Monday, December 19, 2011

Walking In An Economic Wonderland

A Golden Prediction

In reviewing my 2011 predictions made last December (Economic Bowl Pick post December 27, 2011), I discovered the Model T had forecasted an S&P 500 Index high of 1400 for the year.  The index peaked at 1370.58 in late April. Therefore the forecast was off by less than 30 points and just 2.1%.  I hope somebody was paying attention and sold at the right time.  Next year’s predictions come in two weeks.

A Surprising Observation 

A little over a week ago I made my annual Christmas shopping trip to the mall.  I had heard all the negatives about the holiday shopping season.  Yes Black Friday sales were strong, but consumers had spent all their money and recent shopping activity had been slow.  Yes consumers say that will spend more this year, but they really won’t. Internet sales are much stronger this year, so traditional retail sales will suffer.

Therefore I was expecting the number of shoppers at the mall to resemble those of the last three recession-weakened years.  I venture to the mall about the same day and time each December so I do have a good baseline for comparison.

But this trip to the mall was not as I expected.  My first surprise happened in the parking lot.  I always park at the end of the mall (by Sears) to avoid the mall traffic maniacs and so I can park close to a door.  Due to the weak economy I could park about 10 cars from the door the last three years.  In a strong year I would park about 25 cars back.  This year I parked about 35 cars back.  Could there be that many more shoppers here? 

There were more positive signs before I even got inside the door.  I passed several people leaving the mall loaded down with shopping bags. There was a help wanted sign on the Sears door.  Once inside the mall there were customers six deep in two lines at the first check out station. I actually had to walk around people to get through.  And this was at Sears!  I didn’t think anyone was supposed to be shopping at Sears anymore!

In the mall the crowd was huge. I can’t remember ever seeing this many people on my shopping trip. And they were buying stuff.  They were buying clothes, they were buying shoes, and they were buying knick-knacks. They also must have been buying expensive perfume because in one area of the mall the air was so thick with the scent; it was literally difficult to breathe.   The food court was extremely busy also.

I managed to complete my purchases fairly easily although I had to wait at the calendar kiosk because they ran out of shopping bags.  You know business is good when you run out of bags.  While I waited for them to get more bags, I had the opportunity to see which calendars people were buying.  One popular calendar is called “Nuns Having Fun”.  This is not what you expect.  It is totally “G” rated.  The cover shows nuns having fun on an amusement park ride.  Another popular one is a daily calendar called “Oh No Obama”.  It boasts that it lists 366 (leap year) stupid things Obama and his administration has said or done.  No, I did not buy this one.  Why would I want to start every day next year by getting upset?  To me, it ceased being humorous a long time ago. 

I stopped at another store at a “mega” strip mall to buy my final gift.  The store was very crowded and there was another help wanted sign on the door.  There is a whole lot of consuming going on!

The True Meaning of this Economic Wonderland 

I know this is just one person on one shopping trip, but can things really be that bad?  This looks like a recovery, this smells like a recovery and I really can’t believe we are in or headed for a recession when there is this much positive economic activity. There are still some negative economic indicators out there, but for now I’ll believe what I can see and what I see may be a Christmas economic miracle.

How bad can the economy really be when people are forking over cash for greasy mall food, expensive cologne, and buying overpriced calendars featuring everything from scantily clad lingerie models to fully clothed nuns?  And unemployment may still be high, but apparently companies are having trouble finding enough retail workers this year.

So my holiday message to the people who shopped like crazy in the stores and on the Internet this year: I thank you, the economy thanks you and Ricky Bobby would say that the baby Jesus laying in the manger thanks you.  

My holiday message to the economic naysayers is this:  Quit whining about how bad you think the economy is.  It doesn’t help consumer confidence and there is a good chance you are wrong. So just shut the (insert your favorite expletive here) up Scroogeheads and go buy some Christmas gifts. Shame on you for upsetting the baby Jesus on his birthday.

Merry Christmas and Happy New Year to all my readers.

 One Final Gift

If you haven’t had time to give anything to those less fortunate, you can buy Christmas dinner for the homeless at the Refuge of Hope in Canton, Ohio for only $2 per meal.  Click here to donate.

Monday, December 5, 2011

Housing Market Constipation

Two simple stories illustrate the sad and strange state of the housing market:

Story One:
I was considering moving due to my job change and improved finances.  However in the last year, the most valuable and the least valuable properties on my street both sold for 16% under what I considered the market value.  And it wasn’t just my assessment.  The widow who lived next door to one of the sellers was not very pleased with his selling price.  When the last conversation between two long-time, good, neighbors includes the phrase “You stupid son of a *****”, you know things are not good in the housing market.

So my house is now worth 16% less that I was expecting.  When I subtract the home improvements (windows, deck, structure) that I have made in the last 16 months, I would be selling my house (after 17 years) at an effective $10,000 loss.  You may argue that I should not subtract the improvement expenses, but that is a tough psychological sell.  Therefore I am not selling my house and I am going to stay put and enjoy my new deck and windows
Story Two:

My friend’s wife got a new job about ten miles from where he works.  By moving closer to their workplaces they could cut their total daily commute from 165 miles to 35.  So they fixed up their house and put it on the market.  Under normal conditions it would have sold in three months or less and life would be good.  But the house still sits there months later, drawing little buyer interest with the winter commute approaching.    

Multiply these two stories out by the hundreds of thousands and you begin to understand why the housing market, and the economy, is so weak.  The alarming thing is the two housing markets described above are probably “better than average” locations.  They did not experience overbuilding or rapid property appreciation, yet property values have sunk nonetheless.
Recent information from the Census Bureau indicates that only 11.6% of people in the U.S. moved into a new home in 2010.  This is down from 12.5% in 2009 and is the lowest rate since tracking began in 1948.  Many people can’t move because they can’t sell their houses (either the poor market or one of 10.7 million with negative equity).  Also, more young adults are living at home because they can’t find jobs. And in this recession many older workers lost their jobs and are less likely to move across the country to find work.  The result is that when people aren’t mobile, they don’t spend money on new houses, new furnishings or any other expense associated with establishing a new residence.  This is a major drag on economic growth.

Housing Constipation
The housing market is “constipated”.  It is straining to move.  It is pushing, it is wheezing, it is cramping, but it still won’t go.  The other industries are standing outside the bathroom door, impatiently waiting for the housing market to let loose.  They know that housing has to start producing first before they too can find relief.  But housing is bound up due to poor diet (toxic assets) and poor life style choices (sub-prime mortgages).  So it just sits there producing very little and sometimes emitting some very disturbing gas.

The government has tried to stick its hand in there and provide help with the mortgage modification program, but that failed.  The banks are modifying the mortgages of people that they determine should be helped.  They have a vested interest in not foreclosing on more homes because they already own too many foreclosures.  So the government should just stay out of there and let nature (banks making sound economic choices) take its course.  There is no magic enema for this situation and the laxative of low interest mortgage rates has been futile to this point.
Scraping Along the Bottom

I believe that the housing market hit bottom around February or March of this year.  But I was way too optimistic on the rate of recovery.  Most industries that hit bottom after the great recession skidded and scraped “along the bottom” for an extended period of time before starting to recover.  Housing is doing the same.  It was the last industry to hit bottom because it had the furthest to fall. This skid has been long and continues to be painful.  The industries that fell the furthest took approximately 12 months to begin a recovery.  If housing follows this pattern, look for things to start to improve around March 2012.  The recovery will start slow, but has the potential to grow faster as market slack begins to be reduced.
Here is a review of the current statistics in the housing market.  The number on “where we need to be” and “when we will get there” are my forecasts.  Note that the “where we need to be” numbers are much lower than the housing peak.  This is because the housing marketing in the aughts (00’s) was on steroids.  Those numbers are artificially pumped up and won’t be seen again for many years.

Housing Starts
Oct 2011 = 628,000 (Annual Rate)

Oct 2010 = 529,000
Where we need to be = 1,600,000

When we will get there: 2015
New Home Sales

Oct 2011 = 307,000 (Annual Rate)
Oct 2010 = 282,000                 

Where we need to be = 1,000,000

When we will get there: 2016
Existing Home Sales

Oct 2011 =4,970,000 (Annual Rate)
Oct 2010 = 4,380,000

Where we need to be = 6,900,000
When we will get there: 2014