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

To: John McCarthy who wrote (78991)	5/11/2008 10:25:46 AM
From: John McCarthy	Respond to of 116555

Severe Edit First part of article omitted - see link for full article Assessing how much further house prices are likely to fall gets even trickier. One route is to look at market expectations: investors expect a further 20% drop, judging by the prices of futures contracts linked to the Case-Shiller 10 city index. But the futures market is small and illiquid and may overstate the possible declines. The discrepancy between supply and demand suggests that prices could fall a lot more. By historical standards there is a huge glut of unsold homes on the market. The homeowner-vacancy rate—which includes all vacant homes for sale—has soared to a record level of 2.9%, which means that there are some 1.1m “excess” houses for sale compared with the average between 1985 and 2005. Although the inventory of new homes is falling as builders have slashed their production, the supply of homes for sale is being pushed up by foreclosures even as demand from new homeowners remains weak. By most measures, prices are still above the levels implied by the fundamentals. Using a model that ties house prices to disposable incomes and long-term interest rates, analysts at Goldman Sachs reckon that the correction in national house prices is only halfway through. They expect an 18-20% correction overall, or another 11-13% decline from today's levels. But their models suggest that six states—Arizona, Florida, Virginia, Maryland, California and New Jersey, could see further price declines of 25% or more. Optimists dispute this gloomy assessment, pointing out that some measures of housing affordability have dramatically improved. According to NAR figures, monthly payments on a typical house with a 30-year mortgage and 20% downpayment were 18.5% of the median family's income in February, down from almost 26% at the peak—and close to the historical average. But this measure of affordability is misleading, not least because credit standards have tightened so much. The latest survey of loan officers conducted by the Fed suggested on May 5th that 60% of banks tightened their lending standards for prime mortgages in the first three months of 2007. And, as Michael Feroli of JPMorgan points out, the affordability gauge depends on what measure of home prices you look at. Use the Case-Shiller index, where the affordability of housing worsened sharply during the boom, and mortgage payments are still high in relation to incomes. The right-hand chart shows a better measure of housing fundamentals—the relationship between house prices and rents. This is a sort of price/earnings ratio for the housing market: the price of a house reflects the discounted value of future ownership, either as rental income or as rent saved by an owner who lives in the house. A recent analysis by Morris Davis of the University of Wisconsin-Madison, and Andreas Lehnert and Robert Martin of the Fed, shows that the rent/price yield in America ranged between 5% and 5.5% from 1960 to 1995, but fell rapidly thereafter to reach a historic low of 3.5% at the height of the boom. Given the typical pace of rental growth, Mr Feroli reckons house prices (as measured by the Case-Shiller index) need to fall by 10-15% over the next year and a half for the rent/price yield to return to its historical average. Again, that suggests the national housing bust is only halfway through. And, given the scale of excess supply, house prices—particularly in hard hit areas—are likely to overshoot. All told, Mr Bernanke's maps are going to get a lot redder—and the pressure on policymakers to help struggling homeowners is bound to increase. economist.com

To: John McCarthy who wrote (78991)	5/11/2008 10:27:59 AM
From: Dan3	Read Replies (1) \| Respond to of 116555

There is only one thing that can save the economy - increase incomes to where they can afford current prices. How to do that without Weimar Republic levels of inflation? Compensating taxes on energy and the super wealthy. So - eliminate payroll taxes, take maximum marginal rates on income taxes up to ~60% (at, say, $250k per year). Tax oil imports at 100% (and do the same for the btu equivalents for Natural Gas, etc.). Tax domestically produced energy at 65%. Index capital gains to inflation, then tax it as ordinary income. None of this will ever happen, but it's the one thing that would save the economy. Hiring labor would become far less expensive. Between the employer's share and the employee's share of payroll taxes, (SS, FICA, and SUTA) employment costs would drop by 20%. Someone who buys something, holds if for 20 years, then sells it for less (inflation adjusted) than he paid for it would not face crippling capital gains taxes). Someone who flips high priced assets for a living would pay his fair share of taxes, instead of "capital gains" rates. Balance would be restored to the economy and price signals wold encourage production and work, instead of swindling.