Archive for February 2012
Latest from S&P Case Shiller
The always excellent S&P Case Shiller report came out this morning, followed by a teleconference with Professors Carl Case and Bob Shiller. First, some highlights from the report, then some blurbs from the teleconference.
The average home prices in the U.S. are hovering around record lows as measured from their peaks in December, 2006, and have been bounding around 2003 prices for about 3 years. Overall in 2011, prices were down about 4% nationwide, and in the 20 leading cities in the U.S., the yearly price trends ranged from a low of -12.8% in Atlanta to a high (if you can call it that) of 0.5% in (amazingly enough) Detroit, which was the only major city to record positive numbers last year. In December, only Phoenix and Miami were on up-tics.
One thing struck me as a bit foreboding in the report. While housing doesn’t behave like securitized assets, housing markets are, in fact, influenced by many of the same forces. Historically, one of the big differences was that house prices were always believed to trend positively in the long run, so “bear” markets didn’t really exist in housing. (More on that in a minute). With that in mind, though, w-a-a-y back in my Wall Street days (a LONG time ago!), technical traders — as they were known back then — would have recognized the pricing behavior over the past few quarters as a “head-and-shoulders” pattern. It was the mark of a stock price that kept trying to burst through a resistance level, but couldn’t sustain the momentum. After three such tries, it would collapse due to lack of buyers. I look at the house price performance, and… well… one has to wonder…
As for the teleconference, the catch-phrase was “nervous but hopeful”. There was much ado about recent positive news from the NAHB/Wells Fargo Housing Market Index (refer to my comments about this on February 15 by clicking here.) The HMI tracks buyer interest, among other things, but the folks at S&P C-S were a bit cautious, noting that sales data doesn’t seem to be responding yet.
There are important macro-economic implications for all of this. The housing market is the primary tool for the FED to exert economic pressure via interest rates. Historically (and C-S goes back 60 or so years for this), housing starts in America hover around 1 million to 1.5 million per year. If the economy gets overheated, then interest rates can be allowed to rise, and this number would drop BRIEFLY to around 800,000, then bounce back up. However, housing starts have now hovered below 700,000/year every month for the past 40 months, with little let-up in sight.
Existing home sales are, in fact, trending up a bit, but part of this comes from the fact that in California and Florida, two of the hardest-hit states, we find fully 1/3 of the entire nation’s aggregate home values. The demographics in these two states are very different from the rest of the nation — mainly older homeowners who can afford now to trade up.
An additional concern comes from the Census Bureau. Note that for most of recent history, household formation in the U.S. rose from 1 million to 1.5 million per year (note the parallel to housing starts?). However, from March, 2010, to March, 2011, households actually SHRANK. Fortunately, this number seems to be correcting itself, and about 2 million new households were formed between March, 2011, and the end of the year. C-S note that this is a VERY “noisy” number and subject to correction. However, the arrows may be pointed in the right direction again.
Pricing still reflects the huge shadow inventory, but NAR reports that the actual “For Sale” inventory is around normal levels again (about a 6-month supply). So, what’s holding the housing market back? Getting a mortgage is very difficult today without perfect credit — the private mortgage insurance market has completely disappeared. Unemployment is still a problem, and particularly the contagious fear that permeates the populus. Finally, some economists fear that there may actually be a permanent shift in the U.S. market attitude toward housing. Historically, Americans thought that home prices would continuously rise, and hence a home investment was a secure store of value. That attitude may have permanently been damaged.
“Nervous, but hopeful”
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Retail and the Internet
First, if you can only read ONE magazine every week, it must be The Economist. If I were to go into hibernation for a year (or 20, for that matter), a cover-to-cover read of the current issue would bring me up-to-date on pretty much every topic of major importance, both in the U.S. and globally. And no, I don’t get a kick-back from them on subscriptions.
The current issue has not one but TWO thoughtful pieces on the impact of the internet on retailing. From a real estate perspective, this is of vital importance for three reasons. First, internet retailers actually DO occupy space, but it’s a very different kind of space than most-bricks-and-mortar retailers occupy. (For more on my perspective on this, read my interview about Amazon in Seattle’s Daily Journal of Commerce this past week.) Second (as the Economist articles point out), many retailers “get it” but many don’t (more on this in a minute). As a result, some retailers thrive (Apple and Disney are two cited examples, but I’d also note Seattle’s Nordstrom as a firm that grasps how to thrive in both markets).
The third reason is a bit more subtle. The Economist quotes Roy Amara, the American futurologist, who says, “We tend to overestimate the effect of technology in the short run, and underestimate the effect in the long run.” As a small-e economist, I would note that in the long run, internet retailing has the very real impact of making American business more productive, in terms of “unit of output” per “unit of cost” (or “unit of labor”), which is a very good thing indeed. Why? Simply put, the developed economies (U.S., Europe, and Japan, for starters) are fighting a demographic battle. Japan and Europe are more-or-less losing. Their populations are becoming increasingly older, and their population growth is basically flat. The U.S. is barely winning the demographic battle, ironically thanks in no small part to immigration (both legal and otherwise). Why is this important? Simply put, increases in GDP are necessary in order to create jobs and to support the increasing costs of an increasingly aging population. There are only two real ways to accomplish this (note the word “real”, as in without inflation): either grow the working-age segment of the population (we’ve already thrown in the towel on that one) or make equal strides in productivity. Hence, the information age allows fewer workers to generate greater productivity in order to support a population in which increasingly large segments are not part of the productive landscape.
As noted, some bricks-and-mortar retailers “get it”. For many segments of the shopping landscape, an on-line substitute just won’t do. Apple figured this out with the Apple Stores, which are slick looking, very efficient, and a far better solution when need instant answers or want to buy something “Apple”. By the way, I have an Iphone which I acquired from an ATT store. I have to go back into that store occasionally for upgrades or accessories — it’s near my house and thus very convenient. I can’t help but notice that they’ve re-done the store in much more of an Apple-esque image. Accident? I don’t think so, plus the shopping experience is much more efficient and enjoyable now.
Borders didn’t make it, but Barnes and Noble seems to be hanging on, in no small part because of the adaptation to the internet. Interestingly enough, many “mom-and-pop” booksellers were predicted to go out of business due to Amazon, yet many of them have thrived by partnering with Amazon and doing what entrepreneurs do best (catering to “niche” needs). Last time I bought a “new” book it was a Christmas present, and I got it at a deep discount at Costco. The last 10 books to come into the Kilpatrick house, though, came from small-town retailers who had partnered with Amazon, and to whom we paid full-retail.
Interesting side note — ONE of these retailers was Seattle’s Goodwill store, who have cataloged their bookshelves and partnered with Amazon to sell used books. (My congratulations to my good friend, Ken Colling, the CEO of Seattle Goodwill, and no, I didn’t get a penny’s worth of discount.) Also, by the way, it was cheaper for me to go on-line to Seattle Goodwill, buy the book, and have them mail it to us, than for us to drive to downtown Seattle and buy the book the old fashion way. Is Goodwill going out of business because of Amazon? Far from it — this is a windfall for them.
As The Economist notes, and I concur, retailers are struggling to figure out this new paradigm. They are also coping with an explosive growth in shopping space — between 1999 and 2009, shopping space in the U.S. ballooned from 18 square feet per person to 23 square feet.
A final note: The Economist deals primarily with the experience in the U.S.. Clearly in Europe and Japan, this is also a struggle and perhaps an even worse one. However, this information-age paradigm shift is occurring right as many developing nations (China in particular) are seeing an emerging middle class, and the retail-therapy that permeates middle-classes everywhere. Retail real estate developers who look at the Chinese economic trends and think that China may need as many square feet of shopping experience as Americans have come to enjoy over our cultural history may need to think again. The simultaneity of the emergence of the information age with the emergence of a Chinese middle class (not to mention the cultural history, which in China may favor small, entrepreneur-driven businesses) may portend a very different retail future.
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U.S. housing market — good news and bad
The good news, such that it is — home sales are inching up — a 0.7% rise in January from the previous January.
Now, for the bad news — the median home price in America, measured on a January-to-January basis, just hit its lowest point in 10 years, according to a recent announcement from the National Association of Realtors. Indeed, 35% of home sales were “distress sales”, driving the median home price down to $154,000.
- graphic courtesy CNN-Money
This represents a 6.9% price decline from 2011, and a drop of 29.4% since the peak in 2007.
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A few thoughts about the stock market
As the Dow Jones Industrial Average creeps ever so slowly toward 13,000, I’m reminded of the words of William Shakespeare, from the famed “Seven Ages of Man” soliloquy in the comedy, As You Like It:
…and then the whining school-boy, with his satchel and shining morning face, creeping like snail, unwillingly to school…
Now of course this blog is primarily focused on real estate and the various economic forces that affect it. However, since so much of real estate is securitized, particularly in the U.S., and so many of the players in the real estate market are publicly traded companies, an occasional glance at the ticker-tape is in order.
With that in mind, I have a small idea. It’s not a huge one, but just a little observation, if you will, about why the market is creeping so slowly, even though so many pundits claim that it’s underpriced right now. (I neither agree nor disagree with that sentiment — I’m in a wait and see mode.)
However….. I serve on the board of a small Trust which is VERY conservative. Our sole manager also manages a lot of high-tech money (remember — Microsoft is headquartered here… duh…). We have a lot of liquidity, and even our bond investments have a very short average duration.
As one money manager put it to me, “Our clients aren’t interested in MAKING money in the stock market. They just don’t want to LOSE any more money in the stock market.”
Thus, there MAY BE some upside potential to this market. However, it may take a long time to realize it, because so many money managers got singed in the flames of the market burn-out a few years ago.
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Retail — on the mend?
The Marcus and Millichap 2012 Annual Retail Report just hit my desk. It’s a great compendium — one of the best retail forecasts in the industry — and not only looks at the national overview but also breaks down the forecast by 44 major markets.
A few key points:
- What they call “sub-trend” employment growth will prevail until GDP growth surpasses 2.1% (we would add: “…sustainably passes….”) Increased business confidence will continue to transition temporary jobs to permanent ones.
- Most retail indicators performed surprisingly well in 2011, defying a mid-year plunge, a slide in consumer confidence, and a modest contraction in per-capita disposable income.
- The Eurozone financial crisis could undermine the U.S. recovery, but fixed investment will remain a pillar of growth, with capital flowing to equipment and non-residential real estate.
- All 44 markets tracked by M&M are forecasted to post job growth, vacancy declines, and effective rent growth in 2012.
- A rise in net absorption to 77 million square feet in 2012 will dwarf the projected 32 million SF in new supply, with overall vacancy rates tightening to 9.2%.
- However, some major retailers, most notably Sears and Macy’s, will continue to downsize or close stores that fail to meet operational hurdles.
- CMBS retail loans totalling $1.5 Billion will mature in 2012, but many may fail to refinance — about 81% have LTV’s exceeding acceptable levels.
- The limited number of really premier properties in the “right” markets will hit what M&M calls “high-high” price levels, moving some investors into secondary markets as risk tolerance expands and capital conditions become more fluid.
For your own copy of this research report, or to get on M&M’s mailing list, click here.
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Canada looking more like the US and UK?
The books are still being written on the causes and effects of the recent recession, but one wide-spread agreement is that aggregate household debt, and particularly the ratio of debt to household income, has been a real problem for developed nations. In the U.S., this ratio hit between 1.6 and 1.7 at the onset of the recession, and then fell to about 1.4 today. In the U.K., the ratio topped out at just under 1.6 in late 2007, and is now down under 1.5. Given the flat-lining of household incomes in the two countries, this constitutes a very significant pay-down in household debt. Note that for most of the 1990’s, this ratio hovered between 1.0 and 1.1 in the U.S., and between 0.9 and 1.0 in the U.K. It wasn’t until the easy money period of the late 1990’s that these ratios started soaring. (In the U.S., this was a gradual rise, really starting about 1990. In the U.K., the rise was more abrupt, beginning about 2001.)
Now we har that our neighbors to the north are trying to copy our bad behaviors. In 1990, the typical Canadian household had a debt/income ratio of about 0.9. This gradually rose to about 1.1 by the late 1990’s, then hovered there for a few years. Over the past 10 years, the Canadian debt ratio has continuously grown, with no “peak” in the early days of the recession, and now sits at about 1.5.
courtesy RICS Global Real Estate Weekly
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Housing News
I was just at a luncheon (sponsored by the local chapter of the Appraisal Institute) on apartments. One of the speakers noted that a real problem in doing adequate analysis was getting a handle on the single-family housing market — the data simply stinks due to the foreclosure mess, the number of homes being turned into rentals, etc. Thus, as we try to ALSO project the future of the homebuilding industry (really down for the count the last few years), that same dirty-data problem is a real issue.
That aside, the National Association of Homebuilders released a report today noting that the NAHB/Wells Fargo Housing Market Index rose in February for the fifth consecutive month. As I discussed back in November (click here for a link) this index attempt to project home sales based on model home traffic, customer inquiries, and such. Even though the over all stock market was down today, this news sent homebuilder prices higher — indeed, Beazer Homes (BZH) rose by 3.1%, albeit to just over $3/share.
NAHB’s Chief Economist David Crowe said, “this is the longest period of sustained improvement we have seen in the HMI since 2007.” Great news for homebuilders — we hope it stays this way. For a full copy of the article, on Fox Business News, click here.
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European Banking
I like Forbes magazine, and while I’ve only met Steve Forbes once, he’s seems to be a terrifically engaging fellow. That having been said, while he and I are probably not very far apart in our core political thinking, I DO disagree with him on many key points (gold standard being the top of the list). However, he wrote an excellent op-ed piece back in December about Angela Merkel and the actions/inactions which permeate European decision-making today. Recent events, particularly in Greece, suggest that Ms. Merkel may have read Mr. Forbes and followed suit. Nonetheless, I think some of Forbes conclusions may be ill-founded. (For a full copy of his article, click here.)
Forbes draws an analogy between the European actions of this past Fall with the draconian anti-inflation actions of the last days of the Weimar Republic during the great depression. Students of history may recall that those actions led to the fall of the German republic and the rise of Hitler. Forbes suggests that Merkel is frightened of the inflationary impacts of European central banks buying up Italian and Spanish bonds (thus pumping lots of Euros into the economy).
Forbes points out that banking is very different in Europe than in the U.S. He does not explicitly note — but seems to assume his readers would know — that Europe doesn’t have a system analogous to our Federal Reserve, but rather the major money-center banks serve that same purpose. (In practice, the European banks are joined at the hip with U.S. banks, and thus have an implicit liquidity guarantee from the U.S. Fed.) Forbes notes that liquidity is already strained in Europe, with U.S. money market funds having already withdrawn about $1 Trillion. In addition, European businesses look more to banks than bonds for raising long-term capital. In the U.S., industrial bank loans to nonfinancial corporations totals about $1.1 Trillion, while in Europe the corresponding number is about $6.4 Trillion. Contrast this with the bond market — in the U.S., corporate bonded debt is $4.8 Trillion, but only $1.2 Trillion in Europe. European banks are also the primary buyers of European government debt, while in the U.S. the banks are only one set of many sets of buyers.
I think where Forbes misses the point in his criticism is his failure to recognize that liquidity for this bond-buying spree would come not from a central source such as a Federal Reserve system but rather from German taxpayers. The Germans have bent over backwards already to bear the financial brunt of this crisis, mainly because they are apoplectic at the idea of the collapse of the Euro.
Forbes is also implicitly paying some homage to the Hamiltonian idea that a centralized, Federal Europe (which does not yet exist) could buy up bonds from member countries and issue a new “Euro Bond” which would take its place. The first U.S. Treasury Secretary came up with this idea for two reasons — first, the individual states were heavily in debt to pay for the Revolution, and second it would create a much stronger central government, which would issue a uniform currency and raise money through Federal taxes.
However, Europe of 2012 isn’t nearly as well organized as the U.S. of 1790 (amazing, but true). Plus, even if Angela and Nick (remember — Sarkozy gets a vote, too!) could wave Harry Potter’s wand and create a unified Federal Europe, the burden would still be borne disproportionately. Northern European countries (and even Northern Italy, which is more like Germany than pundits recognize) are quite healthy with the status quo. The peripheral countries (the “PIIGS” for short) are the principle problem right now. Back in the 1790’s, the debts of the various states were actually fairly well-distributed. (And yes, the irony of using Harry Potter as an example — a British wizard who still uses the Pound rather than the Euro — was on purpose.)
So, Forbes gets it half right. The model we now see in Greece may be the answer — a compromise on the bonds, with fiscal restraints borne by the countries that are in trouble. Will Europe ever see a Federal system with the same sort of fiscal and monetary controls we have here in the U.S.? Probably not for a long time. In the meantime, Angela has to play the cards she’s dealt, not the ones Forbes would like to imagine she has.
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Conerly’s Businomics Newsletter
I’ve mentioned before that one of my favorite economic writers, particularly for the Pacific Northwest, is Dr. Bill Conerly out of Lake Oswego, Oregon. Even though Greenfield’s practice is national, we have to maintain a bit of a Northwest focus to our work. Dr. Conerly helps us with the underlying economics driving the economy of this salmon habitat in which I live.
Dr. Conerly’s “charts” are wonderfully informal and informative at the same time. In the ‘old days’ he would simply hand-write his thoughts on the charts then fax them to his subscribers (remember “faxing”?). Today, of course, it’s all digitized and stored on his web site, with an emailed link. Nonetheless, the succinct hand-written notes are still there, and the brevity is welcomed. (I could learn from that.)
Rather than reproduce the charts here, I’ll simply give you a link (here) and you can go view them yourself. If you’d like to contact Dr. Conerly — he’s a great speaker and consultant on economic issues — then the e-mail address is bill@conerlyconsulting.com. A quick synopsis may whet your appetite:
- Business equipment orders are still not back to the pre-2008 peak.
- Consumer sentiment is up, but not back to 2007 levels
- A January, 2012, Wall Street Journal survey pegged the risk of recession at 19%
- Private non-residential construction has “turned the corner”, but is still significantly lower than 2007-2009 levels.
- Unemployment: great headlines, but we’re a very long way from feeling good.
- Mortgage rates are at all-time lows, but only if you have great credit.
- Stock market: lots of up-side if Europe manages to muddle through
- Oregon and Washington bankruptcy filings on the way down, but still over double the 2007 rates
- Boeing orders may be tapering off, but still significantly exceed deliveries — no need to cut output
- Wheat prices (an important economic component in our area) are downturning, due to the global slowdown.
Well, folks, that’s about it — great reading from a great analyst.
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A truly dumb idea
First, there is virtually NO chance that this idea will come to pass, thank goodness.
SOME pundits propose shutting down the Federal Reserve. I’m serious. Presidential candidate Ron Paul considers it a central tenet of his philosophy. He would put us back on a gold standard, which would mean that the government could only issue paper dollars if they were backed by gold holdings (i.e. — Ft. Knox), and would stand ready to buy gold at a stated price. One assumes that gold coins would also circulate, although at today’s rates, the smallest gold coin available today (1/10 oz) would be worth about $150. Hardly the sort of thing you’d use in a vending machine.
From an economists perspective, it’s impossible to imagine a 21st century nation — particularly one with the most complex economy in the world — to exist without a central bank. In the first decade of the 20th century, the U.S. suffered a tremendous depression, much of which was driven by bank liquidity problems (and thus bank failures). To address this, the U.S. Government established not one central bank but in fact a network of regional central banks, all of which would coordinate their activities via a central Federal Reserve Board. Members of the Federal Reserve Board are appointed by the President and confirmed by the Senate for 14-year terms, a period of time selected to make sure that no ONE political party or political philosophy would dominate. The members of this board, along with a rotating subset of the Presidents of the regional banks, form what is called the Federal Open Market Committee (FOMC).
The FED really only has two tools at its disposal. Taken together, these tools are called “monetary policy”. It can set the “Fed Funds Rate” which is the rate at which member banks can borrow money for short periods of time. Since member banks borrow (and pay back) constantly, this is an extraordinarily important base-line for interest rates. A rise in this rate would stimulate a rise in overall rates throughout the economy. Currently, this rate is about a half percent — nearly inconsequential. Clearly, the FED wants to keep rates low to stimulate the economy. A hint of inflation in the market would probably stimulate a rise in rates, to slow the economy down a bit and thus negatively impact inflation. The FED can also buy and sell government bonds, and in fact can force member banks to buy and sell bonds. Buying bonds from the banks puts money into the economy that these banks can lend. Recently, the FED has been buying long-term bonds and selling short-term, to “twist” the yield curve.
The Government also influences the economy through “fiscal” policy, exerted through the Treasury Department. Keynesians would hold that the government can stimulate the economy via deficit spending. In the current economic crisis, the Fiscal and Monetary roles heavily intersected, particularly in the TARP funding under President Bush, and continued under President Obama, which used the full faith and credit of the Treasury to prop up our failing banking system. The FED was an active participant in that process, and indeed (as shown in the movie), Fed Chair Bernake really sold this process to Congress. As expensive as it was, and despite the political ramifications, it is beyond belief that any thinking person would have allowed our banking system to collapse. A few banks dying was inevitable (e.g. — Lehman Brothers), but the entire system collapsing would have put the U.S. in an intractably difficult position, probably carrying the entire world’s economy with it.
As pointed out in a CNBC report by Mark Koba this morning (click here for a link), its noted that a gold standard would both put limits on growth as well as impose short-run volatility. The American economy would, at least for short periods, be held hostage to the whims of gold traders. Further, production of gold in the world is probably insufficient to sustain reasonable levels of growth.
In addition, removing a relatively independent FED from the scene would leave the Treasury Secretary in an intractably politicized position. The U.S. has had 75 Treasury Secretaries over the past 225 years, from Alexander Hamilton to Tim Geitner. (Also 6 “acting” secretaries who were never confirmed by the Senate.) Many — if not most — have been contentiously fought over. (The first Treasury Secretary, Hamilton, was shot in a duel. The second was run out of office after being accused of setting fire to the State Department building.) Given the current contentiousness that permeates Capitol Hill, the notion of subjecting the American economy to the vagaries of Congress every 3 years sounds like something out of a third-world country, much less the most important economy in the world.
Fortunately, this proposal hasn’t a ghost of a chance. Nonetheless, the inanity of it begs our attention.
From a small northwestern observatory... 