December 29, 2005


Twenty Years Later, Buying a House Is Less of a Bite (DAVID LEONHARDT and MOTOKO RICH, 12/29/05, NY Times)

Despite a widespread sense that real estate has never been more expensive, families in the vast majority of the country can still buy a house for a smaller share of their income than they could have a generation ago.

A sharp fall in mortgage rates since the early 1980's, a decline in mortgage fees and a rise in incomes have more than made up for rising house prices in almost every place outside of New York, Washington, Miami and along the coast in California. These often-overlooked changes are a major reason that most economists do not expect a broad drop in prices in 2006, even though many once-booming markets on the coasts have started weakening.

The long-term decline in housing costs also helps explain why the homeownership rate remains near a record of almost 69 percent, up from 65 percent a decade ago.

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's, a research company.

The share has increased since 1998, when it hit a low of 17 percent before house prices began rising sharply in many places. Although the overall level has reached its highest point since 1989, it remains well below the levels of the early 1980's, when it topped 30 percent.

'Inverted curve' on bonds raises some concerns: Economists say event could signal recession, or not (JEANNINE AVERSA, Associated Press)
Whether a harbinger of troubled economic times or a quirk due to light trading around the holidays, this week's flip in the bond market — where long-term investments for a while fetched lower interest rates than short-term ones — bears close watching.

Yields, or the return, on 10-year Treasury notes on Tuesday dropped slightly below the yields on two-year notes, marking the first time this has happened in five years. This phenomenon, also evident for part of the trading session Wednesday, is called an "inverted yield curve" and in the past it has often preceded a recession.

Typically, longer-term instruments carry higher interest rates than shorter-term ones to compensate investors for tying up their money over a longer time frame, a decision that can be fraught with uncertainty.

When the situation reverses, it signals that bond investors are betting that interest rates down the road will move lower, something that can happen in the event the economy were to slow down or slip into a recession, thus blunting any concern about inflation.

The Fed has hiked interest rates 13 consecutive times into the teeth of a global deflation, raising real rates to an absurd level, thuis inverting the curve and making low housing costs higher than they should be.

The Most Important Economic News of the Year (Arnold Kling, 29 Dec 2005, Tech Central Station)

The table below presents annualized productivity growth for various five-year periods, starting with the period 1955-1960 (from the fourth quarter of 1955 to the fourth quarter of 1960). [...]

What the table says is that the economy today is in great shape. The average productivity growth rate in the last five years is the highest over the past half century.

Posted by Orrin Judd at December 29, 2005 11:45 AM

John Rutledge has some thoughts on the inverted yield curve.

Posted by: Bruno at December 29, 2005 12:48 PM

"CNN Money reports today 'Sixty-five of the nation's 299 biggest real estate markets, representing 38 percent of all housing, are severely overpriced and subject to possible price corrections.' 15 different metro areas in FLorida are in the list of extremely over priced metro areas and all 15 had grown more over priced during the last quarter. In Phoenix Ariz..over 30% of all homes selling on the market are owned by investors. That means they are getting out in droves and when the speculators (investors) leave, it is a sign."

Posted by: toe at December 29, 2005 7:00 PM

A sign that with wages rising, jobs plentiful and rates about to fall we're headed into a home buying boom.

Posted by: oj at December 29, 2005 8:16 PM

i hope we are heading into a boom. the economy is strong enough but people are watching to see which way the market heads. right now it's in a holding pattern. if the market does take-off again i will be able to sell my house in irvine and buy a town in new hampshire.

Posted by: re/toe at December 29, 2005 10:50 PM

Re: inverted yield curve:

What really drives recessions is not the shape of the yield curve, but the LEVEL of rates. The current situation contrasts sharply with, for example, 2000. David Malpass, Chief Global Economist at Bear Stearns, points out that when the curve was flat in 2000 it was at a 6.4% level not the 4.3% of today. Malpass has had the best handle on the economy for several years now.

The indicator is "broken" because of artificial impacts on the long end. The WSJ cited a Fed study suggesting that the impact of Asian bank buying was about 75 basis points and CNBC said as much as one percent. Several sources [assert] that this foreign buying is good for the U.S. citizen and our markets.

Most importantly, other economic indicators are very solid. Yield curve inversion is only one indicator.

- Jeff Miller


Which Chart Isn't Telling the Truth By CONRAD DE AENLLE NYTimes

What's wrong with these pictures - the ones charting the courses of the Dow Jones industrial average and the yield curve?

The Dow is hovering on the threshold of 11,000 after languishing for more than four years on the other side of the line. And the bond market is close to its first inverted yield curve in five years, meaning that Treasury instruments with long maturities have lower yields than shorter-dated paper.

If these milestones are reached around the same time, it may worry investors with long memories. A strong Dow is usually a sign of economic optimism. But an inverted yield curve is held to be a precursor of recession, because it usually occurs when bond investors are willing to accept yields that are lower than current rates for years to come. That seems like a raw deal - unless you're anticipating a long bout of slow economic growth and quiescent inflation.

When stocks and the yield curve have sent different messages, as in 2000, the yield curve usually is the more prescient indicator, said Matthew Smith, chief executive of Smith Affiliated Capital, a New York firm that manages fixed-income investments. But, he asked, "If we're heading into recession, why is the equity market acting the way it is?" [...]

[I]f the yield curve inverts, Mr. Smith said, it may only be a sign of a whole lot of dollars looking for a home. Chinese manufacturers, Middle East oil producers and European and Asian exporters all have dollars to invest. [Emphasis added]

A safe place for them, especially with the dollar as strong as it has been lately, is the American bond market, Mr. Smith said. "The dollars are out there, and they don't really have a place to go," he said...


Clever moniker.

However, the real-estate bubble in NH is even more inflated than the one in CA - the proceeds from your Irvine home would only buy oj's garden shed.

Posted by: Michael Herdegen [TypeKey Profile Page] at December 30, 2005 3:21 AM

An inverted yield curve is actually NOT generally a sign of recession, as far as I know. It's a sign that markets expect future short-term interest rates to be lower than current ST rates. One thing that could cause such expectations is the notion that inflation will be lower in the future. Inflation is quite low now, so if it drops much, then we actually will be in OJ's oft-repeated mantra of deflation.

Posted by: Tom at December 31, 2005 10:08 AM