Real Estate: The Gordian Knot of the Economic Problem

Yesterday was important, due to the publication of a slew of statistics relating to the US real estate market. This sector is critical to the unfolding of events, both in terms of global economic activity and of the health of bank balance sheets in particular, given their still too high correlation to these particular assets.

First, the requests for mortgage loans for the week of 13 November fell to the lows of 1997 when interest rates are hovering near 5% on 30-year loans, i.e. close to their historic lows; the residential real estate market is benefiting from the federal government tax credit set up in February: $8,000 for first-time homebuyers, and now extended to next February!

This lack of demand for credit, thoroughly documented in these daily notes, remains consistent with the debt deflation process, as confirmed an hour and a half later, with the release of housing starts and requests for building permits.

These two series came in unexpectedly low at 529,000 vs. an expected 600,000 and 552,000 vs expectations of 580,000, respectively.

But above all, as you can see in the graph below, they are returning to their lows for the year, and remain much lower than during the depths of the recessions of the 60s, 70s, 80s and 90s.

Moreover, if we consider the growth in the US population during the period, from 117 million to over 300 million, the longer life expectancy, the still low interest rates and the tax breaks, we get an idea of the dimensions of the sector stress.

And the continued hike in the US unemployment rate hardly helps matters either, especially, since we now know that stocks of unsold homes are probably over 2 million units.

So why start up new housing starts in such a context?

(In Spain, building firms have ended up concentrating on public works projects: all of Madrid is a public works project!)

Given this situation, it is hardly surprising to hear Fed officials repeat day in and day out that they are in no hurry to end their 0% interest rate policy, as Ben Bernanke did this afternoon.

While it is true that the Fed will probably exit this recession differently this time around (more symmetrical) than during past recessions to avoid criticism from those who consider that it maintained interest rates "too low, too long" during the "deflation scare" of 2002, it is also true that this recession is very different from those preceding it, both in terms of its magnitude and structural fissures!

Check out this report, "Retailers send distress signal for holiday quarter", explaining the difference between the perception of real activity by sell-side analysts and business executives (Target (TGT), Saks (SKS)).

When we see that in overall credit, which we continue to watch over like milk on the stove, that total outstanding loan volumes held by the biggest American banks continues to contract (Value of loans held by 22 largest banks fell for 8th straight month in September), we can only try to highlight the difference in behaviour within the group of banks.

BoA and BNY (real economy) are seeing sharp contraction while GS and MS (investment banks) are rising sharply.

And just what type of activity do the latter firms finance?

Housing Starts and Building Permits in the USA

No loans, no jobs, but tons of stocks…

In Europe, construction statistics for the eurozone, out this morning, were greeted with huge relief, since the annual decline amounted to just -8%, vs -11.30% the previous month.

Unfortunately, this is another damaging case of optical illusion skewed by variational analysis. Let met quote, once again Bank of England Governor, King: "It's the level, stupid - it's not the growth rates."

I have provided the graph, below, which traces levels: it speaks for itself.

Construction Output on Eurozone

It’s the level…

And, in conclusion, here's a little bonus gift, the filmed intervention of Steve Keen, the importance of whose works I have often highlighted in these lines: Per Capita Talk.

Disclosure: Long 20 years OAT 0% Coupons, EDF Corp 5 Years 4.5%.

Comments

[Kansas City Shuffle]

Erwan,

What are OAT zero Coupons? Is OAT a company i can't find or something else?

Btw, the key development of yesterdays data is that it was the first time since the expected end of the housing tax credit. It shows how many people moved up their purchases because of the government and reveals the strength of the housing market based on pure private demand which isnt good.

Thanks.

2009 Nov 19 11:17 AM

[Erwan Mahe]

OAT zeron coupons are French Treasury Bonds stripped, worth 43.50/44 today, 20 years maturity, no coupon, reimbursed at 100 in 04/2029. actuarial yield 4.35% roughly.
I do not advise anyone to do the same thing, except if your deflationnary bias is so strong as mine...

2009 Nov 19 02:32 PM

[Tony Petroski]

The madman weighs in here about lumber futures.

By the way, good article by Mr. Mahe.

The madman has the Chinese buying lumber. Huh?
I had lunch yesterday in Bejing with Chairman Hu, and even though he admitted his minions were buying up copper and getting a foothold in Caribbean oil, he admitted that lumber coming out of Canada was not yet on their radar screen. It must be that the construction woes are overstated.

2009 Nov 19 03:08 PM

[whidbey]

All too true,

but its the policy appropriate to the dilemma that concerns us. Or, are we to believe, given the facts, there is no appropriate policy?

I think American still see their situation as "manageable" about in the same sense that one might say the Japanese debt is "manageable". Words and comparisons that have little meaning until fleshed out. I think you point might be that in fact the debts are not manageable in any meaningful way. That is a hellish conclusion if true.

2009 Nov 30 03:05 PM