June 2006


I apologize for another real estate post, but I’m stressing that the most important development in Bushlandia this week is the popping of the real estate bubble. Uncle “Helicopter” Ben just celebrated the falling of Greenspanomics by pinning another hole in his bubble with 5.25% interest rate.

In the meantime, this wonderful site is posting the realtime statistics of real estate prices in few selected cities. The “trouble zones”, where the median price declined from May to June are:

  1. Boston -0.9%
  2. Las Vegas -0.5%
  3. Miami -1.4%
  4. Phoenix -1.4%
  5. Sacramento -1.3%
  6. St. Louis -1.8%
  7. San Diego -0.7%
  8. San Francisco -0.8%
  9. San Jose -0.5%
  10. Tampa -1.7%
  11. Washington -1.1%

Let me say this in dollars: the average Miami (FL) home lost $5,400 of value in one month. If you add mortgage interest $1,500 and tax/condo fee $800 then the price to own a home in Miami is about $7,000-$8,000 now. The average rental price for 2b/2b condo is $1,100, or you can rent a house for $1,500. A very good house for $2,000. So the ownership is more expensive than rent by $5,000-$6,000.

Let check in few weeks how the price reacts to this latest Bernanke achievement…

I’m posting the final article in my 3-day “housing bubble” sequel. Two previous reports were covering trailing indicators and demonstrated how bad the real estate market was back in April. Today we got some fresh June numbers, and they are not pretty. The MBA mortgage applications fell by 6.7%:

  1. Purchase index is running at 18.2% below same time last year
  2. Purchase index is 12.5% below January, or is on track for 25% y/y decline
  3. The overall index is at 4-year low, same level as May 2002
  4. Mortgage rate stands at 6.86%

Tomorrow feds will perform a clean kill of adjustable ARM rates by increasing the rate to 5.25%. By the time of the next meeting the real estate market will be dead.

After a gloomy report of new home sales that I covered yesterday, today’s report of existing home sales is continuing the trend:

  1. Inventories are at 6.5 months supply, a 9 year record
  2. The inventory growth is accelerating. If we compare with last September, sales are 7% down, or on track for 12% y/y decline. But if we compare with March, sales are on track for 20% decline
  3. Existing home sales indicator is trailing new homes by 1-2 months, so it is much worse now than the numbers tell

In short, there is a emerging fight between home builders and private sellers. While builders are demonstrating the readiness to drop the price at the yearly rate of 20% or more, if you count free golf club memberships coming with many new homes, stubborn private sellers are so full in debt that they just can’t afford to take the loss and instead are just hanging on the market until it will become evident that this price just can’t stand against last year highs.

Anecdotally, I can confirm that in my area home prices are down by over 5% from last year. After the 50% appreciation in the 3 crazy years anything decent was priced at $800k and over and was selling fast. Now, there are amazing homes for $700k and nobody wants them.

Remember, the statistics shows only deals done 3 months ago. The huge discounts you see for sale now are just not accounted.

The new home sales data was just released this morning are pretty bad for real estate market. To summarize:

  1. Home sales are running at 1,234k annual rate, which is a whopping 37% below the annual construction rate of 1,940k homes. There are 700k of new homes coming this year that just nobody wants
  2. The median price of new homes slumped by whopping 4% in just one month, or 49% annual rate
  3. Taking a longer trend, the median price plunged 6% since February, i.e. it is falling at more realistic, but still horrible rate of 18% per year

The 18% of annual price decline across the whole country is unprecedented. We never had a meltdown of this magnitude. The only similar development in history is Japanese asset price bubble.

Just be prepared.

I will just post the wonderful explanation of Iraq war origins written by Republican congressman Ron Paul.

First, why we can exchange paper for real goods: 

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case thats the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars– due to their depreciation– will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to rule the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it cant last.

Now to the origins of the war: 

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul ONeill, the major topic was how we would get rid of Saddam Hussein– though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked ONeill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

And the happy end:

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned. 

I can't say it better. 

When Bush was asked what he thinks about the "most Europeans consider the United States the biggest threat to global stability", worse than Iran or North Korea, – he dismissed this as absurd.
What else would you expect from a reformed alcoholic who believes that US Constitution is "a piece of paper"?

 

The recent defeat of the “knock and announce” rule is just another confirmation of the main topic of my blog: the ruling class represented by Bush administration is fighting against the established civil liberties of American people, as free people are harder to control then scared, suppressed crowd of proudly mooing sheep. Thanks Scalito.

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