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Don't believe the near-term housing data

By Bubbabear   Follow   Tue, 27 Nov 2012, 4:14pm PST   488 views   1 comment
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September 1, 2012 Housing data showing rising prices released over the past week has inspired a chorus of cheers. "The housing market is beginning to find its footing again," exulted CNBC. "The free fall appears to be over for both sales and prices." The New York Times echoed, "The housing market is starting to recover. Prices are rising. Sales are increasing." And the skies are clearing. And the sun is shining. And all is going to be well with the world. At least in the same fantasyland that suggests there was ever a glimmer of economic recovery in the first...

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country_stroll   Thu, 29 Nov 2012, 4:18am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 1

When reading the scales for housing prices, it's foolish to say that housing is going up by itself when the FED has its thumb placed squarely on the other end of the beam. It is not just important to know that housing prices are going up, but also to know WHY they are going up.

A fundamental nautical truism states that a rising tide lifts all boats. This is equally. albeit oppositely, true in matters of asset values purchased with borrowed money. I.e., a falling interest rate lifts all housing prices.

But high tide only lasts for so long, and when the tide goes out, it exposes all manner of derelicts that are hidden by the waters. As Warren Buffett said about the option market: "No one knows who is swimming naked until the tide goes out."

When rates rise, the housing market will lose its hidden stimulus. In fact, if the rates just stop falling there will be less yearly increase in purchasing power. In contrast to the economic bubble we experienced from the housing boom via heloc borrowing, we are now experiencing a housing boom as a result of falling interest rates stemming from an economic collapse! How ironic is that?

I believe we are at, or at least very close to, the bottom in the interest rate cycle. Absent the rebirth of NegAm Option ARMs, 3% is just about the floor for a 30yr FRM. If rates are at a nadir, then. for any given debt-to-income ratio and down payment percentage. housing prices are at their zenith. As rates rise, buyers will have to put more down and take on more monthly debt to afford the same priced house.

To offset the impact of rising mortgage rates, incomes must outpace inflation. It's hard to see how incomes will rise in an environment of rising taxes and falling salaries and benefits.

The Federal Reserve's plan is to drive down borrowing costs, allow severely underwater homeowners to either default or refinance through the GSEs, and thereby increase the discretionary income of the average household to jumpstart the economy.

Unfortunately, governmental stupidity is also at its zenith. Regulatory and tax uncertainty is causing economic malaise resulting in companies focusing on cutting costs to increase profits instead of expanding their revenues. Any increase in discretionary income created by the FED is more than taken away by increases in insurance premiums, reduction in hours and/or wages, increases in copays or deductibles, or increases in savings for retirement, college education, or emergency funds.

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