price declines? It is much more difficult to project investor demand for housing than underlying (owner-occupied) demand, as the latter can be estimated pretty well by a combination of job growth, affordability, and demographics (which tends not to change much from year-to-year). Investor demand is more complicated and depends on expectations of returns among many asset classes. What we do know is that investor demand is more volatile than owner-occupied demand, that it depends crucially on expected home price gains, and that the last time the investor share of home purchases was this high was in the late 1980s. Many analysts think that a high investor share in the Northeast and California helped exacerbate the housing downturn that happened during the 1990-91 recession -- making the drop in home prices both longer (extending well past the end of the national recession) and deeper than otherwise would have occurred. When might investor demand for housing moderate and by how much? We can't answer these questions with any degree of confidence, but we can say that the risk of regional home price declines is higher as a result of the increase in the investor share. Moreover, changes in investor demand and home price growth are highly related -- meaning that any slowdown in housing demand (which we expect for 2005) should slow home price growth, which in turn should reduce investor demand and slow price gains still more -- feeding back yet again to investor demand. This doesn't mean that home prices are necessarily poised for a plunge (and they certainly aren't nationally), but the high investor share does pose an increased risk for home prices in those markets that have had the highest investor shares. This will be an exceptionally quiet week for economic releases, especially in comparison with last week's employment and ISM reports. On Monday, consumer credit for January is projected to slow to an increase of $2.3 billion -- mostly in response to significantly slower auto sales, after a surge in December. On Thursday, wholesale inventories for January are expected to rise by 0.6 percent -- a continuation of the recent upward trend that is helping to boost overall economic growth. Also on Thursday, initial unemployment claims are expected to be little changed at around 312,000 for the week ending March 5th -- continuing to show a significant improvement in the job market. Finally on Friday, the trade deficit for January should edge up to $56.9 billion -- mostly in response to higher oil prices. David W. Berson Fannie Mae Economics Last Revised: March 7, 2005

To: russwinter who wrote (28041)	3/8/2005 12:16:47 AM
From: RealMuLan	Read Replies (1) \| Respond to of 110194

>>last year they dodged a bullet by finally putting together a good crop, after four years of decline.<< Russ, apparently, you do not closely follow the new agricultural policies Hu-Wen administration adopted in China since 2004. That is eliminating agricultural tax, and subsidize farmers for farming (11 billion Yuan agricultural subsidies has been spent and farmers paid billions of less taxes in 2004). That is the only reason why there is an agricultural harvest in China last year. And this will be the policy for the next decade. So it is not one bullet, it is setting the trend! wake up.