Posts By Lee Adler – The Wall Street Examiner http://wallstreetexaminer.com Busting the myths Sat, 27 Aug 2016 01:41:01 +0000 en-US hourly 1 35992186 Here’s Why B of A’s Chart of Fast Growing Low Wages Is BS http://wallstreetexaminer.com/2016/08/heres-b-chart-fast-growing-low-wages-bs/ http://wallstreetexaminer.com/2016/08/heres-b-chart-fast-growing-low-wages-bs/#respond Fri, 26 Aug 2016 16:04:42 +0000 http://wallstreetexaminer.com/?p=304762 Good guy Sam Ro, now at Yahoo, tweeted out a chart by Bank of America Merrill Lynch (BAML) this morning showing that low wage job gains have outpaced gains in high wage jobs.I happen to keep charts on wage growth by industry, so I know a little about the subject. I had my usual calm and measured…

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Good guy Sam Ro, now at Yahoo, tweeted out a chart by Bank of America Merrill Lynch (BAML) this morning showing that low wage job gains have outpaced gains in high wage jobs.I happen to keep charts on wage growth by industry, so I know a little about the subject. I had my usual calm and measured response.

Here’s that chart again, plus another showing the changes in nominal terms.

Average Real Weekly Earnings - Click to enlarge

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Average Weekly Earnings (Nominal)- Click to enlarge

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As I always stress, charting data is a matter of perspective. If low wage jobs are showing material gains versus high wage jobs, it’s not apparent in the big picture. I know how BAML tortured the numbers to come up with their conclusion. They featured rate of change. Minimum wage boosts in many states and localities over the past couple of years make it seem that low wage workers are catching up. Prior to mid 2013 there was no difference in gains between the top 80% and the bottom 20%. The total size of the low paid workers gains is minuscule, and invisible when placed on the same total wage scale with other industries.

The idea that low wage workers are outpacing high wage workers is a scam.

And what’s the point of this argument? How do low wage jobs matter to investors? Low wage workers are merely your tired, your poor, your huddled masses yearning to make a buck. Have they made any real progress to being any more than the flotsam and jetsam of a throwaway society?

Please.

Yes, wages at the lowest end of the spectrum have risen thanks the minimum wage increases over the past couple of years. Once this wave is past, then what? Is there any reason to believe that these sectors will do any better than the long-term trends?

I don’t think so.

I went into a McDonald’s yesterday with our granddaughter. It’s been a year or so since the last time I was at a McDO, as they call them here in Quebec where I spend the summer. I can’t remember the last time I was in one at home in FL. Nevertheless, the stores have always seemed pretty consistent between Canada and the US.

In this busy store in a small town in rural Quebec, where tens of thousands of breadwinner jobs have been lost as major industrial employers have left town over the years, 3/4 of the cashiers have recently been replaced by computer screens that take your order and your payment.

Low skill, low pay jobs are going the way of the dodo bird. Medium and high skill manufacturing jobs with good pay have been shipped overseas for decades. And US companies are replacing American high skilled technicians with cheaper imported workers who are brought in under the H1B visa program. .

Our society has figured out no way, nor shown any will, to counter these trends. The result has been that the US middle class has been both shrinking and losing purchasing power. The consumerist foundation of the US economy is being hollowed out, driven by central bank financial repression and financialization that benefits only the few.

This is what a society in terminal decline looks like. Meanwhile the financial markets party on as those at the top enjoy a false prosperity, thanks to the Fed’s policy of robbing hard-working savers to transfer income to speculators and banks. These policies shock the conscience. The result of such shortsighted stupidity and immorality may be a long time coming, but it will not be pretty.

I weep for America.

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The post Here’s Why B of A’s Chart of Fast Growing Low Wages Is BS was originally published at The Wall Street Examiner. Follow the money!

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Wall Street Journal Regurgitates Misleading Government Data on Durable Goods http://wallstreetexaminer.com/2016/08/wall-street-journal-regurgitates-misleading-government-data-durable-goods/ http://wallstreetexaminer.com/2016/08/wall-street-journal-regurgitates-misleading-government-data-durable-goods/#comments Thu, 25 Aug 2016 17:15:03 +0000 http://wallstreetexaminer.com/?p=304663 The Wall Street Journal today dutifully reported the Commerce Department’s seasonally adjusted data on Durable Goods orders in July, proclaiming: U.S. Durable-Goods Orders Rebounded in July, Jumping 4.4% However, the actual, not seasonally adjusted data tells another story. It’s easy to actual data to tell if the momentum of the business is gaining or losing…

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The Wall Street Journal today dutifully reported the Commerce Department’s seasonally adjusted data on Durable Goods orders in July, proclaiming:

U.S. Durable-Goods Orders Rebounded in July, Jumping 4.4%

However, the actual, not seasonally adjusted data tells another story. It’s easy to actual data to tell if the momentum of the business is gaining or losing ground. Just compare the year to year change for the current month with immediate past months.

The actual data showed a year to year decline of -6.4% and a month to month decline of -13.7%.

That doesn’t tell us much on a standalone basis. We need to compare that to past data to see the momentum of the business. The year to year decline of -6.4% in July was indeed a hair better than June’s drop of -6.7%. However the July drop was larger than each of the 10 months prior to June. That’s a pretty weak basis for claiming that July had an increase of 4.3%. It’s easy enough to see on a chart however.

Durable Goods Orders - Click to enlarge

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We also see that the July level was 1.7% below the July 2007 peak, while the June level was just 1.1% below the June 2007 peak.

The June-July month to month drop of -13.7% means little on its own. A month to month decline of some magnitude is normal for July. The July month to month decline was a hair better than in July of 2015, when the drop was -14.1%. Is that a material improvement? Not compared with an 8.4% July gain in 2014. That was an outlier, but the average change in July since the recovery began in 2009 has been -10.5%. The current month was materially worse than average, 30% worse to be precise.

This data is for nominal dollar value. It does not adjust for inflation. Using the PPI for durable goods as the deflator, the big picture on a unit volume basis is a whole lot worse than the nominal data shows. Meanwhile stock prices have decoupled, particularly since 2013.

Real Durable Goods Orders and Stock Prices - Click to enlarge

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In terms of unit volume of orders, current levels are well below 2007 levels. Order volume has been in a downtrend for 16 years as the US persistently loses durable manufacturing sales and production to the rest of the world. There has been no secular recovery, and the cyclical recovery ended in 2013.

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The post Wall Street Journal Regurgitates Misleading Government Data on Durable Goods was originally published at The Wall Street Examiner. Follow the money!

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Buy When There’s Blood In The Streets – Part 2 of Not The Best Time In History To Invest In Real Estate http://wallstreetexaminer.com/2016/08/buy-theres-blood-streets-part-2-not-best-time-history-invest-real-estate/ http://wallstreetexaminer.com/2016/08/buy-theres-blood-streets-part-2-not-best-time-history-invest-real-estate/#respond Tue, 23 Aug 2016 23:28:36 +0000 http://wallstreetexaminer.com/?p=304433 Yesterday I began to show why now is not the best time in history to invest in real estate, rebutting a column posted August 22 at Dow Jones Marketwatch. In fact, the headline...

The post Buy When There’s Blood In The Streets – Part 2 of Not The Best Time In History To Invest In Real Estate was originally published at The Wall Street Examiner. Follow the money!

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Yesterday I began to show  why now is not the best time in history to invest in real estate, rebutting a column posted August 22 at Dow Jones Marketwatch. In fact, the headline

This is the best time in history to invest in real estate

reminds me of the times when extreme headlines like this have marked major turning points in markets. Perhaps the most famous was Business Week’s cover story, “The Death of Equities,” in 1979. That was near the best time to buy stocks in my lifetime.

More recently and at a lesser scale, we have the example of the widely publicized piece by Jason Zweig of the Wall Street Journal proclaiming “Let’s Be Honest About Gold: It’s a Pet Rock.” That was in July of 2015 when gold was near its bottom in the $1100 range. It has been among the best performing asset classes since then.

The headline on the Marketwatch piece has a similar feel. It may well mark a major turning point in the multifamily rental investment market.

But I’m not here to argue that. I simply want to show that the headline and the arguments that Reeves puts forth in support of it, are just wrong. Far from being the best time ever to invest in rental property, the fundamentals are atrocious. It’s a market that has been rigged by the world’s central banks.Ever cheaper financing has pushed multifamily housing prices into the stratosphere, and pushed capitalization rates into the sub-basement of history. This is where the real estate bogeymen live and thrive. If you go there, they will eat you alive.

Mortgage Rates, Rents, and Multifamily Housing Prices- Click to enlarge

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The uptrend in multifamily housing prices isn’t about improving fundamentals. It’s about central banks constantly making real estate financing cheaper and cheaper, not to mention easier. The chart above shows that as money has gotten cheaper, virtually all of the gains in real estate prices can be attributed to the value of the financing. The market is completely at the mercy of a rise in mortgage rates. Certainly there’s an argument to be made that the Fed would never allow that, but would the assumption that mortgage rates would never rise be a prudent basis for investing today?

If the day ever comes when they decide to stop driving up the prices of income producing assets, the double edged sword of leverage inherent in real estate will turn from a profit maker, to a killer.

I covered some of this in the piece I posted yesterday. Now let’s get to specifics on a few of the points in the Marketwatch post.

First the author says that the general real estate environment is “quite good” because prices are rising, new home sales are at their strongest level in 7 years. Then he notes that critics (like me) might note that such conditions were present during the bubble. He argues that Realtor.com says it’s not a bubble because “conditions” are different now. I pointed out in Part 1 the problem with using Realtor.com to support the bullish view. Realtor.com is the online marketing arm of the Realtors’ housing market cartel. It’s also a subsidiary of News Corp., which also owns Marketwatch. So there’s a built in conflict there that wasn’t disclosed.

The author points out that housing starts are only at half their level of the top of the last bubble. But he’s not talking about the whole housing market when he says now is a good time to invest. He’s talking about the rental market, which is more precisely the multifamily market. Multifamily housing starts are at a 28 year record, well above where they were at the peak of the housing bubble. And they are still rising. Record and growing supply is typically not a healthy environment for investing. That’s especially so when rents are rising faster than household incomes, a condition that’s been under way since 1999 and has been recently exacerbated as rents soared and incomes didn’t.

Multifamily Starts and Rent to Income Ratio - Click to enlarge

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Today we have record new multifamily housing supply and record low rent affordability as rents soar faster than household income. Does that sound like the kind of market that’s a good investment?

This market is now 7 years off its low. The last housing bubble lasted about that long from its base to its high. This does not look like a great entry point, and is clearly not the best ever.

The next point the author, Jeff Reeves, made was that foreclosures are low.The problem with this logic is that low foreclosure rates are consistent with market tops. They are inconsistent with bottoms, or even good market entry points. Foreclosures were very low in 2006 when the housing market peaked. They were high when prices bottomed.

Then he makes the point that Las Vegas, Miami, Tampa, and Orlando are not back to peak bubble levels. That may be true, but it doesn’t make this a good entry point. First, on the basis of the national median sale price of all homes sold by NAR members prices have reached new all time highs, exceeding the 2006 peak by a couple of percent.

While prices in former bubble markets have yet to exceed their 2006-07 highs, the price inflation in those markets since 2011 has nevertheless been astounding. The days of rapid housing inflation are probably finished, again because prices, and yes, mortgage payments are outrunning household income.

Former Bubble Market House Prices- Click to enlargeData Redfin.com – All MLS listings sold

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If you think those numbers are impressive, consider that’s for all MLS listings. Just looking at condo sales, the numbers are even more astounding. Miami, up 143% or 28% per year. Tampa and Orlando, both up 121% or 24% per year. Las Vegas up 96% in 4 years, again 24% per year. I’m sorry, but gains of 24-28% per year over 5 years only happen in bubbles. This is an echo bubble. It might have another year or so to run. It might not. You pays your money and takes your chances at this point. The risk reward equation isn’t to my liking. But be my guest. It’s your money.

Likewise new home sales prices have reached all time highs, 20% above the bubble peak. July new home sale prices actually peaked last year. They have been flat since then. The market has reached the limit of affordability as builders have built and sold more houses in a higher price range. This is another warning that the market generally is closer to a top than a good entry point.

New Home Sale Prices - Click to enlarge

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The Marketwatch piece next makes the point that new online real estate investing tools make it easier for Joe Sixpack to become an absentee landlord. Great idea. You too can be a partner/landlord of a property you have never seen, in a neighborhood and city you know nothing about, with an investment of as little as $5,000! And we’ll only charge you 4% percent/year for the privilege. And this doesn’t even consider the soundness of the conduit you are using to make the purchase. How sound is it as the custodian and manager of your investment. Can you even get access to that information. At least with a REIT from a well known investment manager, you have some prospect of business continuity. With these new online crowdfunding websites, what assurance do you have?

I just… I mean… I can’t.

But I looked at one of these “tools.” It featured single family “investments.” I tried to think of a place where price inflation on a “single family investment” is virtually “guaranteed.” The first place that came to mind was the Upper East Side of Manhattan. I know that neighborhood pretty well. I lived there at one time and I have friends who live there now.

I picked a listing on the north side of 73rd Street between First and Second. I think that’s Lenox Hill. Asking price is $500,000 with a quoted cap rate of 1.47% for a 400 square foot condo in what appears to be a typical Manhattan brownstone 5 or 6 story walkup. God knows what the assumptions were on that cap rate. But hell! 1.5% on an investment with NO RISK! I think I’ll just jump all over that!East 73rd Street Manhattan

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The next point of the article was that financing a real estate investment today is easy! I’m done with sarcasm for now. Let’s just just say that easy financing is not a hallmark of great times to invest.

The final point of the post is that there’s been massive growth in investment in “alternative assets,” of which real estate is the largest. Need I mention that when something becomes so popular and easy that “everyone is doing it,” that that’s typically not a good time to buy?

Reeves finishes this load by backing off the contention that this is the best time ever to invest in real estate. But he thinks that there is strength in diversification and that your portfolio should include everything from TIPS to gold, to small cap biotechs, and hell, with investing in anything today risky and likely to generate low returns, why not a little real estate? I guess he’s not into preservation of capital. I suppose that holding cash in an environment that’s fraught with risk just isn’t sexy enough.

I know a few people that have made a lot of money in real estate. They all had one thing in common. They made it their full time job. They worked at it every day. They bought low, and mostly never sold, using their own skills to enhance the value of their properties over time. The always bought the cheapest properties they could in the softest market conditions, and in up and coming locations, with obvious reasons for that to be so. This is not what Reeves is recommending. He’s recommending easychair, absentee investing via a few computer mouse clicks.

Easy come, easy go, I say. I saw a lot of dilettante real estate investors lose everything even in neighborhoods they knew something about. They’re typically people with a lot of cash burning a hole in their pocket. Today, that means at least $150,000-$200,000 to buy anything decent with 75-80% commercial mortgage financing at 4 to 4.5%. The problem is that cap rates in the best locations are no more than 4 to 5% for solid multifamily properties. There is just no margin of safety.

As for single family properties, they can only be bought and financed with negative cash flow. That’s the biggest no-no in real estate investment. It bases the purchase on a pile of rosy assumptions that typically never come to pass.

Even a 5% cap rate leaves no margin for error. Leverage cuts both ways, and real estate provides both operating leverage and financial leverage. Any slight uptick in interest rates will instantly wipe out most or all of your equity. Your greedy banker will be standing by to snatch your property out of your cold sweaty hands at a moment’s notice.

Likewise your net operating income can be adversely affected by economic softness which would cause rents to fall, and/or vacancy to rise. Inexperienced investors rarely take into account that buildings depreciate. If not aggressively maintained they depreciate physically. They  depreciate functionally over time as styles and tastes change in the marketplace. Inexperienced investors almost never budget enough to account for these long term costs. And if they do, some other idiot won’t, and will overpay for a property that you want. You end up in a bidding war with an idiot. Don’t be a bigger idiot.

This is particularly true when pundits are telling millions of small investors that this is the best time ever to get into the market. That alone is enough to almost guarantee that it’s not, and that it’s more likely to be a terrible time to invest.

Worst of all, neighborhoods sometimes deteriorate. This is called economic obsolescence. That’s a disaster when that happens. Unlike with physical and functional obsolescence, you can’t spend your way out of this one. Your equity will disappear and there will be no way to recover.

To have a successful real estate investment, you must buy low. You must be able to recognize upside potential in neighborhoods. You must be able to identify properties that are underrented, with real potential to increase rents with smart improvements. You must be patient, investing in markets that are cheap, holding and maintaining your property for years, and investing in upgrades when called for.  It helps if you can do the work yourself, or at least oversee it. This is a full time job. It can’t be done from a computer, letting someone else do the work. That someone else is a pro who will skim the cream before you see a dime.

Baron Rothschild famously said in the 18th century, “Buy when there’s blood in the streets.” While he meant it literally, talking about war, value investors in the modern era have used it as a rallying cry to buy stocks when prices have suffered steep declines.

I saw the same thing in the real estate market. We called buyers who had cash, and were willing to use it to snap up properties in the early 1990s S&L crash, “vultures.” They made fortunes.

Conversely, today there’s no blood in the streets. There was from 2009 to 2011, but since then the streets have been more lined with gold than flowing with blood.

Since the 2009-2011 bottom rents have risen 20%, occupancy has risen from an all time low of 89% to a 20 year high of 93%, and mortgage rates have continued to decline, reaching all time lows. This has brought cap rates to the absurd point that 4% cap rates and bullish assumptions that would make a streetwalker blush are considered investment grade. They even use the word “investment” to label single family houses with a 1.5% cap rate. What could go wrong?

Can it get any better than this? Maybe, but common sense would suggest that we are much closer to a top than a good time to buy.

In this environment, any adverse market or economic event, such as a rise in interest rates, or a recession, could wipe out your equity. There’s nothing like owning a trophy property that’s under water. Your banker will be happy to take it off your hands. If you don’t have the financial wherewithal to keep up the payments and wait out a turn in the market, you will lose both your money and the property. Unlike a margin call in the stock market, which may leave you with a few shekels, when you lose your real estate investment you get nothing.

N-O-T-H-I-N-G!

That’s the elevated risk you assume if you buy rental housing today with a few mouse clicks. Unless you are prepared to pound the pavements and do the heavy lifting yourself, and think and act like a shark or a vulture, and unless you have the resources and the will to absorb the loss of your equity while continuing to make mortgage payments, stay away from rental property. This is no time for dilettantism in real estate.

The post Buy When There’s Blood In The Streets – Part 2 of Not The Best Time In History To Invest In Real Estate was originally published at The Wall Street Examiner. Follow the money!

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Not The Best Time In History To Invest In Real Estate – Part 1 http://wallstreetexaminer.com/2016/08/not-best-time-history-invest-real-estate-part-1/ http://wallstreetexaminer.com/2016/08/not-best-time-history-invest-real-estate-part-1/#respond Tue, 23 Aug 2016 03:33:08 +0000 http://wallstreetexaminer.com/?p=304417 According to Jeff Reeves at Marketwatch, this is the best time in history to invest in real estate. Having spent half my professional life in the real estate and real estate finance businesses, let’s just say I was “curious” as to how he reached that conclusion. So I wiped the chocolate milk off my face that I had…

The post Not The Best Time In History To Invest In Real Estate – Part 1 was originally published at The Wall Street Examiner. Follow the money!

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According to Jeff Reeves at Marketwatch, this is the best time in history to invest in real estate. Having spent half my professional life in the real estate and real estate finance businesses, let’s just say I was “curious” as to how he reached that conclusion. So I wiped the chocolate milk off my face that I had just spit up through my nose, took a deep breath, and dove in.

Reeves started out on the right foot:

Ads for house-flipping seminars have returned to AM radio and late-night cable TV in many markets — and so have Better Business Bureau complaints. So-called “liar loans” or “Alt-A mortgages” that played a big role in the housing crash are increasing in popularity. And, of course, there are the fears that a low-interest-rate environment has already prompted everyone to refinance and has artificially created demand for housing thanks to cheap access to mortgages.

Correct!

But it was only a diversion. What followed was either disingenuous, desperate, or delusional.

I think the hysteria over another housing crisis is a lot of hogwash.

Particularly if you’re an investor, there has never been a better time in history to get into real estate.

The next 1500 words were both tortuous and torturous. Unless you are a masterful long form writer with an encyclopedic first hand knowledge of the facts and history as, for example, Mr. Stockman, most media hacks are pumping gibberish once they get past 1000 words. They’re lost in the woods.

But I resolved to pick through the word salad to figure out just what the writer’s point was. I won’t bore you with a point by point examination and rebuttal. I’ll  just give you a preamble on my general feelings about the issue, and then rebut a couple of Mr. Reeves’s key points.

I have no idea what Reeves’s background and experience in real estate are. But, just so you know where I’m coming from, I’m not a real estate investor. I own two homes free and clear, neither of which is much of an investment. I did sell a home in Florida at the top of the bubble in 2005. I had bought the house at the bottom of the 1990-91 real estate crash. Buying at the bottom and selling at the top was pretty good first hand experience. Doing commercial appraisal work for banks and property owners, and especially for the FDIC and RTC from 1987 to 2001, was also pretty good experience with the best and the worst of the real estate cycle.

During that period as a commercial real estate analyst, I appraised hundreds of large commercial and investment properties, and did numerous market studies for big development deals. When the deal was atrocious, and many were, I warned the client and appraised the property accordingly. They would then find another appraiser to give them what they wanted for the deal to go forward. Then a year or a couple of years later, the bank or the RTC would come back to me to get the property reappraised after it had been foreclosed. Some of those deals were even worse than I thought. I also saw good deals, and I fought for them with facts, data, and honest analysis.

Before that, I cut my teeth in the business selling residential real estate, followed by a few years working as a residential mortgage broker. I have had my boots on the ground in both real estate bubble markets and real estate depressions. I’ve experienced all of it first hand and I analyzed the market intensively for a long time.

The other thing I’ve experienced is a family that has been in the real estate business for more than 100 years. I have witnessed their feast or famine cycles first hand. I know the stories of what the conditions were like in each of those cycles.

Simply based on the intuition drawn from spending my entire life either actively involved in or around the real estate business, I feel reasonably confident that this is not “The Best Time In History To Invest In Real Estate.”

In fact, I feel reasonably certain that this is one of the worst times that I have ever lived through to “invest” in real estate. I’m almost 66 and have been paying attention to these things for about 40 years. I can’t say it’s the worst time in history to invest, but I can say it’s one of the worst times I have seen in the last 40 years. 2005 was the worst, and today is just as bad in many ways, and worse in one way in particular that I’ll get to later.

Today’s market may not have the insane froth that blew off in 2005, but the fundamentals really are atrocious. In order to believe that you have a shot at not losing money, you must first believe that central banks will keep printing money and suppressing mortgage rates forever. With rates at these historically low levels there’s just no margin for error. If and when commercial mortgage rates rise, real estate cap rates will necessarily go with them, the property’s market value will fall accordingly and your “equity” in your real estate investment will disappear in a Palm Beach minute.

So, sure… if you believe rates will stay low forever, be my guest! Jump right in with your investment capital. Take that risk. Just be prepared to lose it all. Owning a multifamily building is like buying a stock as a long term investment on 80% margin. Would you do that? If the answer is no, then you shouldn’t be buying real estate. Because real estate is far more complicated, time consuming, and headache prone than stock ownership.

What can go wrong? Let me count the ways.

For example, a 20% increase in the cap rate, say going from today’s 5% for a top quality property in a great location, to 6% in a slightly tighter credit environment would virtually wipe out your equity. Another quarter point or so would probably finish the job.

Then the question is whether you can maintain rent levels through an economic “soft spot,” hold expenses down and continue to make the payments if you are underwater on your equity. Because the minute you go into default by being a little too late with a payment, or breaking some other obscure mortgage covenant, if it’s a great property in a great location, the bank will waste no time foreclosing on you. Good luck trying to stop that in bankruptcy court.

And please be aware, virtually all commercial mortgages have balloons every 5 or 8 or 10 years. At one of those rollovers you will face a come to Jesus moment when the inevitable soft market comes around. You had better pray that you’ve been able to hold the property long enough that you’ve had some equity buildup, or that the pollyanna market of today lasts long enough to have another 5-6 years of 5-6% real estate inflation, so that you have an equity cushion.

And this business about using the word “appreciation” to describe what is the purest form of inflation. Stop it already. It’s inflation. You’re betting that wage inflation will keep up with rent inflation so that you can keep your property 95% occupied. Because that’s the occupancy assumption on which your initial 5% cap rate is based. There, again, is no margin for error. If rents go up too fast, renters will double up faster, and it won’t take long for the property that was 95% occupied to go to 80%, and you’ll have problems collecting the rent on another 10%. If that happens, there you go again: Goodbye equity.

I’m on a roll here but I think I’ll stop for now and start tearing apart Jeff Reeves’s piece point by point in a Part 2 post tomorrow. Who knows, there might even be a Part 3. Hell, I might even serialize it. This could be a 10,000 word financial opinion prize winner! The Bullblitzer Prize.

Before I leave you to think about this, let me take Point 1 in rebuttal to Mr. Reeves. He starts his thesis focusing not on home ownership as an investment. Instead he says, “considering the investment potential — particularly in the rental market — you may want to take another look.” He’s clearly talking about the multifamily housing market.

The first thing I want to pick on is the citing of Realtor.com as a source of “information” supporting the idea that the current housing market in general is not in a bubble. Realtor.com! for goodness sakes.

Let’s be clear about who owns Realtor.com and what its business is. Realtor.com is the primary website for Move Inc. Move Inc. is the online marketing arm of the National Association of Realtors. Its job is the marketing and advertising of houses. It works for the Realtors’ housing market cartel. It’s not here to give us the bad news, or to even give an honest appraisal of the market. Its sole job is to get us to push the BUY button, or to list our property for sale with one of its members. Of course it will find ways to “prove” that this is a great time to buy! You’ll get all the pros, and none of the cons of buying housing now.

Move Inc. is a subsidiary of, drum roll please… News Corporation. Do you know who else News Corp. owns? That’s right, it owns Dow Jones Marketwatch, the very publication for which Mr. Reeves works. A serious, objective analyst would not cite Realtor.com as an unbiased source of real estate market information. At the very least, and I mean VERY least, journalistic ethics would demand that these relationships be disclosed.

More tomorrow!

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The Economy Will Fluctuate http://wallstreetexaminer.com/2016/08/economy-will-fluctuate/ http://wallstreetexaminer.com/2016/08/economy-will-fluctuate/#respond Thu, 18 Aug 2016 16:43:41 +0000 http://wallstreetexaminer.com/?p=304047 Lest we get too bearish on the US economy in the short run, it pays to remember that even though the Fed has outlawed the business cycle, “the economy will fluctuate.” Contrary to the wisdom of JP Morgan, the stock market may not fluctuate, but the economy will. Unlike the good old days when economic cycles…

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Lest we get too bearish on the US economy in the short run, it pays to remember that even though the Fed has outlawed the business cycle, “the economy will fluctuate.” Contrary to the wisdom of JP Morgan, the stock market may not fluctuate, but the economy will.

Unlike the good old days when economic cycles typically ran roughly 4 years between recessions and grew at an average of 5% over time, today it doesn’t work that way. Today, the economy fluctuates over 3-4 months, almost imperceptibly, and economic growth averages 1.5% or 2%, depending on the time of the month. In the second quarter, GDP growth was reportedly +1.2%, which real time tax collection data had clearly foreshadowed.

We were reminded of the 3-4 month cycle in July when Federal Withholding Tax receipts rebounded sharply after the persistent weakness of the second quarter. These fluctuations aren’t seasonal because sometimes the cycle lasts 3 months, sometimes 4 or 5 months. They don’t occur at the same time every year. But like all things, the economy does still have these small, mysterious cycles. Breathe in, breathe out. Or something.

The second quarter weakness made it appear that the US was sinking into recession. At least that’s what I thought at the end of June, but I warned that an upturn in this short term cycle was due, and sure enough it came pretty much on schedule.

Many bearish observers focus on the lagging data from the second quarter which showed slowing and extrapolate that forward. As a long term bear on the state of the US middle class, and a harsh critic of central bank market manipulation and the disastrous economic trends that are a result of that, I fully commiserate. Central bank policy has punished savers and rewarded speculators. It has encouraged corporate chieftains to engage in financial engineering schemes that hollow out their companies while enriching themselves and their top lieutenants. Fed policy has enabled them to persistently cheat workers out of a fair share of the US economic pie.

So for most Americans incomes stagnate or fall. The bulk of the new jobs that the economy generates are low paid service jobs. For more intellectually demanding, higher pay jobs, corporate bosses import cheaper talent from China and India. Then the bosses require their US employees to train the new hires, only to then be forced to turn over their jobs to the lower paid newcomers. In this survival of the fittest and cheapest environment, only the smartest survive and prosper. The rest get leftovers or nothing at all. When fewer people get the rewards of hard work and thrift, the foundations of the economy eventually crumble.

It’s insidious and slow moving, but over the long haul the trend is clear. More Americans are doing worse under policies which promote speculation and debt over savings and real investment. The trend of serial central bank policy blunders that I have talked about for the past 14 years continues to hollow out the US economy. Ultimately that will lead to cataclysm if the trend is not at least halted, if not reversed. Neither of those seems likely for the foreseeable future. The Fed is terrified of raising interest rates even a quarter of a point. A fair and reasonable return on the savings that come from hard work and thrift are not on the horizon.

While the long term trend is a growing disaster, the short run economic counter trend bounces matter because the Fed bases its policy decisions on whatever’s happenin’ now, baby. If we get a handle on the current reality ahead of everybody else, then as traders we have a leg up on what the Fed is likely to do next, like the long expected phony interest rate rise that the Fed keeps postponing.

Just as the withholding data showed an uptick in July, a subgroup of the July industrial production data released this week also rose markedly. The overall data was punk, but this critical industry surged, and it wasn’t all because of the weather.

The industrial production index for electric power generation and distribution is a decent proxy for the US economy as a whole. While industrial production does not directly measure services output, electricity serves everything that the US economy generates. All businesses, whether industrial, commercial, or services use electricity. All households use electricity. When electricity generation surges there can only two reasons for it. It’s either the weather or a change in business conditions. If July was brutally hot, then people will use more electricity to run their air conditioners. If July weather is more or less normal, then if there’s an increase in electricity distribution, it would probably be due to an increase in business activity.

Electricity generation and distribution in the months of May, June and July had been flat from 2006 to 2015. Some of that was due to increased energy efficiency. Some was because the economy remained weak, with activity shifting from high value, energy intensive uses, to low value uses which use less electricity. That flat performance continued in May and June of this year, but July 2016 electricity use surged to a new high. Something changed in July.

Electric Power Generation- Click to enlarge

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But was it just the weather? We know that July was really hot in most of the US. NASA data shows that the average temperature in July was 75.25 degrees F. That was 1.33 degrees hotter than July 2015. So at least some of the increase in electricity usage was because it was hotter. But July 2012 was significantly warmer than July of this year, at an average temperature of 76.77 degrees. July 2011 was also hotter than this year.

US Mean Temperature By Month- Click to enlarge

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If the increase in July electricity use was exclusively due to this year’s hot weather, then it would still be less than usage in July 2012 and 2011. But current usage was higher than both of those years. That suggests that a portion of the increased usage was due to increased business activity. Usage in May and June was still rangebound below the peak levels. The fact that July usage broke out to a new high and temperatures didn’t, suggests that US business grew in July. That tends to corroborate the implications of the strong uptick in withholding tax collections that month.

Assuming that this trend continues through August, 2 months of strengthening economic data such as the July jobs data, should be enough to finally get the Fed to move off the dime at its next meeting on September 20-21.

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Industrial Production Let Me Count The Ways http://wallstreetexaminer.com/2016/08/industrial-production-let-count-ways/ http://wallstreetexaminer.com/2016/08/industrial-production-let-count-ways/#respond Thu, 18 Aug 2016 02:08:48 +0000 http://wallstreetexaminer.com/?p=303979 Don't believe everything you read about the economy in the Wall Street Journal

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Don't Believe Everything You Read About the Economy in the Wall Street Journal.

The monthly industrial production indexes contain a wealth of information about the performance of the US economy. They represent the production of factories, mines, and utilities in unit volume, not dollar sales, including totals, and figures by industry. While they do not represent service industries directly, they do so indirectly because industrial production feeds service business and vice versa. The IP indexes give us a pretty good idea of how the US economy is performing overall, and by industry.

There are a number of ways to look at the data. Some are helpful. Some are useless. For example, the Wall Street Journal reported that “Industrial production, a measure of everything made by factories, mines and utilities, rose a seasonally adjusted 0.7% in July, its largest advance since November 2014, the Federal Reserve said Tuesday.” That’s not only useless. It’s misleading. The Journal also claimed that “manufacturing production posted its largest advance in a year, one more sign the sector is stabilizing.” It reached that conclusion based on the seasonally adjusted numbers reported by the Fed.

The problem is that on an unadjusted basis, that is, actual production as opposed to a statistical abstraction, there was no improvement in either the broader index or the manufacturing index.

Industrial Production Annual Change- Click to enlarge

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To avoid the problem of seasonal adjustment we merely need to compare the annual rate of change between different periods to see if growth is accelerating or declining. Growth began to slow in December 2014, going negative in September 2015. The year to year decline reached -2.6% in both December 2015 and March of this year. It was at that point that the downward momentum stopped, with the year to year decline improving to -0.45% in June. But in July, the annual rate of change slipped to -0.5%. Contrary to what the Fed reported and the media regurgitated, there was no improvement in July.

Looking at the long term trend, here’s another interesting tidbit. The level of the index in July was only +0.6% higher than in July of 2007 when IP was peaking after the housing bubble had begun to deflate. At the same time, the S&P 500 is 54.4% higher. And they say this isn’t a bubble!

Industrial Production Trends - Click to enlarge

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Let that sink in for a moment. stocks have risen 54% while industrial production is virtually unchanged since 2007. Therein lies the power, and the uselessness of central bank market rigging. It works for the speculators. It doesn’t work for the economy. A case can be made that by discouraging savings, QE and ZIRP actually retard economic growth.

Notably, as IP has stalled over the past year, stock prices have continued to rise. Even though the Fed ended its QE program, it has kept interest rates near zero. At the same time the 2 headed monster of the BoJ and ECB have continued and even increased their QE programs. In this interconnected world of finance dominated by multinational megabank trading firms, QE anywhere is QE everywhere. So US stocks continue to inflate while the US economy languishes.

Prior to last year, skyrocketing oil and gas production contributed mightily to total IP. Had it not been for the energy boom, industrial production overall would be far weaker today than in 2007. Breaking out Energy production and IP Ex Energy better illustrates just how weak US production is. Without the benefit of a 21.4% increase in Energy production since 2007, Industrial Production would be down 5.6% since then. Making matters worse, energy production declined over the past year.

Industrial Production- Energy vs. Non Energy- Click to enlarge

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The Wall Street Journal’s interpretation of the Manufacturing Production data was that it had posted its best gain in a year. That’s just false. Over the past year the annual growth rate has fluctuated around zero. The best gain was +0.88% in July 2015, with October 2015 coming in second at +0.87%. The year to year gain this July was +0.03%, or virtually unchanged. That was worse than June’s gain of +0.39% y/y. There’s no way to construe that as the “best gain in a year” unless you make up phony numbers using seasonal adjustments.

Manufacturing Production- Click to enlarge

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The US manufacturing “recovery” is dead. It recovered most strongly between 2009 and 2010 and the gains have slowed ever since. The growth rate has fluctuated around zero for the past year. Manufacturing production is still 5.2% below its level of 9 years ago. That production, and the jobs that go with it, are likely to be permanently lost. Policies that discourage savings and real investment coupled with trade policy that favor moving manufacturing jobs to emerging markets where worker wages are a pittance and working conditions are worse, are largely to blame.

Bottom line, don’t believe everything you read about the economy in the Wall Street Journal or any of the mainstream financial media. It may not be the whole story. In fact, it may even be dead wrong. For Industrial Production, the seasonally adjusted gain of 0.7% is just a made up number, as all seasonally adjusted data is. It’s not only meaningless in this case, it’s misleading. Industrial production did not strengthen in July.

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Yes, We Do Have Inflation, We Do Have Inflation Today http://wallstreetexaminer.com/2016/08/yes-inflation-inflation-today/ http://wallstreetexaminer.com/2016/08/yes-inflation-inflation-today/#respond Tue, 16 Aug 2016 18:11:45 +0000 http://wallstreetexaminer.com/?p=303848 In conjunction with the record highs in stock prices, the CPI data released today continues to show that ZIRP suppresses consumer goods inflation while inflating asset prices. This should be news to no one. The Bank of Japan dropped interest rates below 1% more than 20 years ago and to zero in 1999 and their CPI…

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In conjunction with the record highs in stock prices, the CPI data released today continues to show that ZIRP suppresses consumer goods inflation while inflating asset prices.

This should be news to no one. The Bank of Japan dropped interest rates below 1% more than 20 years ago and to zero in 1999 and their CPI has been zero ever since. The US has had ZIRP and very low inflation since 2009. Central banks ignorantly and willfully ignore these facts. Instead, they impose policies that foster wild speculation and financial engineering schemes. These policies benefit no one but speculators, hedge fund managers, and corporate executives.

The BLS reported headline CPI for July at a seasonally adjusted annualized rate of zero, with core CPI at 0.1%. I won’t quibble with that. The annual rate of change on a not seasonally adjusted basis was +0.8% on the headline number versus +1.0% in June, so there was clearly some softening in July.

The Fed first enunciated its 2% inflation target in 2012. It focuses on the core PCE, which clearly understates actual consumer inflation using mechanics which I have recently covered here and in numerous past posts. Using a less biased measure such as the Producer Price Index for Finished Consumer Goods, inflation has run at a compound growth rate of +2.1%. That slightly exceeds the Fed’s target ever since it was first established.

CPI, PCE, and Reality - Click to enlarge

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This is even after a flat period that has persisted for the past 6 months. This has been a common pattern since 2012, with inflation subdued in the first half of the year, then surging in the second half. At any rate, fairly measured, consumer inflation has been above the Fed’s target.

Based on core CPI, which severely undercounts housing inflation, whether by house prices or rents, inflation has undershot the Fed’s target. Core CPI has had a compound growth rate of 1.9% since 2012.

The Fed focuses on Core PCE, which is an even more suppressed measure. The Fed has thus been able to pretend that inflation has been well below the target of 2%. Core PCE has a compound growth rate of 1.5% since 2012. That has been one of the Fed’s main reasons for keeping interest rates near zero.

Not only is there no evidence that super low interest rates stimulate consumer inflation, there is plenty of evidence that ZIRP actually suppresses consumer prices. Prices will only rise to whatever the traffic will bear. Given current policy and the resulting effects, American consumers simply cannot afford to pay prices that rise faster than their wages.

QE and ZIRP have diverted money into speculation by bankers, hedge fund managers, other leveraged speculators, and of course, corporate executives. They use interest free debt to have their companies buy back the shares they issued to themselves under stock option grants. Meanwhile they shortchange investment in labor. They keep domestic wages low by either replacing workers with automation, or by importing cheaper labor, or by exporting American jobs to places where they can be done more cheaply. Consumer prices can’t rise faster because consumer demand is weakened by current policy.

Money printing (QE) has stimulated inflation, just not the kind that economists define as inflation. They keep their focus strictly on the CPI and PCE, which are arbitrary baskets of consumption items designed to understate actual consumer inflation. The Federal Government created the CPI to index the cost of government benefits, salaries, and contracts to the “cost of living.” That can be whatever the government wants it to be. Throughout its history CPI methodology has been repeatedly changed to keep the numbers as low as possible.

The government, economists, and the Wall Street media make no pretense of measuring monetary inflation or asset inflation. Economists and policymakers completely ignore these kinds of inflation. In fact, asset inflation isn’t even called “inflation.” It’s called “appreciation” or “gains” or “growth.” It all sounds very benign.

But it isn’t. Inflation of asset prices can only continue for so long. Eventually they collapse, bringing disaster to the financial system. That only starts another round of monetary inflation and the cycle goes on ad infinitum, constantly weakening the economic base over generations. Total debt has grown exponentially with round after round of ever increasing monetary stimulus. It is no accident that the real growth rate of the US economy has dropped over the past 40 years from around 5% to around 1-2%. Monstrous levels of debt are slowly but surely bleeding the US economy to death.

So keep this in mind the next time Wall Street economists and pundits claim that “there’s no inflation.” Since ZIRP was instituted in 2009, the money supply has inflated at a compound annual growth rate of 6%. Meanwhile government measures of consumer prices have only inflated by 1.5% to 1.9% over that period.

CPI, Money Supply, and Stock Prices - Click to enlarge

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That money hasn’t simply lain fallow. It has caused massive inflation in asset prices. Stock prices have risen at a compound annual rate of 13.8% since 2009. Housing prices have risen at a compound rate of 11% per year based on the current MLS data from the NAR, which is the broadest and most comprehensive data on the housing market.

So ZIRP has clearly resulted in inflation, just not where the Fed economists are looking. They turn a blind eye to asset inflation, ignoring its growing danger to the fragile financial system and US economy.

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Real Time Tax Withholding Data Warns In Advance on Economic Releases http://wallstreetexaminer.com/2016/08/tax-withholding-data-warns-advance-economic-releases/ http://wallstreetexaminer.com/2016/08/tax-withholding-data-warns-advance-economic-releases/#respond Tue, 09 Aug 2016 18:24:23 +0000 http://wallstreetexaminer.com/?p=303290 I warned in my latest Federal Revenues Report that withholding tax collections had rebounded sharply in late July, to bring the 4 week average of biweekly collections to its biggest gain in several years. That gain reached double digits, something we have not seen since 2011. That report was based on daily data through August 1.…

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I warned in my latest Federal Revenues Report that withholding tax collections had rebounded sharply in late July, to bring the 4 week average of biweekly collections to its biggest gain in several years. That gain reached double digits, something we have not seen since 2011. That report was based on daily data through August 1.

There had been some very weak readings prior to that. Consequently I couldn’t tell whether this was just a snapback to trend, or possibly a sign that the US economy was heading into a blowoff resulting from all the monetary stimulus it has received. That stimulus has been boosted lately as negative interest rates in Europe and Japan causes capital to flee those markets and head straight for the US.

In the Federal Revenue reports, I consider and analyze a variety of Federal Taxes which the US Treasury collects and reports in real time. It’s critical information because it gives us a heads up on how the lagging economic indicators will be reported in the following month.

The 4 week data on the withholding taxes showed the increase in withholding that the month end data could not, due to calendar anomalies. In July of this year, the last day on which taxes could be collected was Friday, July 29. In 2015, the last collection day in July was the 31st. That meant that the collection of taxes due from the last 2 days of July rolled over into August this year. Those collections did not show up in the July number. As a result the year to year change for the month of July was a decline of 1%. That’s how most observers who track this information reported it, and interpreted it.

They missed the boat on that. I reported that the decline was due to the calendar and that a method which ignores the calendar and bases its report on a 4 week period of biweekly collections showed a stunning double digit increase as of August 1. That was higher than any time since the 2010 rebound from the recession. It is true that even on a smoothed basis, withholding collections are volatile, but a couple of weeks of rising collections can’t simply be written off as anomalous. We must look at patterns and trends to see if the move is consistent with those patterns.

In this case it was, which gave us a heads up that the nonfarm payrolls data would be stronger than the consensus expected, when many observers were leaning the other way. In fact, I had been leaning the other way until the last couple of weeks of July when the tax collections began to uptick.

As recently as July 15, collections were running weak, but then something changed. The year to year change in weekly collections was extremely weak at -15.5% but the following week saw a rebound to +27%. The next 2 weeks saw gains of 6.7% and 5.1%. These numbers are not adjusted for inflation. Since most paychecks lag the pay period by a week or two. The uptick in taxes suggested that the early July jobs survey period would be strong.

Weekly Withholding Taxes - Click to enlarge

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The late July uptick was not inconsistent with the typical fluctuations in this data. It was larger than usual, but it was within the trend channel.

Weekly Withholding - Click to enlarge

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As a technical analyst I respect trendlines and evidence of cycles, concepts which economists never consider. To them, econometric models are science while technical analysis is voodoo. That’s one reason why economists’ forecasts are always wrong. They do not respect technical analysis. It’s similar to their ignorance of the most fundamental rules of double entry accounting. You can’t forecast accurately if you don’t accept reality. Technical analysis and the fundamentals of Accounting 101 provide the framework for understanding how things work in the real world, in particular in technical analysis the understanding of trends, and cycles within trends.

There are many ways of looking at data in the attempt to best understand it. The data on which these charts are based is complete through the week ended August 5. They show the recent uptick in collections versus the weakening that had been under way since the last week of May. However, weekly collections are still well below their late May peak. It is not clear that the recent uptick represents a change of the trend that has reflected a weakening US economy. As a result we need to watch the data closely in the weeks ahead for any sign of a real change in direction.

Get a handle on the real time tax data and what it tells us about the US economy and markets in the Pro Trader Federal Revenue Reports

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How Much Stimulus Did Fed Housing Subsidy Really Buy? http://wallstreetexaminer.com/2016/07/much-stimulus-fed-housing-subsidy-really-buy/ http://wallstreetexaminer.com/2016/07/much-stimulus-fed-housing-subsidy-really-buy/#respond Thu, 28 Jul 2016 12:58:03 +0000 http://wallstreetexaminer.com/?p=302179 Today I’ll dig a little deeper into the new home sales data and related data. I want to help you see how the media spins the story to suit its narrative in support of the status quo. The status quo includes the ideas that the housing “recovery” is a big deal, that housing inflation is a matter…

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Today I’ll dig a little deeper into the new home sales data and related data. I want to help you see how the media spins the story to suit its narrative in support of the status quo. The status quo includes the ideas that the housing “recovery” is a big deal, that housing inflation is a matter of “appreciation,” and that we should all thank the Holy Fed for stimulating this great recovery. But the data suggests that rather than stimulate recovery, Fed actions seem to have retarded it.

Yesterday we covered the idea that the media ignores historical perspective in touting the strong recovery off the housing crash low. Even with the rebound, the market is still little better than recession levels from 20 years ago. At the same time, by pushing mortgage rates to record lows, the Fed has stimulated enough housing inflation to suppress sales in spite of population growth and growth in the number of full time jobs. It has also cost savers trillions in lost income.

The Fed wanted lower mortgage rates to stimulate the market. But the combination of the increase in jobs being mostly low pay service jobs, and the rapid inflation of house prices has left most households off the Fed’s gravy train. At typical qualifying ratios and down payments, households at the median household income can only qualify to purchase a house priced around $200,000. The problem is that home builders aren’t building houses priced less than $200,000. That leaves almost half of US households unable to buy new homes. In some overheated metro markets, the percentage is even greater.

New Home Sales Under $200,000 - Click to enlarge

In June, nationally, builders sold only 8,000 houses priced at less than…

Read the rest of this post at David Stockman’s Contra Corner.

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Behind The New Home Sales Data — A Darker Backdrop http://wallstreetexaminer.com/2016/07/behind-new-home-sales-data-darker-backdrop/ http://wallstreetexaminer.com/2016/07/behind-new-home-sales-data-darker-backdrop/#respond Wed, 27 Jul 2016 12:51:07 +0000 http://wallstreetexaminer.com/?p=302168 There’s so much great data in the Commerce Department’s monthly new home sales report. It’s always useful to parse it for all the tasty morsels that the mainstream media ignores. We’ll take a look at some of it here, with more to come in the days ahead. First let’s look at the usual positive spin…

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There’s so much great data in the Commerce Department’s monthly new home sales report. It’s always useful to parse it for all the tasty morsels that the mainstream media ignores. We’ll take a look at some of it here, with more to come in the days ahead.

First let’s look at the usual positive spin given the report in the mainstream media which is usually devoid of historical perspective whatsoever. It’s always about the short run. The Wall Street Journal’s headline said it all.

U.S. New-Home Sales Posted Solid Gain in First Half of 2016

Solid pace offers fresh evidence of healthy momentum in the U.S. housing market as home-buyers enjoy low interest rates

All of that is true, but it doesn’t tell the whole story. To his credit, the Journal’s Ben Leubsdorf noted in the body of the article that “the pace of home construction and purchases of new homes remain depressed compared with levels seen during past economic expansions” but he never addressed just how weak those sales are.

Here’s some perspective.

Sales have nearly doubled from the June 2010 and June 2011 lows of 28,000 to this June’s 54,000. But this is still down sharply from the June 2005 peak of 115,000 units. At the same time, it barely exceeds the low of 47,000 reached in June 1991 and 53,000 in June 1992 during that recession.

New Home Sales Long Term- Click to enlarge

Read the rest of this post at David Stockman’s Contra Corner, where first published.

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