Thursday, June 28, 2012

A Brick By Brick Housing Recovery

The dust has finally settled down
The sun is shining on these pieces that are scattered all around
This house was everything we knew …

Brick by brick, we can build it from the floor
If we hold onto each other, we'll be better than before.
And brick by brick,
we will get back to yesterday ….

Last December I described the housing market as being “constipated” and said the market would continue to “skid” on the bottom before finally starting to recover around March 2012.
This forecast was very accurate.  Usually a correct prediction made just four months out is not impressive, but few people were forecasting this.  Back then, people were panicking because the market hadn’t “bottomed out”.  Now people are panicking because the market isn’t recovering fast enough.
The problem is that people are using charts, graphs, and models based on historic data to compare and forecast the current economic and housing recovery.  You can’t do this because many traditional indicators are still malfunctioning.
This was a very damaging recession.  There is no quick bounce back.  There is only a slow, sometimes excruciating painful, and climb out.   Imagine a long distance runner who falls down the side of a hill. He gets up, brushes himself off, climbs back up the hill and rejoins the race.  He bounces back and is able to finish the race, albeit at a much slower time than if he had not fallen.  Contrast this to a runner who falls and breaks his arm.  There is no bounce back.  And he won’t be finishing this race or any race until his arm is healed.
When will the housing market start to race again?  We may not have the old models to help forecast, but we have a new one.  Many industries crashed during the recession and have since started recoveries.  Housing was the last to hit bottom because it had the furthest to fall.  If you look at what happened in the capital equipment, transportation equipment, and recreational vehicle markets, there is a sequence to the recovery process:

1.     Crash – the industry suffers a severe, unprecedented, drop in sales.

2.     Skid – the industry hits the bottom, but does not begin a recovery.  It slides on the bottom for almost a year.

3.     Walk – the industry begins to show increased sales, but at a very modest rate.

4.     Run – the industry gains momentum and sales return to healthy (but not peak levels)

The housing market stopped skidding around March and started walking in April.  We will be walking for a while before we run (forecast at end of post).

The Current Housing Market

Housing Starts, New Home Sales, and Existing Home Sales are all up 15-30% over last year, but this sounds better than it actually is.  Remember 15% over a very low number is still a weak number.  And there has not been consistent growth from month to month in some of the statistics.  This causes “panic” from some people, but it is characteristic of the “walking stage” of this recovery.   

Another hopeful sign is that housing prices actually increased on average in the March-April time frame for the first time in many months.  This was not expected to happen until later this year. 

But there are factors holding back the market.  Listings are very low, down around 20% from a year ago. People cannot sell their homes easily if their mortgage is underwater. Unemployment is still high so people are not getting jobs and buying a house.  People are not changing jobs so they are not moving to new locations.  Prices are still much lower than peak so many people are waiting for a stronger market before putting their house up for sale.  And banks are still holding back on some repossessions because prices are too low.

Sales are also being slowed by tight credit.  Mortgage rates are low but it is one giant teaser rate.  It looks very appealing, like a swimsuit model, but you are not getting any of that unless you have a “super fine” credit score.

There are some positive factors.  There is less slack in the market than was previously thought.  The shadow inventory (repossessions or future repossessions) is smaller than expected.  This is because it is not in the banks’ interest to repossess too many houses and people are not “walking away” from underwater mortgages as much as feared because they still need a place to live.  Bankers and customers continue to work together to prevent foreclosures.  This is an example of the free market at work.

Basic economics is the key to housing recovery.  Low inventories (supply) lead to higher prices.  Higher prices lead to less people being “underwater”.  Higher prices also lead to higher inventories and this will ultimately lead to a strong housing recovery.  But this process takes time.

The Forecast

The “walk” phase will last through 2012, but each quarter should be stronger than the preceding one.  Based on what has happened in other industries, look for the housing market to start “running” around March of next year.


Sunday, June 17, 2012

I’m Voting For Ross Perot (just 20 years too late)

The main arguments against the President of the United States needing corporate business experience are:

1.     It’s not really needed since presidents have functioned fine without it.

2.     The last time we tried it (Herbert Hoover), it was a disaster.
In response the second argument: People are still trying to figure out what caused the Great Depression and while Hoover made mistakes, I don’t think his business background caused him to make bad decisions.  And I don’t think the notion “we tried that once 83 years ago and it didn’t work” holds much validity in 2012.

The first argument merits more discussion.  In the past we have elected many successful military generals as presidents.  This is logical because the men proved themselves leaders on the battlefield.  More importantly if the biggest threat facing the country was another war, who better to lead the country than a former general?  In times of peace, we go for politicians but we still tend to favor those with executive government experience (governors and mayors).

There have been successful presidents who have not had much first-hand business knowledge.  So it is true that corporate business experience was not needed in the to be an effective president. 

However the world has changed greatly in the last 25 years.  The United States has gained more military superiority which reduces the chances of fighting a defensive war.  But we also lost much of our economic superiority as the “world economy” blossomed.  In addition many industries were deregulated which fostered competition, but it also increased the complexity and variability of our economy.  The biggest challenge we face today is worldwide economic competition.  What do you fear most: China’s military or China’s manufacturing?

A President of the United States may not have needed business acumen in the past, but will definitely need it in the future.  If you are expected to manage an economy, it helps to understand one.  And we know what the alternative is: Career politicians produce more politics and less action.

We have not had a “Business-President” in a long time.  The last business-presidential candidate we had was Ross Perot in 1992. 

Perot’s main message was:

1.     Government spending was out of control and we shouldn’t borrow money to pay for our reckless spending.

2.     Government programs, including Social Security and Medicare, were very poorly managed and in need of major reforms.

3.     Both political parties were irresponsible and lacked the backbone to stop the spending and fix the problems.

And now 20 years later it is obvious that Perot was correct and a visionary.  Visionaries are mocked because they see the truth long before other people do.  Perot described the situation in 1992 by using an array of charts and graphs (precursor to a PowerPoint presentation) and the expression “giant sucking sound” (to describe jobs leaving America).  Many people dismissed Perot because he looked funny, he talked funny and he sounded like a crazy man.   But knowing what you know now if you could go back in time, who would you vote for president in 1992?
Provided Perot could accomplish his goals in eight years as president and turn the reins over to a like-minded leader in 2000, how much better off would we be today?  Sure we still would have had recessions due to the business cycle, but we would be so much better off economically that we are now. And it doesn’t matter who you blame for the current mess. Clinton, Bush and Obama have all contributed.  

So the last time we had an opportunity to elect a candidate with strong business experience, we did not do it.  This was a mistake the country (myself included) made and we have paid enormously for this choice for the last 20 years. The problems are now much worse and we are running out of time.  Elections matter and corporate business experience is vitally important.  Where will we be 20 years from now if we don’t get our financial house in order soon?

Monday, June 4, 2012

Taking Care of Business (Experience)

Taking care of business every day
Taking care of business every way

I discussed the need for political leaders to have corporate business experience in the post “California Dreaming” (April 2010).  At that time Meg Whitman (former CEO of E-Bay) and Carly Fiorina (former CEO of Hewlett-Packard) were running for governor and senator respectively in California.  My argument was that to solve the country’s economic (business) problems, you need people with real business experience.  Unfortunately both the women lost. Now California is depending on Gov. Jerry Brown to fix its fiscal mess and it is not going so well.

It appears that once again I was ahead of the curve.  Now the main issue in the presidential campaign is the value of business experience.  Several commentators are claiming that corporate business experience does not qualify you to be President of the United States and that this experience is irrelevant when evaluating presidential candidates.  Obviously I disagree.

This argument is ludicrous.  It’s referred to as the executive branch of government.  Hello! Do you think someone who has been a business executive might have learned something relevant to serving in the executive branch?  The President is also referred to as the Chief Executive of the United States.  Chief executive of a large corporation, chief executive of a large country: can you maybe see how experience in one might be useful in the other?

Based on my observations of many years of business experience, here is a list of skills business executives must learn and display to be successful:
-        How to take responsibility for your decisions (and not blame others)

-        How to lead a diverse group of people to achieve corporate goals (leadership skills)

-        How to make good decisions, how to make unpopular decisions, how to recover from bad decisions. (decision making skills)

-        How to allocate and utilize assets wisely

-        How to evaluate and hire outstanding talent

-        How to develop and execute strategic plans

-        Understand how a “sub-macro” economy works and how to generate profit under constantly changing conditions

-        How to build and motivate teams

-        How to develop strong leaders to serve under and after you

-        How to influence others one-on-one (how to create “buy-in”)

-        How to listen to the opinions of others and use the information to choose the best course of action

-        Understand the importance of strategic alliances and loyalty

-        How to compete against strong rivals

-        How to unite opposing factions without “taking sides” 

Now let’s make a list of the skills that have been lacking in our government leaders the past several years. Well, um, eh, I guess we don’t need to make another list.  We can just use the one above.  Well isn’t that interesting.  Maybe you don’t need business skills to be President; but you may need them to do the job well. 

And those commentators arguing otherwise still don’t get it.  I’m guessing that they never worked in an organization other than journalism or government.  After generating much criticism after writing their initial articles, a couple of them tried to defend their positions by claiming that it is not being “Socialist” to criticize someone’s business success.  I happen to agree with this.  When you make this type of inane argument, you don’t sound like a Socialist.  No, you sound like a freakin’ Communist.