Northman's Fury

Bush is telling people everything is fine

Much like Iraqi democracy and the Katrina recovery, no doubt.

He's offering some relief to about 80,000 people to stem the tide, out of what I've heard reported as nearly 14 million subprime mortgages. Drop, meet bucket. We'll be hearing more about this.

More fallout from the bursting credit bubble as the overpriced housing market is set to begin correcting.

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

. . .

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

Housing is a commodity like any other and therefore follows the same rules. Once enough people forget that and buy into the hype that this market will somehow be different, its bubble time, and the bursting will be bad.

Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.

So much in one little paragraph. The declines won't erase the gains of the last decade unless the downturn is much worse than economists are expecting? Are these the same economists who predicted that there would never be a national decline in housing prices? I refer you to my post on Friday, where I linked to a couple of folks comparing the situation to a similar bubble in Japan. It's quite possible this will be much worse than those trying to stem the tide want to admit it could be.

The year-over-year value shouldn't matter to those who don't plan to move, but that ignores one of the other big drivers of this crisis; the push for people to treat their houses like a giant piggy bank they could borrow more and more against to finance other spending. Take an example from later in the article:

In the Old Town neighborhood of Chicago, the town house that Ian R. Perschke, a technology consultant, and Jennifer Worstell, a lawyer, bought in late 2004 has appreciated more than 30 percent, they estimated. The gain was big enough to allow them to take out a larger mortgage and renovate two rental units in the house. But Mr. Perschke said he understood that he was “not going to see that appreciation over the next three years.”

These two were smart in that they used the refinanced, bigger mortgage to produce a bigger income stream from the rental units, but many used that money for consumption purchases, and the danger is not that the house won't appreciate more, but that it will depreciate enough that the mortgage winds up being worth more than the property. When that happens, and when it happens to people in the sub-prime category who can't keep up with their payments, the banks foreclosing on the properties can't get their money back, and the large number of those foreclosures in starting to flood the market and driving prices down even further.

Now all of this would be good news for home buyers, except that because of all those defaulting loans and drop in the value of properties, the banks are having a more difficult time finding the money to lend for home buying even for those with good credit.

One of the problems with this whole thing was the perception that housing is always a good investment, that it always goes up, that it never loses its value, and that it therefore a safe and secure way to make money. The truth, as is noted in the article, is that housing over time has historically done little better than basic inflation. The perceived gains were only due to the fact that most people kept their houses for a long time. Over 20 or 30 years, prices rise dramatically as inflation drives things upwards. When the housing prices unhitched from the inflation rate and started to soar, they were moving into bubble territory. They will fall back to at least a level consistent with inflation gains, which is going to hurt a lot of people who bought during the boom.

If you want to know, there's a very interesting article linking the current mess in the US with the Japanese real estate boom/bust cycle in the 1980’s, and some additional analysis from Ian Welsh at the Agonist.

If they are even close to the truth, things are going to get very ugly, not just because of the similarities to the Japanese crisis, but because of other factors which will add to the United States problems. The ongoing wars in Iraq and Afghanistan, which will continue to drain government coffers for quite some time even if they ended immediately, and whose drain will continue to rise the longer they continue.

The Baby Boomer Bulge of retirees is about to start putting stress on the Social Security, health programs, and pension plans.

And the massive budget and trade deficits are reaching a point where they will have to be balanced. These all add up to a very nasty fall for the US and everybody who depends on their consumption to drive world markets.

The New York Times has a story about the average income of Americans that simply amazes me for the utterly incompetent use of statistics.

The fact that average incomes remained lower in 2005 than five years earlier helps explain why so many Americans report feeling economic stress despite overall growth in the economy.

It tells you no such thing. The important number when trying to figure out how the average person is doing income-wise is the median, not the mean or average. There are some hints in the article about where the average person actually fits:

The growth in total incomes was concentrated among those making more than $1 million. The number of such taxpayers grew by more than 26 percent, to 303,817 in 2005, from 239,685 in 2000.

These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005, compared with 2000.

. . .

Nearly half of Americans reported incomes of less than $30,000, and two-thirds make less than $50,000.

That means the median income of Americans is somewhere around $30,000 a year. The 0.25% of people who make over $1 million a year are hardly representative of the population as a whole, but they can pull up the average considerably. Whatever the point the author was trying to make gets lost in the fact that he's using the wrong data point.

If median income has dropped, that means most people are making less and therefore are right to feel poorly about the state of the economy. If it has risen, people should be feeling better about the economy since most people should be making more. Using that with other data can help show if the gap between rich and poor is growing or shrinking. Whether or not the average person is doing better or worse is the crux of what people want to know, and it frankly confuses the hell out of me that the author would do a story on incomes and fail to include that data.

McClatchy has a good article on how the push for ever lower prices by US retailers such as Wal Mart combined with the lack of direct US regulation of of product-safety standards has helped create the situation for the cheating by Chinese manufacturers. What caught my eye, though, is this little piece at the very bottom:

Experts agreed that moving production out of China would not necessarily make consumer goods safer given other issues in global production.

“Where would you go right now? If you go to Thailand, they just don’t have the capacity and the knowledge base,” Dean said. “I’m not sure they’d be any more reliable. . . . The reliance on China is paramount.”[emp. added]

As I pointed out in an earlier post about the Chinese threat to dump US dollars to devalue the currency, the relentless push for cheaper and cheaper products has put much of the world's manufacturing capacity in China.

. . . regardless how bad the US dollar gets, they are still going to need to buy plenty of manufactured goods, and all of the factories are still in China. . . . Money valuation can change rapidly, factories don't move nearly as fast.

You don't want to buy things made in China because you believe them to be unsafe? Good for you, but good luck finding an alternative. You don't have any factories anymore, and even if you could build them, you'll have to pay the workers in North America a hell of a lot more than the Chinese pay theirs, so how are you going to compete?

Oh well, the odd poisonous product is a small price to pay for the ability to continue buying cheap goods