Wednesday, September 15, 2010

Irrational Optimism about Housing among Experts; Continued Consumer Pessimism

ABC News reports Economic Pessimism at a Yearlong High:

For the third straight month significantly more Americans say the economy is getting worse, 38 percent, than say it’s getting better, 22 percent. The rest, 37 percent, say it’s staying the same, which for nearly all of them means bad.

The gap between pessimists and optimists has grown from 6 points in July and 11 points in August to 16 points now, its biggest since September 2009. Economic optimism is at its low going even further back, to March 2009.

Stock prices are of course much higher than in March 2009. Contrarians who want to "buy" pessimism should realize that with mutual fund cash at or near a modern record low as a % of assets under management, facts do not support that idea that the stock market is especially either oversold.

There is however some optimism, and some of it may be misplaced.

Some of the optimists who should be realists are real estate experts who should know better. reports U.S. Home Prices Face Three-Year Drop as Supply Gains and describes a hold-on-and-wait viewpoint from two interesting players:

Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta’s Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005.

“I’m stuck,” Miner said. “I thought it was a stepping stone to a house.”

Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three- bedroom house in a good Atlanta-area neighborhood at today’s prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated.

“I’m not $200,000 in the hole, thank God,” she said. “But the quarter of the country that’s underwater -- that’s me.”

Ms. Miner would not "cost" her a specific amount if she sold now, other than closing and moving costs. Her home has lost value. Another person who appears to have an optimistic point of view about prices bouncing back is even more surprising:

The slide in values and record-low interest rates may offer some bargains for property hunters. Prices have returned to historically affordable levels, said Karl Case, professor emeritus of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller index. He estimates a bottom for prices in six months. . .

Case is an example of a homeowner waiting to sell because of low demand. He’s seeking to sell the A-frame on 15 acres near Cooperstown, New York, that he bought for $190,000 in 2005.

“I want to keep it if I can’t get what I want,” he said. “It’s a terrific little getaway and I’m not going to give it away.”

In the meantime, all the Fed and Federal programs (including bank forbearance) have kept housing prices above their equilibrium price. Waiting for any specific property to come back to the price you like is quite a gamble. It's like buying Oracle at 30 but it's now 2002, not 1999 and it's and 10, or 20, or whatever. It may never come back.

I am looking for housing to play the role that tech played for years following the tech bust: a deflationary or relatively disinflationary force. I also expect short-term interest rates to stay below the rate of consumer price rises for some time. This could be the 1940s and early 1950s again, with very low interest rates due both to public fear and active purchase of Treasury debt by the Fed coupled with high rate of price rises; let us hope no worse war comes along.

Under this scenario, classic inflation hedges beat general common stocks, and Treasuries are trading vehicles; and cash is trash until and unless the U. S. actually enters a sustained period of generalized price decreases.

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