S&P CASE SHILLER: THE HOUSING DOUBLE DIP IS HERE
This morning’s Case Shiller data shows more of what we’ve been seeing in other housing data despite being a lagging indicator. Clearly, the weakness in the housing market is back:
“New York, November 30, 2010 – Data through September 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. In September, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down; and only the two composites and five MSAs showed year-over-year gains. While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market.”
“The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City
Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all
nine U.S. census divisions, recorded a 1.5% decline in the third quarter of 2010 over the third quarter of
2009. In September, the 10-City and 20-City Composites recorded annual returns of +1.6% and +0.6%,
respectively. These two indices are reported at a monthly frequency and September was the fourth
consecutive month where the annual growth rates moderated from their prior month’s pace, confirming a clear deceleration in home price returns.”
Source: S&P
And this is the chart that shows why Bernanke did QE1 and QE2 for past 2.5 years. My mortgage payment is down BIG, thank god. My run-up in equity is mostly lost on house bought in 2003. Happily, Ben is helping.
Arguing against QE2 was dumb.
QE2 was dumb. Rates are up since the Bernanke JH speech and the CRB commodity index is up 13.4%. The only things QE did was encourage speculation which in commodities is resulting in margin compression.
Rates went down a lot in advance of the Bernanke speech. It doesn’t matter what they did from your starting point — what matters is that tens of thousands of people have re-financed at much lower rates.
True, if a borrower timed the refi right they could have taken advantage of the lower (for a time) rates. Congrats to you for being smart enough to do this. I would argue though that not enough borrowers were willing or able to refi (due to negative equity) during this period to offset the negative effects of QE2.
That is a good point. However, I have come to learn some interesting things — many people I know bought 5 years ago and they bought 5-year fixed, 25-year floating mortgages. They automatically re-set at the prevailing rate — no qualification needed — its automatic, with no fees.
In some cases — not mine — people bought 5-year interest only and now have to start paying principal. There payment would have gone up BIG — except that the interest portion drops substantially and its basically a wash.
I have heard this a lot. This is a good thing that Bernanke got mortgages down big, trust me.
Mikey:
The standard 5 yr ARM resets to an index (usually to Treasury, or 6 month LIBOR). The typical reset is only good for one year, then resets again.
The indexes are VERY low right now, and most folks that have resetting ARMs saw their rate go down this year. Some chose to refinance to a fixed rate, in this low rate environment, and not many are choosing ARM’s today, despite them being tantalizingly low.
Like you say, people in standard interest only ARMS resetting this year would not have experienced a greatly increased payment:
Example: $250K loan, 5yr ARM at 6.00%, interest only, with a 2.25% margin. Interest only Payment (excluding tax and insurance) =$1,250
If it reset today at anything below 3.5%, the payment would not rise (despite the 25 yr term, and principle and interest). Using the 6 mo libor index at 0.46 plus the margin of 2.25, the reset could be as low as 2.75%.
The loan payments that ARE significantly rising (though not as much as feared), are the Option Arms, which featured a LESS than interest only payment. Those payments started very low, gradually increasing for about the first 5 years, and then reset to a principal and interest 25 year loan.
Example: $250K loan, Option ARM at 6.00%, with a 3.00% margin. Minimum Payment (excluding tax and insurance) =$804.10 (based on 1% of loan balance, amortized). Minimum payment increases by 7.5% annually, in the 5th year the payment would be $1,073.85 (assuming no reset due to reaching LTV limit).
If it reset to 3.5% at the end of the 5 yr period, AND the principal had increased by $40,000 (an estimate, based on deferred interest), the fixed payment would be $1,451.81. That’s an increase of $377.96 per month (from the preceding year). Some folks could swing it, some folks were counting on increased future income, some folks are going to have to pack it in (most likely those with substantially higher loan amounts, or lesser incomes).
So, I agree that it is a good thing that we got the interest rates down big time. The train wreck unfolding now could be a lot worse. The last reset for an Option ARM should occur mid 2012 (there were none offered that I know of past mid 2007). It’s a reasonable assumption that rates will remain fairly low until then. It may be a part of the grand plan, but then again, Option Arms may only be a flea on the hair of an elephant.
One caveat to all of this: There were a lot of different structures to Option Arms, the one I presented was fairly typical. If anyone has questions about their Option Arm, I suggest they talk to an experienced loan originator (working at least 5 years). They were very complicated loans, but I can attest that some folks are CHOOSING to remain in them, and some folks cannot refinance out of them (as they were excluded from the high LTV HARP program), nor can they sell the properties without a short sale.
Mikey1975,
With all due respect the problem Helicopter Ben is fighting is much bigger than U.S. housing. With the Euro imploding (excellent articles at this web site on that subject) its driving the value of the dollar higher. Much speculation in markets Ben saw this coming and implemented QE2 to counter the upward pressure it would put on the U.S. dollar. A strong dollar is good during a secular equity bull, but a weak dollar is best during a secular equity bear, …which we are currently in.
Even with QE2 the dollar has been in rally mode since early Nov. when Ireland and concern over other PIIGS really came back into the spotlight. Why keep the dollar weak at this point? In this economic environment raising taxes and cutting spending have a negative impact on economic growth, not to mention they can be a political hot potatoes. The alternative is to inflate to “manageable” levels the $60-trillion or more in unfunded government liabilities. Its a typical ploy of congress to let the Fed do their dirty work. That way they can avoid negative press by cutting peoples benefits or raising their taxes. At the same time they can use the Fed as their wiping boy. Just look at what Congress ISN’T doing and how the squawk at what the Fed is doing.
With the Euro now out of the competition for world reserve currency status the world, for the most part, simply has to accept how much Ben debases the dollar. Historically currency debasement (currency inflation) eventually leads to inflation, not that there can’t be deflationary events along the way as occurred in ’08 and appears to be at hand now.
China for one is looking at the secular (long term) trend. The longer term implications of the Fed’s dollar debasement program is clear to them. Just look at what they are doing with their $1.6 trillion in U.S. dollar reserves. They are not only buying gold, but recommending the buying of gold to the Chinese public. …Not to mention China is investing as many of those dollars as they can into natural resources around the globe. coal in Australia, uranium in Canada, oil and minerals in Brazil, East Africa, and other S.America countries. You might consider doing the same. As we can’t control what the Fed does, but we can invest accordingly.
Historically there have been three secular commodity bulls since 1900. The shortest was 16-yrs., the longest 21-yrs in duration. This one started with the tech bust/dollar bull market high between ’99 & ’01 so historically you are looking at perhaps 2016 to 2021 prior to the end of this secular trend. As secular bull markets in commodities coincide with secular bear markets in equities, it only makes since to overweight commodities and commodity related issues during the current secular trend. My preferred sectors at this time being energy due to “Peak Oil” which I suspect will overwhelm the slowing economy much as QE2 is being overwhelmed by “Greece II” (the new Euro sovereign debt implosion), and agriculture due to the growth of China’s and India’s middle class and low global inventories. I know Jimmy Rogers likes the industrial metals, but its hard to see that sector, with perhaps the exception of copper) doing a lot in a global economic contraction. I know, China is still growing but Europe is their #2 customer and you see what’s going on over there. Not to mention the steps China is taking to slow their “currently” overheated economy.
In sum, the global economy is a total mess and chicken little Congress has done little other than thrown it all into Big Ben’s lap. Ben’s doing all he can under the circumstances he has to work with, …not that I agree with everything he’s doing. But to simply do nothing and let the U.S. and global economy contract as it did during the ’30s? Geese. The real problem is the Fed has been doing everything they could for two decades to keep the economy from puking. Eventually it will and it will likely be worse than had they simply got it over with years ago.
Put another way, every time the Fed gave the economy pepto bismol it allowed Congress to avoid the hard choices that would have put the U.S. on the right path. In stead Congress simply used the temporary calm to continue shoveling food down the mouth of the U.S. economy. Now I’m afraid its, “just one last wafer-thin mint” time. You’ll have to Google that one if you don’t understand.
Nice summary, Brujo.
One of the best arguments I have seen for being bullish in commodities, and a decent defense of Bernanke actions.
Congress seemingly cannot bring itself to act in the best interest of America.
Right, don’t disagree with any of this except that U.S. housing is first and foremost the issue — though its certainly not the only issue.
Regarding mortgage re-sets — yes, many people are in fear of losing their jobs and might feel they need to sell their house anyway — so they are comfortable just holding an adjustable mortgage as they probably won’t make it X years anyway. This would be an unmitigated disaster if not for QE1 and the move in rates ahead of QE2 — watching rates only since the ‘announcement’ is pretty ridiculous — there was a massive run-up in front of it. So much so that many were calling it a bond bubble.
In fact, bond total returns are still well into the double-digits YTD% — and everything from 7 to 30 year treasuries are still well ahead of the S&P 500 — despite the ridiculous starting point of November 4th.
The bond market would have to sell off huge for people to not continue to re-set at much lower rates than 5-7 years ago — even if they don’t qualify for such re-sets.
I think it’s a real stretch to argue that QE alters interest rates or the value of the dollar. In fact, there is almost zero evidence that it does either….
It surely matters for confidence — which is an underrated aspect to an economy. Try talking to CEO’s of large corporations that make decisions on things like layoffs.
Fed action can’t control interest rates, the dollar or the economy — all it can do is exert some influence on each of these. Even if that influence is just confidence, that is important.
I don’t disagree at all on the psychological front. It’s an underestimated tool to utilize. But if hope were all we needed these last few years I think Obama would be much more popular right now….Operationally, QE does very little.
What the Case Schiller Index tells us is that nobody is lining up to buy houses. Real estate is a great investment, as long as people have the expectation that prices will continue to rise, and that will surely happen again sometime in the future. But the continued fall in prices across the nation, month after month, indicates that people on mass expect prices to continue to fall, and they continue to wait until they think that they are as low as they will go before buying again (and banks don’t want to lend while prices continue to fall). I don’t know why everybody is so afraid to say it; THERE IS A CONTINUING AND GROWING EXPECTATION OF FALLING REAL ESTATE PRICES! DEFLATIONARY EXPECTATIONS IN REAL ESTATE PRICES IS GROWING DAILY! And real estate is the biggest and most important asset in the economy. That is why Bernanke is again stress testing the banks; another round of losses on mortgage backed securities is on the move!
On average, you still would have been better having your money in housing over the last 10 years than in the stock market. More or less so, in any given year.
Housing went up on average 45% over the decade.
Stocks…? depends on any dividends I suppose. Just looked at all of the Vanguard funds 10 yr performance, which includes dividends. S%P 500 not even 1%, the best fund returned 22% (precious metals).
Sure, there are costs to own housing (interest taxes and maintenance), but some of that is offset by tax deductions.
Add to the mix that housing providing you a roof over your head, and it’s not even close.
Of course, no telling what the next decade brings.