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September 8, 2006
Bond yields rose slightly this week in a long-overdue correction from straight-line decline, but not enough to move mortgages above 6.50% for low-fee deals.
A bigger rate rise was intercepted at mid-week by declines in price in the whole commodity complex. Oil has broken to $67, natural gas to $5.71 (60% below last winter’s spike), wholesale gasoline to $1.63 (retail gas should fall below $2.50 in a month or so), and gold may shortly fall below $600. Oil patch people still say that energy markets are vulnerable on the upside, but I have to believe that the last year’s high prices are at last affecting both consumption and supply.
Basic economic data continues to be good: the purchasing managers’ service-sector numbers were fine, and there was no increase in this week’s claims for unemployment insurance.
The housing market is now the all-consuming economic topic, and “Prices are falling” is the everybody-says, everybody-knows factoid du jour.
It’s not a whisper-turns-to-hysteria deal. The dominant tone in prices-are-falling pronouncement is pleasure, often self-satisfied and/or envious: I knew they would fall. Serves ‘em right (most common among those who missed the party, couldn’t afford to buy what they thought they deserved, or don’t much care for Realtors). Every bond trader wants a housing collapse and recession. Stock market types are delighted that housing may finally look worse than their (flat) stuff.
Whenever somebody recites the prices-are-falling mantra, take a second to check content. Asking prices? Upside asking prices are always subject to downward revision. Average or median prices? Those are statistical curiosities moving with the mix of houses sold, saying nothing about the fate of individual homes. Or the real deal: homes that cannot be re-sold for a price paid a year or two ago?
There is one data base – one – that uses proper “paired-sale” methodology, comparing the resale prices of the same house over time. www.OFHEO.gov, the new regulator of Fannie and Freddie, has built that data base by using millions of appraisals going back to the 1970s, then breaking values into 275 big metropolitan statistical areas (MSAs).
I hate to give credence to those happy to see prices fall, but they are falling. OFHEO says that in the 2nd quarter this year home prices fell in 61 of 275 MSAs versus only 15 in 2Q ’05. The overall deceleration in national prices from a 10.06% annual gain to 1.17% was the most abrupt ever measured. That said, the pattern underway does not look at all like the Bubbleologists’ forecast, in two ways.
First, the declines are shallow, just like previous end-of-boom episodes. Of the 61 declining MSAs, only four fell by 2% annualized, and two by 3%, none larger.
Second, and confounding: of the 61, only eleven were in the Bubble Zones (4 CA 3 MA, 3 FL, and 1 NV), and thirty-four were in the Auto Wreck –- Michigan, Indiana, Ohio, and related spots. Seventeen of the bottom twenty were there, too.
One way to read the data: the land-scarce and wealth-rich Bubble Zones are the resilient polar opposites of the land-rich and economically poor Rust Belt. Land-rich Arizona and Nevada, and condo-crazy Florida may faint, but not the coasts.
Or… the Auto Wreck is just a precursor, an indicator of spreading economic ill-health, and the Bubble Zones are on the way down and certain to hit bottom, too.
I continue to believe in the great economic strength and scarcity on the coasts, but I am disturbed by an aspect of delay in the data. The OFHEO numbers are April-June figures, and housing conditions have deteriorated steadily and considerably since, best measured by increasing un-sold inventory.
A modest decline in price from a top would be routine, and sometime this winter we’ll know whether that’s what we have, or something else.
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