Wednesday, March 28, 2007

The Recession That Never Occurred

The phenomenon of a housing bubble has been widely used, but not much news has been focused on it until recently due to the huge boom occurring in the early 2000s. The most fundamental way that a housing bubble forms is through a fairly simple process. The process starts with general economic expansion with increased employment which drives demand for homes. Initially the increase in demand causes supply to shrink and vacancies to disappear causing prices to start increasing. The increase in housing prices causes homebuyers to forecast higher prices in the future either leading to purchase of an investment property or a new home since homes in the future will be more expensive. The bubble comes about once supply reaches demand and inventories of new homes increase, prices start to decline and the bubble is fully visible. In addition, people must be aware that the prices are increasing above a fundamental level of regular economic growth. So this is the case in the mid-1980s and the current state of the housing market in 2007.

The first progression of a housing bubble is the expectations of homebuyers in at the time. Whether people believe a bubble is going to appear is often the starting point for a housing bubble. So, a study in 2003 appearing in Brookings Papers on Economic Activity mention that many buyers did not believe they were in a housing bubble because they felt there was little risk in buying a home, which Is a factor in bubble situations (Anonymous 2003). Though the study's conclusion reveals that since many people were buying "strictly for investment purposes" it is a key factor in a housing bubble forming. Furthermore, if people are buying for an investment they are buying for the short run, and in combination with low subprime mortgage rates can only pay for the house for a short period of time while the interest rate is low and if housing prices start to fall and these investors cannot sell nor pay off the raise in their non-fixed interest rates, then there are defaults on loans and many disasters can spiral out of this situation. The good thing about 2003 is that housing prices continued to soar up until 2006 when the bubble was pretty indistinguishable and many homebuyers became wary. In early 2007, several articles were published regarding the current state of the housing sector and whether economists felt the housing sector would lead to national economic problems such as a recession.

The housing bubble is in a state of limbo. Many experts acknowledge the current decline in prices, but some expect it to end soon while others feel it will continue for some time. The market is in a state of correction. The current decline will continue for a little bit longer, but should level out within the next couple of months as the 2nd quarter is usually the hottest time of the year for real estate purchases. The only negative to this information is a recent article by Rex Nutting, a writer for MarketWatch.com, that states new-home sales fall to a seven year low and February's inventories of unsold homes is at a 16 year high. The negative out of this information is that February is suppose to be a strong month and with the numbers being worse than January it shows no signs of slowing down. Though, many experts suggest that the true indicators cannot be understood until March's numbers come out. One such expert is Stephen Stanley, chief economist for RBS Greenwich Capital, who admits that "It is dangerous to overinterpret the February numbers given the weather, so it is probably best to wait until March and see what a more normal weather month brings" (Nutting 2007). Despite the poor numbers and enormous amounts of unsold new homes, there are still positive economic conditions and relatively low mortgages rates that encourage buying. The only sure deterrent for many homebuyers is the expectation that prices will continue to drop, so they might as well hold off on buying a new home. Furthermore, if the low February numbers were so bad, why was there not a major market downturn or recession like symptoms? In response to the news Jay Suskind, head of trading at Ryan Beck, mentioned "certainly in the last day and a half it has been about housing concerns, but the flipside is that the market closed up nicely yesterday and we're seeing some of that today," in addition stating "The market bends but won't break and has been very resilient …the market is saying that it's confined to housing concerns and there is a sense that perhaps we are close to a bottom in housing" (cnbc.com 2007). So, Suskind feels that the business world understands the housing concerns, but feels the correction will end shortly. Since there was not a huge drop in the market and the small drop only lasted a day, it is noticeable that many people do not believe a recession is coming about or much more severe housing problems.

In contrast, the housing market is on a decline and cannot be entirely predictable. Many experts suggested February to be better than it was, but that was not the case. So, some experts are expecting two years for a turnaround while others expect a start up later in 2007. David Seiders, chief economist for the National Association of Home Builders, feels that 2007 will be the first nationwide decline in housing values ever. He does not feel it will be a huge stating that "It won't be a big decline, maybe 1%" (Kerch 2007). The bottom line is that it is the first predicted decline in housing values for a single year ever, which is significant. Seiders main concern is the "seriously large inventory situation (of new homes)," but he believes that there will be a gradual recovery over the next two years. Despite, the relative safe standing by Seiders he has continuously decreased his outlook for new home sales over the past month from 2% to 4% to 8% decreases in home sales this year. The negative and continuous changes in outlooks show some uneasiness in his predictions and a longer than expected turnaround. In addition, on the blog "housing Crash Blog" the writer, though may not be too credible, suggests that housing prices could be falling for "5 years or more" (Housing Blog 2007). The argument he makes is that mortgages rates have been increasing due to the "trillions of dollars" in unpaid loans that mortgages institutions will have to absorb. Therefore, this raises the mortgage rates and also does not allow partially risky homebuyers to obtain loans. Thus, home prices will continue to fall since no one will be able to afford them for awhile. This follows the suit that "cheaper money drives up housing prices… reverse the process and you get the logic of bursting bubbles" (Jubak 2005). In his defense, I feel he has a valid point, but five years is a ridiculous amount of time when mortgage rates are still near record low levels, though mortgage companies are tightening up their credit standards. In response to the blog Frank Nothaft, chief economist for Freddie Mac – one of the largest mortgage lenders, mentions "We should hit the trough (of the housing bubble) in the first half of the year. But we're a few years away from robust levels of activity we saw in 2005" (Kerch 2007). Furthermore, the housing market is unpredictable in its current state and most experts have been off in housing numbers for the first two months of 2007, which is quite disappointing. The numbers have been off and some have the economists, but I still see the housing bubble slowing down in mid- late 2007 without general economic hardships.

Despite the predicted decline in housing prices for the year and general uneasiness in the housing sector, our economy is still strong and a recession is quite unlikely. The strength of the economy while the housing sector is dropping is a significant factor in the conversation of a housing bubble. Since, approximately 5% of our GDP comes from housing construction one would think the new-homes sales number would have had a larger affect on the US economy. In 2005 Dean Baker, co-director for the Center for Economic and Policy Research, mentions that housing prices are surging well above the fundamental level which will generate a housing bubble that will cause problems due to the large amount of evenly distrusted wealth across the nation. He makes a point that "the collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession" (Baker 2005). Baker mentions that home construction has been increasing a near record pace for a few years and that once the market cools off there could be a major drop off of 40% equivalent to 2% of GDP. In addition, he adds that the decrease in demand will add about 2% of GDP and if unemployment follows suit then several millions jobs will be lost as well. Furthermore, the government could not currently boost the economy out of recession due to our large deficit. So, in effect the recession would be quite severe if it were to occur. The reason the recession will not occur is because the housing market has been in decline for a year now and the economy is still in good shape. David Seiders states "One of the good things is that the U.S. economy has been able to handle the dramatic correction in housing…GDP growth, unemployment, the overall inflation situation and interest rates have all been positive despite housing's woes" (Kerch 2007). In addition, the stock market has retained its strength despite housing issues. Since the economy is stable and many experts perceive the housing sector to continue its struggles for some time, it is a safe and very likely occurrence to believe the US economy will not enter a recession. The housing sector is under a major correction process due to the surging boom of 2004, 2005 and early 2006, but the overall economy is still strong and a recession is quite unlikely.



An In-depth look at the Housing Conversation

In researching the current state of affairs in the economy, many people would be well aware of the questions surrounding the housing sector. In response to these questions I have researched several articles and watched some interviews that put many questions to rest and ask many more. One thing about the housing market is it is currently very uncertain and many housing index numbers are inaccurate to put together a full report. Furthermore, the best knowledge and understanding available is from experts within and surrounding the industry.

The first two articles appearing in the peer reviewed journal Brookings Papers on Economic Activity are "Is There a Bubble in the Housing Market?" and "Bubble, Bubble, Where's the Housing Bubble?" These two articles discuss the current state of the housing market in 2003 and 2006, respectively. The first article compares two surveys of homeowners in 1988 and 2003. The survey asks relevant questions to access the current ideas and feeling about the housing market in four primary areas (LA, NY, Milwaukee and San Francisco). The experts use the surveys to compare the boom peak year of 1988s housing market and the current status of the possibility of a housing bubble in 2003. The second article written by Margaret Hwang Smith, Gary Smith, Christopher Mayer, and Robert J. Shiller is more relevant to us since it is from 2006 and discusses the belief that many states are in the midst of a housing bubble and buyers should be aware. Four economists put forth their understanding and knowledge about the housing market and predict future outcomes.

The rest of the articles are from big news outlets discussing the possible housing bubble since 2005. The first article written by June Kim appears on BusinessWeek Online entitled "Housing Bubble – or Bunk?" published on June 22, 2005 in the midst of the housing boom. The article discusses the possibility of a sharp decline in housing prices with four key economists in the business world today. The article has a positive stance on the housing sector. Next, is a "The Housing Bubble Fact Sheet" written by Dean Baker, one of the previous key economists a month later in July 2005. He makes several important comments on the housing sector in a published report for the Center for Economic and Policy research. The article is neutral towards the housing sector with belief that the market will have a downturn that could be negative. Another negative article appears on Housing Crash Blog entitled "US Housing Crash Continues: It's a terrible Time to Buy." The article written on March 21, 2007 compares renting and owning a home in the current market and why it is not a good market to buy in, today. The next series of articles appears on MarketWatch.com. These two articles "Housing Still on Down Slope" and "New-home Sales Fall to Seven-Year Low" discuss the surprising numbers of February housing indexes and give expert opinion on what the housing sector has in store for 2007. In addition, on Cnbc.com on March 27, 2007 there is an article "Stocks Close Lower as Housing Concerns Sideline Buyers" that reports that despite the surprising decline in housing sector numbers stocks were lower, but not to devastating. The last two articles appear on MSN Money and one written by Jim Jubak in June of 2005 is entitled "Why There Is No Housing Bubble" and discusses the boom in 2005 and why the bubble is not going to burst soon (in 2005). The second article written in April 2006 by Bill Fleckenstein titled "The Housing Bubble Has Popped" discusses the report of falling sales and a decrease in demand in the early portion of 2006. These articles give a could mixture of psotive and negative outlook on the housing market to provide a well-rounded and fair assessment of the current and recently perceived notion of the housing industry along with the not too easy question – Will the housing Bubble lead to a recession?


 

Is

Which Side to Be On?

The decline in the housing market and decrease in almost every measure of housing conditions has been at the front of the business world for several months now. The idea of a national housing market has long been ignored and put off due to the local nature of housing prices. Though it seems apparent we could be in the midst of a national housing bubble during 2007. Economists have different positions on what to expect. Many feel that the housing market will continue to decrease to the middle of 2007 and start to level off while others feel that the market will continue to decrease until 2008 and few believe the bubble will burst causing many economic problems for investors, homebuilders and many financial institutions. In response, there has never been a year with the average national home price decreasing for the entire year, so it would be smart to assume that the market will rebound before the years end. Though with recent economic reports that February set several low records for housing the argument that a housing bubble exists is set in stone. The real question is whether the bubble will lead to economic problems or a recession. The housing bubble has, yet to cause any drastic problems outside of loan tightening and a housing slump. No other sectors have dropped considerably besides housing, though the overall market can and has had down periods when significant negative housing numbers are released. In my argument I understand that housing bubbles are important to the economy to help alleviate high prices and level out the real estate market, though a strong national housing bubble could be disastrous, it is unlikely to occur due to the local nature of real estate prices.  So, in turn housing bubbles are a natural and important occurrence in the economy and the current housing bubble will not cause huge economic problems in the United States.


 

A Glimpse at the Housing Argument

The housing market in the United States has often been a relatively safe investment. Many investors feel the housing market is not too volatile therefore is a less risky investment than stocks. In the late 1990's and early 2000s the housing market was skyrocketing due to low interest rates and a dramatic increase in home purchases. It is relevant to point out that the housing sector of the economy is very much linked to the interest rate and general economic conditions. It has only occurred recently that many economists see the huge price increase and significant supply increase of new homes through 2004, 2005 and early 2006 could bring about a housing bubble that could lead to a recession. When asking most financial institutions or economists many say that there won't be a national housing bubble since the average national home price has never been in a decline for a single year. Yet it is becoming more and more convincing through housing data and record low numbers that it could be quite possible for a national housing bubble to arise. Though the argument to consider is will the bubble lead to a recession or and other economic problems? Many experts have different opinions on the matter and may often times be skewed due to their role in the business world. Many may suggest they think all will be fine, since if they express a negative opinion their own company could suffer from many buyers being wary of the housing market. In large part, many believe everything will be fine since there was such a massive boom in the mid 2000s that it is only normal and almost obvious that a correction in housing prices must occur. Since the recent news in 2007 has not caused any major damage despite the news being negative, we can be assured that the US economy will not see a recession.

In general, the safety of the economy and housing sector lies within the interest rate as mentioned earlier. Recently, the interest rate has been on the rise due to the Fed trying to tighten up inflation worries. Though the rates have been rising, they are still close to historical lows just under 6%. The problem that lies within the housing industry is the ability for home buyers to get a mortgage. During the significant housing boom, most home buyers were able to get mortgages with any credit therefore adding to the number of capable home buyers in the economy. Now many financial institutions are tightening up their lending practices due to the number of defaults occurring on mortgages given out over the past couple of years. So, now many buyers are unable to get mortgages and cannot afford the homes that are at high prices today. A home buyer must now have excellent credit and substantial wealth in order to approve for a loan and this adds to the housing sector demand declining. In addition, the major disappointment within the housing sector right now are new homes sales not existing home sales, since supply has no far exceeded demand. Furthermore, the link between tightening loans standards and the housing sector are all linked together and can be associated with the correction that is currently occurring within the residential real estate market.

Monday, March 26, 2007

The Tumbling of the Housing Market

    The article "Housing Still on Down Slope" by Steve Kerch appearing on MarketWatch.com on Feb 8th 2007 discusses the current situation of the housing market and forecasts housing prices for the future. Three economists mention that the real estate market is still declining and will not stabilize until the middle of the year. David Seiders states that there will be a decline in housing starts, which are the number of privately owned new homes entering the market, from previous years leveling out around 2002 numbers of 1.5 million. The maximum number of starts was seen in 2005 with 2.1 million, which shows a considerably more amount of money in the US economy. Though the starts are suppose to represent wealth in the economy, GDP growth, unemployment and overall inflation and interest rates situations have all been positive. So even though it seems there has been a housing bubble, it is not as severe as many would have portrayed since it really has not harshly affected the economy. Furthermore, David Berson, chief economist for Fannie Mae, believes investors and home owners will not see real home price gains for several years. This could surmount to a problem if many investors were planning on selling their homes and cannot, but still must pay for rising mortgage rates. Many people will then default on their mortgages causing many homes to enter foreclosure. The owners who default will have many problems, but all the foreclosures on homes will allow many new home owners to enter the real estate market at a much cheaper price. If many people enter the market at a low price, then homes will eventual rise and possibly create a similar bubble in the distant future. Currently, we do not need to worry about the future markets just about the current supply and demand and housing-price declines. The housing prices in 2005 were significantly high which caused supply in the housing market to increases while many homebuilders were trying to reap the rewards of the high prices and to keep up with the demand. The demand was partially inflated due to many people investing in real estate due to the rapid increases in prices. So, now investors and homebuilders are all trying to sell homes which no one wants to buy since demand was inflated and prices were sky high. Now prices are dropping to find the market equilibrium where supply equals demand at a reasonable price level.

Monday, March 19, 2007

Wikipedia: Las Vegas Sands

Las Vegas Sands is currently in development stages of several resort areas around the world. The company is in building stages of The Palazzo which is scheduled to open in late 2007. The resort will have a luxury - Beverly Hillish - theme and be a robust 50 stories tall. The Palazzo and the Venetian will be connected providing a vast array of restaurants, gaming, shopping and poolside fun for all guests. The Palazzo will add 3,025 suites to the already 4,000+ suites offered by the Venetian. Furthermore, Las Vegas Sands has in building stages is The Venetian Macau, which will anchor their other properties under development along the Cotai Strip in Macau, China. The Venetian Macau adds to their other property in Macau - The Sands Macau - and the revenue expected to be produced by the Cotai strip has already surpassed the Las Vegas Strip, and many investors have already bought into the companies stock to reap the benefits of the potential of this gaming Mecca.

Moving on to the South of Asia, LVS is in preliminary development stages of a plot they were awarded in Singapore. Many gaming companies bid for the rights to build in this lucrative market and Las Vegas Sands came out on top and were awarded the rights to develop the land. The Resort is currently known as The Marina Bay Sands and is forecasted to open in 2009. This resort will be the first casino allowed in Singapore in the last 40 years.

Lastly, the las Vegas Sands has development plans for a resort on Hengqin Island, China, along will a gambling hall in Pennsylvania. There is also speculation that LVS has bids for places in Europe and this shows the vast array of development sites that Las Vegas Sands has proposed.

Sunday, March 11, 2007

1) The Bubble Goes…

The past year or so housing prices have been declining due to one major reason - people are unsure of the current housing market. Are we in a housing bubble or not? Should I buy a home or rent? Should I sell my home now or wait? Many analysts and economists have commented and studied the particular phenomenon of housing bubbles and the current state of real estate affairs. There are many beliefs on what will happen in the near future due to the recent decline in housing prices and surplus of homes for sell. The importance of the housing market is due to the substantial amounts of wealth invested in real estate by U.S. citizens. The real estate market is regularly used as an index for economic conditions and forecasting. Therefore, if housing prices were to substantially decrease it could cause an economic disaster. Currently, there are many economists on both sides of the argument some saying the housing bubble is in the process of bursting and either 1) will crash quickly and cause economic problems or 2) decline slowly and economic problems will be manageable; then there are other people that feel the market is just slowing down and the market will soon pick back up. No one can surely know what will happen, but it is evident that the increases in housing prices year to year have been decreasing after tremendous gains in the late 1990s and early 2000s. Furthermore, in the next couple of weeks, I will be researching and analyzing the argument over the real estate market through a variety of sources: The Housing Bubble Blog, Housing Crash News, MarketWatch's Real Estate Weekly, among many others.

Friday, March 9, 2007

The “Whole” Foods Industry

The nutritional food industry has many competitors, but two of the largest companies have just merged. On February 22nd, Whole Foods (WFMI) said it had acquired its smaller rival Wild Oats Markets (OATS) for $565 million in cash. The acquisition positions Whole Foods to compete with larger supermarket chains just as Ralphs and Vons, which have an increasing amount of healthy food for sale. The news brought increase too both companies stocks, clearly showing the merger was widely accepted. In the article on MarketWatch.com entitled "Whole Foods to acquire rival Wild Oats, shares jump" the writer Angela Moore reports increases of 13% for Whole Foods and 17.2% for Wild Oats. The article shows many perspectives on the merger by several analysts. It is mentioned that Whole Foods gained some great locations and a similar business, so the company should see increased sales, margins and continue its potential as the leading health supermarket. Many analysts upgraded their rating on Whole Foods to outperform or buy. One such analyst called this acquisition a "strategic slam dunk." The strength in the deal lays in Whole Foods current operations. They will be able to decrease the overhead costs and turn around the underperforming Wild Oats retailers. This will bring added value to Whole Foods stock and continue to establish its name as the leading retailer in this industry. The article mentions Whole Foods had been looking to acquire Wild Oats for the last six years and now was the perfect time to make the final bid. Wild Oats had slow same store sales growth therefore the company was probably undervalued. Whole Foods offered an 18% premium on their stock and now is in position to turn Wild Oats around and grow from the ever-expanding healthy consumer population. Though the food is more expensive and recent economic problems may have hindered these higher priced retail grocery stores, Whole Foods made a great merger in a downtime in this industry. Once the economy picks up and more consumers start considering organic and natural foods, then Whole Foods has positioned themselves to acquire all the potential customers. Currently, Wal-Mart is trying to compete, but Whole Foods has a better image in this industry and very popular amongst the healthy wary middle class. The news helps Whole Foods out because of their recent decline in first-quarter profits, but may struggle for the next couple of quarters due to several factors. The merger with Wild Oats will cause a lot of overhead and change within Whole Foods. Whole Foods will need to reconsider all management within Wild Oats, along with remodeling their stores to the level of quality that is known at their current stores and there are probably many stores owned by Wild Oats that are near a Whole Foods that will probably needed to be sold. All of these factors lead to strains on the company's income until these two companies mesh and run as one unit. In light of all the news, the CEO of Whole Foods John Mackey supported these findings mentioning that the benefits from the acquisition of Wild Oats would not be seen for about a year. So, in the long run the company is a good investment, but there will undoubtedly be some bumps in the road that need to be fixed and the stock price is bound to fluctuate over the next couple of quarters. In addition, as advice for investors, just sit back and wait for the hype to calm down before settling into this behemoth of a natural foods retailer.