Housing Bubble Bursting?

[moh malekpour]

Tax cut has been a political tool since government started taxing people. There is nobody, poor or rich, who likes to pay tax and there is nobody who doesn’t like tax cut. Politicians know that sentiment and use it to the max. Republicans have used this sentimental tool more than Democrats as they pride themselves to be pro tax cut. How difficult is it to do something that every voter and constituent loves it? The difficult thing is to do something that nobody likes it and that is to cut expenses. Yes, Republicans cut taxes but turn around and borrow the same amount or even more for spending. Is there any different for the citizen to pay it now or pay it later with the interest. Pay it now means what Democrats want to get it now by taxing people and spend it. Pay it later is what Republicans want to not pay it now but instead borrow it and spend it and pay it later with the interest. I go for pay it now if I have to pay it later with the interest because I am not going to kid myself that I am getting something while in reality I am not and also if I pay it now, I don’t have to pay interest on borrowed money later.

 

[moh malekpour]

As Brad pointed out in his post, the definition of a recession used by economists (since 1966, when I took my first macro-economics course in college), is 2 consecutive quarters of negative GDP (actually, they used GNP back then).

There are not 2 consecutive quarters of negative growth, therefore it doesn't meet the minimum standard to be labeled a recession.

The chart shows that the GDP for 1st QT of 2001 was -0.25 and for the 3rd QT was -1.75. Although these two QTs were not consecutive but were very stiff figuers ,however, you say that year 2001 was not in recession. How about if the GDP for all four QTs of 2001 were 0. What is the definition of consecutive of 0 GDP? Recession,stagflation, deflation, depression or Growth?

 

[Austin]

Normal Is Not Defined In Economics

How about if the GDP for all four QTs of 2001 were 0. What is the definition of consecutive of 0 GDP? Recession,stagflation, deflation, depression or Growth?

Moh, you speak with much wisdom. The point you are squeezing out of this is that deviancy defines normalcy or equilibrium. If we had 0% growth it is called a mature economy. The opposite of recession, stagflation, deflation, depression, and growth is equilibrium or the normal condition. I haven't grown in about 45 years and I am as happy and prosperous as I can be. It is not a bad state at all. My weight goes up and down from time to time, but those are just the seasons of a mature life.
I had a Chinese roommate in college. He use to read a little book with the saying of the Chinese philosopher Confucius. For some reason, I never forgot this one: "Why can't a giant Oak tree grow to reach the sky?"

 

[Randolph Kinney]

I recall there was a revision that toggled it between recession and no recession. Did you find it charted?

Roger, the graphic that I posted to Brad was data from November 2002 showing 3 consecutive quarters of negative GDP growth in 2001. That source was also from the federal government. So yes, the recession of 2001 was revised several years after the fact to show an intervening quarter of robust GDP growth followed by a negative quarter. Moh is pointing out the stupidity of the data as the government shows it to be now and how does one relate to a year of zero sum growth for all quarters; was that stable growth, net? Or was that slow growth? Or was that really negative growth averaged over a year so that it looks like a year of little positive growth???
:new_popcornsmiley:

Hopefully the Fed isn't as formula driven as you suggest.

I have not suggested the FED is formula driven. The FED does not control the debt market overall. It does influence short term interest rates with its monetary policy. Long term rates respond to market participants. If and when the FED tightens monetary conditions sufficiently to produce high short term rates and the market participants judge it to be too tight by inverting the yield curve, it does follow that GDP growth not only slows but does slump into negative growth.

The whole issue is whether the FED is all knowing enough to engineer the so called soft landing scenario that has been believed in by certain people. I say the FED is not all knowing and does a poor job of maintaining stable prices, stable employment, and stable economic growth.

The government with its monetary and its spending controls the economy. It produces winners and losers with its policy changes. Inflation is another product of taxation on the economy. Who wins? Does not the biggest debtor benefit? Does not government collect more taxes?

Your caveman story of money is very apropos. Now all you have to do show how Grog takes a percent of each transaction and distributes the results to his friends to complete the analogy. Or maybe Grog should have an excess deer meat tax for people who have more than others so that Grog can feed the people who don't have much deer meat. Then your story will have all the necessary components to show how people are being swindled.

 

[Pamela Crowley (Florida)]

Some Palm Bay, FL builders are now discounting around 15% off their prices along with offering higher commissions to the Realtors they wouldn't talk to at all a couple months ago, increased concessions and additional free upgrades (this is above the 15% off) and still have a fast growing number of finished or almost finished houses where the under contract speculators have cancelled. I expect that 15% discount to get larger, by how much I don't know.

Vacant lot sales are screeching to a halt and the few recent sales are over 50% lower in price than last Fall.

 

[JSmith43]

Or maybe Grog should have an excess deer meat tax for people who have more than others so that Grog can feed the people who don't have much deer meat. Then your story will have all the necessary components to show how people are being swindled.

WHat I really intend to do is take out the political red meat comments (all of it), clean up the story line (only as much as I have to) and turn out a series of small books suitable for children 10-15 years old. Think of it as a step above a Rocky and Bullwinkle cartoon, with the bonus being the journey to the "moral of the story" might actually be both funny and educational.

That would get them quite a boost if they could be entertained enough to wade through what is really an economics text in disguise, don't you think? Economic theory is foreign to so many kids it is a personal disaster for them and later, a public disaster for me and others when they become voters!

This adventure of Grog sets up the next adventure in which he does redistribute wealth without the necessity of taxation and all the accounting, enforcement and tax cheating that goes along with a taxation system.

The big nut to crack is GDP calculation. I believe a streamlined version has to be developed and safeguards against cooking the numbers have to be designed and tested. Then we could actually have a taxless system that is disciplined by the percentage of GDP annual cap on the government spending. Some period other than annual might be more appropriate, such as a 5 year average with step limits (kind of like ARM adjustment caps).
If enough kids grow up with an understanding of fundamental economics, they won't be as vulnerable to BS by politicians and might actually support replacement systems of funding government that would be successfully demagoged and blocked, if proposed at the present time.

Then all the cavemen that were tax collectors and accountants could spend their days raising chickens or hunting deer. Grogs country would truly be more bountiful after those guys got put back to productive tasks:new_usa:

 

[Couch Potato]

Droping like a rock.

Vacant lot sales are screeching to a halt and the few recent sales are over 50% lower in price than last Fall.

I wouldn't be surprised to see sales below $20K the way things are going, but somehow I doubt the days of sitting on the market at $5K will return. Time will tell.

 

[Randolph Kinney]

Roger, you have hit upon the way to educate the people. Rocky and Bullwinkle are a good enough, lovable set of characters to portray the evils of society. Our political leaders can be a character like Wrong-way Peach-fuzz. The FED can be Snidely Whiplash. Our society is victimized by inept politicos and a FED whose attempts to maintain control join together to wreck havoc. And society buys into a scenario that a soft landing is being accomplished by Wrong-way Peach-fuzz and Snidely Whiplash.

Enter Grog with the solution. Quit messing with the money supply and credit. You don't need to accommodate Peach-fuzz spending. A cap on taxes or ratio of spending to GDP growth fixes the amount of spending as a percent. If the economy does not grow, you cannot spend more. But I leave it to you to write the book and the mechanics of how it all works out.

 

[JSmith43]

Roger, you have hit upon the way to educate the people. Rocky and Bullwinkle are a good enough, lovable set of characters to portray the evils of society. Our political leaders can be a character like Wrong-way Peach-fuzz. The FED can be Snidely Whiplash. Our society is victimized by inept politicos and a FED whose attempts to maintain control join together to wreck havoc. And society buys into a scenario that a soft landing is being accomplished by Wrong-way Peach-fuzz and Snidely Whiplash.

Enter Grog with the solution. Quit messing with the money supply and credit. You don't need to accommodate Peach-fuzz spending. A cap on taxes or ratio of spending to GDP growth fixes the amount of spending as a percent. If the economy does not grow, you cannot spend more. But I leave it to you to write the book and the mechanics of how it all works out.

I don't know, you seem to remember Rocky & Bullwinkle better than I do:icon_smile:

If I could get permission from whomever owns the rights........ Heck, I'd joint venture it with them & do all the work rather than post on the forum every day. The contemplated books are just my style. Finally, a use for that juvenile humor gene.

 

[Randolph Kinney]

Pam, Greg, here is a product for all the people in Florida.


Hedging against the house
More derivates coming based on home prices in major metro areas

By John Spence, MarketWatch
Last Update: 6:15 PM ET May 21, 2006



BOSTON (MarketWatch) -- Exchanges are rolling out more futures and options that allow jittery home owners to hedge against a decline in the value of their houses.

The new financial products, which are tied to various indexes tracking home prices in major metropolitan centers, are launching as it appears the housing bubble is finally winding down.

The Chicago Mercantile Exchange on Monday plans to introduce cash-settled futures and options based on real-estate prices in 10 large cities: Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Denver, Las Vegas and Los Angeles. The indexes were co-developed by Standard & Poor's and economics professors Karl Chase and Robert Shiller, whose popular book "Irrational Exuberance" chronicled the stock-market bubble of the late 1990s.

The CME says the planned futures would be priced at the housing index level times $250. As an example, at the end of the second quarter of 2005 the indexes for Denver for Los Angeles stood at 133 and 245, so the contracts would cost roughly $33,000 and $61,000, respectively.
Citing data from the Federal Reserve, S&P notes the value of the U.S. housing market at the end of 2005 stood at $21.6 trillion, or more than the stock market.

"Reliable and timely information on the U.S. housing market is extremely important, considering that, for many Americans, their home continues to be their biggest asset," said David Blitzer, chairman of the index committee at S&P, in a statement.

Last year online derivatives exchange HedgeStreet Inc. introduced so-called hedgelets, which are contracts priced as low as $10 each, that allow investors to play a rise or fall in single-family homes in Chicago, Los Angeles, Miami, New York, San Diego and San Francisco using data from the National Association of Realtors. Last week the exchange, which allows traders to speculate on the likelihood of future economic events and indicators, announced it expects to add contracts for Boston.
Additionally, Chicago Board Options Exchange earlier this year said it plans to launch futures contracts based upon median prices in the NAR's existing-home sales data.

Exchanges are scrambling to unveil the housing-market derivatives as more signs point to an end of the multiyear real-estate boom. Former Federal Reserve chief Alan Greenspan, speaking at an event in Washington last week, said there has been a slowdown in investment demand for housing, but that he sees a soft landing rather than a collapse in prices.
"We have just experienced one of the most impressive housing cycles on record, but it has quickly come to an end -- so much so, in fact, that housing starts have fallen at a 56% annual rate over the past three months, a turndown of sudden proportions that we have not seen since the opening months of 1991," cautioned Merrill Lynch North American Economist David A. Rosenberg in a recent note.

Adding to the bearish news, an index that measures sentiment at home-building companies showed managements in May turned negative on the housing market as the benchmark slipped to its lowest level in 11 years. See previous story.

Rising interest have helped take some of the steam out of the housing market. In its latest weekly survey, Freddie Mac said the 30-year fixed-rate mortgage averaged 6.6%, up from 5.71% at the same time last year and its highest level since June 2002.

Through Friday's close, the Dow Jones U.S. Home Construction Index, which measures public building companies, was down 21% year to date.

John Spence is a reporter for MarketWatch in Boston.