Houses Losing Value (but nobody seems to notice), Fuzzy Numbers on Trade, and a Good Depression.

August 12

One Third of New Owners Owe More Than House Is Worth (August 12 - Bloomberg)

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.

For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

"For homeowners who need to sell, this is a gravely serious situation," Humphries said in an interview. "It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices."

With one-third of all homes bought in the last five years underwater on their mortgages, we can be pretty sure that the remaining two-thirds are not sitting on much of a gain. Assuming an average of 5.5 million homes sold each of those five years, that’s a total of 27.5 million homes with their noses either under or barely above the water line. The statistics are relentless and unambiguous – house prices are falling in a way that’s never been experienced before within our country, unless you count Atlanta shortly after Sherman’s arrival.

As I have long maintained, this is a once-in-a-lifetime credit bubble we went through, and the bursting is not likely to be contained by any simplistic efforts like the shoveling of money into Wall Street banks, which seems to be the favored approach of the US Congress, Treasury and Federal Reserve.

And through all of this, even with the news being consistent and unidirectional, we find that a majority of US homeowners have not yet gotten the message (see next).

Most Homeowners Believe Their House has Recently Risen in Value

The housing downturn has been under way for a while now, so it's hard to believe that many homeowners could still think their homes are appreciating these days.

Yet a recent survey from Zillow.com found that 62% of homeowners believe their home's value has increased or stayed the same in the past year. They can't all be right: According to Zillow, 77% of homes in the United States actually declined in value during the same time.

"Our survey reveals a wide gap between the perception homeowners have about their own home's value and the realities of a market in which three-quarters of homes declined in value in the past year," said Dr. Stan Humphries, Zillow vice president of data and analytics, in a statement. "We attribute this gap to a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others, but not them."

In the survey of 1,361 homeowners, three out of four expect their home value will increase or stay the same in the next six months, yet 42% expect values in their neighborhood to drop. Four out of five homeowners expect the amount of foreclosures will increase or stay the same in the next six months, compared with the last six months.

Sounds like a serious case of Lake Woebegone Syndrome (LWS) has infected the land (“where all the women are strong, all the men are good-looking, and the children above average, and…”). So 75% of homeowners expect their house to stay the same or rise in price, but 42% expect their neighbor’s house to drop in price. This statistic alone tells me we have a long way to go in the unfolding of this particular drama. My earlier estimate of a housing bottom in ~2015 is looking good.

U.S. Trade Gap Unexpectedly Narrows to $56.8 Billion Aug. 12 (Bloomberg)

The U.S. trade deficit unexpectedly narrowed in June as the biggest jump in exports in more than four years overcame record imports of petroleum.

The gap shrank 4.1 percent to $56.8 billion from a revised $59.2 billion in May that was smaller than previously estimated, the Commerce Department said today in Washington.

After eliminating the influence of price changes, the trade deficit narrowed to $39.1 billion, the lowest since December 2001, from $43.5 billion in May. Those are the numbers used to calculate gross domestic product and may prompt economists and the government to increase their estimates of second-quarter growth.

Okay, I think that the dropping of our trade deficit is a good thing, but I want to draw your attention to another egregious example of a Fuzzy Number. Check out that last paragraph above, which says, “After eliminating the influence of price changes, the trade deficit narrowed to $39.1 billion…”.
If the trade deficit was adjusted down from $56.8 billion to $39.1 billion, this means $17.7 billion was “adjusted away.” Huh?

That’s a 31% drop. The funny thing is that import inflation is reported as being only 20% at the same time. The reason for this discrepancy?

1) Boosting reported GDP. By subtracting a big inflation number from imports, GDP can be claimed to be higher, because we are apparently importing less and exporting more.

2) Claiming lower inflation. By reporting a separate and different and lower number for import inflation, the actual rate of inflation is hidden from view and doesn’t overly interfere with US bond markets.

How can they do both at once? Easy - they think nobody is paying attention or cares.

America needs a 'Good Depression' (August 11 – MarketWatch - Paul Ferrell)

Most economists predict it'll take till 2010 to burn off our excess housing inventory. RGE Monitor say Fannie and Freddie bailouts aren't working; they'll soon be "profoundly insolvent" and need to be "nationalized." Treasury Secretary Henry Paulson has no long-term plans, he's a caretaker, plugging holes, anxious to get back to Wall Street's money machine, running out the clock till he turns over the catastrophe he enflamed to a new bunch of politicians and their armies of 42,000 greedy lobbyists.

Lessons learned? Zero. Why? Wall Street, Washington and Corporate America are a one-trick pony with one narrow-minded strategy: Economic g-r-o-w-t-h, bull markets, megabonuses. In good times they tout "free markets." But when greed bombs, these big babies throw free market "principles" under the "Reagan Revolution" bus as their lobbyists go whining to Congress for megabillion taxpayer bailouts and access at the Fed casino's discount window to siphon off more taxpayer money. What hypocritical wimps!

Wall Street and its co-conspirators are doing such a miserable job, America needs a new strategy: Stop all the short-term "hole-plugging." Let go and let an old-fashioned "Good Depression" do the job that our happy-talking leaders refuse to do. Let it clean house and reawaken America to basic values. Otherwise a "Good Depression" will turn into a new "Great Depression."

I happen to agree with Mr. Farrell on this one. I am quite a bit annoyed, if not irate, that the same Wall Street titans who lecture everyone within earshot about “free markets” and the need to keep “government from interfering” with their financial innovation are the same ones who shamelessly demand bailouts as soon as it looks like they are going to have a bad quarter or two.

My solution? Easy. All bailouts come with a stipulation that all profits recorded during the boom years are returned to the Treasury, including management bonuses, and that any company receiving a bailout cannot keep the same C-level management team in place.

At any rate, this is a thought provoking article that would be fun to discuss with interested friends and neighbors.