Stewart Blog

Findings of the MIT-Harvard Study on Property Values for 20 Years in Massachusetts

• -   Foreclosed property values decline 27 percent
• -   Death of owner sees a 5 to 7 percent price reduction
• -   Bankruptcy filings see a 3 percent home value decline
• -   A foreclosure within 250 feet negatively impacts value of a house by 1 percent
• -   Lower-priced neighborhoods have greater foreclosure discounts implying a fixed-cost component in the process

Report: Foreclosures Reduce Home Values by 27%- WSJ

Foreclosures Remain Heavy as the Housing Market Continues to Work Through Excess Inventory

The loss of more than 7 million jobs since January 2008 continues to haunt housing as even among the most creditworthy cannot continue making payments after losing their jobs. 

Prime loan borrowers have seen default rates jump 425 percent since January 1 2008 and jumbo loans have rocketed up 600 percent.

The top 20 metro areas with the highest foreclosure rates were in Florida, California, Nevada and Arizona.

One in 15 Las Vegas houses received a foreclosure notice in the past 12 months.

While all of this appears to be bad news, the good news is that we gain ground on pulling excess supply off the market, albeit painfully.

Foreclosures boom among nation’s most creditworthy- USA Today

Record low interest rates and a volatile and uncertain stock market are spurring underwater homeowners to bring cash to sell their home and then go right back out and buy bigger-better homes at significantly reduced prices. 

Doubling Down on Housing- WSJ

Light at the End of the Tunnel (and it’s not another train) : Demand for Luxury Autos Grows

The Wall Street Journal reports that buyers in the U.S. and China are resuming purchases of luxury autos.  BMW is anticipating a 10 percent increase in auto sales in 2010 versus 2009.  Mercedes is seeing increased activity as is VW on their high-end cars. 

The chart below shows sales in the U.S. of light weight trucks and autos on seasonally-adjusted annualized rate.  As shown, sales hovered right at the 16 million units per year until declining in 2008.  In 2009 sales flirted with the 9 million mark.  The spike in July and August in 2009 was the impact of the Cash or Clunkers program. Since then, sales have climbed back to the 11 million plus level, with expectations of more gains as the year progresses according to the Wall Street Journal article referenced above.

Note the immediate decline following the expiration of the Cash or Clunkers program in September 2009, but also see that was temporary. While the program did steal demand from the future, it was just a month.  Hopefully we will see a similar pattern in housing following the expiration of the $8,000 homebuyer tax credit. 

Hopefully this is the first of many “Light at the End of the Tunnel (and it’s not another train) news”

Luxury-Car Sales Recover- WSJ

So what comes first jobs or housing demands?  This Wall Street Journal article addresses housing as potentially taking the U.S. out of this jobless recovery.  Rather, the article concludes, it will be jobs that take housing out of their doldrums.  Key points:

1. Even if home prices rise an anticipated 4 percent today (Case-Schiller), they still will remain 30 percent below 2006 peak levels
2. 1 in 4 homeowners are underwater on their homes owing more than the house is worth
3. A cheap interest rate policy is ironic since it was copious quantities of cheap money that helped create the housing bubble in the first place
4. Construction layoffs alone have accounted for 27 percent of the loss in jobs as we overbuilt housing in many markets (from 2000 to 2009 while the country added 15.89 new dwelling units we lost almost 1 million jobs—and we need to create 1.25 to 1.5 new jobs per new dwelling units)  So it will take a significant surge in jobs to absorb the excess of housing
5. If other real estate related jobs are included (landscapers, sales agents, lenders and architects, then the real estate segment accounts for one-in-three job losses.

It’s all about jobs.  Period.  Sorry about being repetitious—but it’s all about jobs. 

Why Jobs, Not Housing Data, Is the Key- WSJ

All-Time Record U.S. Deficit of $1.47 Trillion Forecast by the White House in 2010 With Little Improvement in 2011

The US Government is borrowing 41 cents of every dollar they are spending this fiscal year resulting in the largest single deficit in the history of the country at $1.47 trillion.   And there is little improvement on the horizon, with a White House estimate of a $1.42 trillion deficit (or 37 cents of every dollar) in 2011. 

But that’s not the bad news.  The bad news is that the stimulus package seems to be only stimulating the deficit and not jobs – and more jobs are what it is going to take to truly get out of this recession.  As shown on the U.S. Government site http://www.recovery.gov  most of the stimulus has been directed towards non-jobs producing expenditures. Through July 16, 2010, expenditures have included:

Tax Benefits                        $223 billion

Contracts, Grants & Loans    127 billion

Entitlements                        138 billion

Total Expenditure                $488 billion

It is disappointing that the least amount of expenditure has been for Contracts, Grants and Loans, which result immediately in the most jobs produced.  New jobs have a multiplying effect on the economy as they not only produce increased demand for goods and services, but they also pay taxes resulting in a reduced U.S. deficit. 

So what do we have to show for the $488 billion of stimulus thus far?  According to the U.S. Bureau of Labor Statistics  (total U.S. Employment, Seasonally Adjusted), there have been 882,000 total jobs gained since the end of December 2009.  That means we effectively spent $583,288 per net-new additional job created.  But it gets worse.  Of the 882 thousand new jobs, 339 thousand are temporary U.S. Census worker jobs (that would have been created regardless of the stimulus) that go away in the next three months.  So that means we have spent not the $583,288 per job, but rather, $837,050 per job.  Try to calculate a positive rate of return on that investment—not even new math will get you there. 

So what do we do to get more jobs?  Since 70 to 90 percent of all new jobs are created by small business, we need to redirect U.S. Government spending and incentives to increase the demand for the goods and services produced by small business.  Providing a couple thousands dollars of tax credits aimed at new hires will not get you there—you must first increase their business.  And we desperately need to boost consumer confidence giving Americans comfort in resuming investments and purchases of goods and services.  See my blog from July 21 regarding plummeting consumer sentiment.

 So let’s hear your suggestions on what needs to be done differently to get the demand up for the goods and services provided by small business and also to stimulate consumer confidence.

White House predicts record $1.47T budget deficit- USA Today

Existing Home Sales For June Down 5.1 Percent Sequentially Form May But Up Almost 10 Percent Year-Over-Year — Prices Up 1 Percent From June 2009.

To read the full NAR press release click here

Estate Tax, Which is Zero this Year, Comes Back Full Force in 2011 at a 55 Percent Tax Rate — George Steinbrenner Passing in 2010 Saved His Heirs $500  Million.

Estate tax to return in 2011, and it could hurt ordinary folks

In every recession since 1949 the recovery from the recession has been driven by a recovery in housing.  Unfortunately, housing is once again hitting the skids.  The long hot summer continues…

Housing Market Stumbles- WSJ

Consumer Confidence Plummets in July Portending Skittish Consumers and Delayed Economic Recovery

How we feel regarding our future impacts how we spend (or do not spend) today.  Bad new is that U.S. Consumer Sentiment, as reported by the University of Michigan, fell from 76 in June to 66.5 in July.  That was the third largest month-to-month sequential decline since 2000. 

While the recession commenced January 2008, the Consumer Sentiment Index declined systematically in 2007—so the predictive power of the Index warrants consideration regarding where the economy is heading.  The first graph shows the Index monthly since 2000.  The second graph shows the percent change in the index from the same month in the prior year and the corresponding percent change in U.S. Light Truck and Auto Sales. 

From a statistical perspective, the Pearson Product Moment Correlation Coefficient between the Consumer Confidence Index and Vehicle Sales is 0.761 and the Spearman Rank Correlation Coefficient is 0.721, both statistically significant at a 99 percent level of confidence.  In normal human terms, that means that “So goes consumer confidence, so goes car sales.  And so goes the economy.”

If you wish to examine other economic data, a stellar source of information is the St Louis Federal Reserve Bank.  Economic data from that site are available at  http://research.stlouisfed.org/fred2/

We will not create sustainable private sector jobs until we increase the demand for the goods and services provided by small business—the true growth engine for jobs.  Unfortunately, this latest consumer sentiment index indicates a delayed recovery.   It will remain a long, hot summer…..

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