WASHINGTON (Reuters) – Housing starts fell to a five-month low in May but industrial output rose, evidence of an uneven recovery that has kept inflation at a minimum.

As the government’s tax incentives for homebuyers expired, new home building dropped 10 percent to a seasonally adjusted annual rate of 593,000 units, the lowest level since December, the Commerce Department said on Wednesday.

Home building plH – Yahoo! Finance

economy, housing, real estate, homebuyer tax credit

A quartet of top U.S. bank stocks rose on Wednesday after J.P. Morgan Chase & Co. reported earnings that surpassed Wall Street estimates, and the insurance sector also weighed in with gains to lift financial stocks more than 2%.

I suggest that the management at JPM horde all that cash, as the next big mortgage resets occur in 2012 (5 years after the peak of 2007, when everybody and their mother, dog, parakeet, and gerbil bought houses with no money down, poor credit, and insufficient income).

Now that many of those same people are now either unemployed or still making less money than their mortgage payment, the pressure is going to be HUGE on the housing market, banking sector, and overall economy. Let’s hope the news that the economy and employment pictures are improving, else we fall into a really nasty tailspin. Let’s also hope I’m wrong about the resets (here’s the good personal news: my mortgage from 2004 reset at a lower interest rate).

What About Greedy Bankers?

Some like to point out that Wall Street creating the easy home securities like ARM and sub-prime loans, but realize that Wall Street would not have been able to create these things if Alan wouldn’t have allowed interest rates to drop well below market rates.

Its Official, Alan Greenspan Is To Blame | PennyJobs

Not sure I agree with the statement (it seems like a circular argument), but I, too, place a lot of blame on Greenspan and the Federal Reserve. And my opinion isn’t influenced, in this case, by the fact that I think the Fed does too much. It’s based on the idea that one of the, if not THE, central functions of the Federal Reserve is to regulate banks and other financial institutions.

The Fed failed in its oversight of the banks; in fact, they encouraged risky behavior. I think they were of the mind that all of these “derivatives” were reducing — if not eliminating — the risk naturally inherent in risk-based securities. After all, mortgages, for example, have inherent risks and their priced almost solely according to this risk (in the form of the interest rate).

A simple economic lesson: Higher interest rate = Higher perceived risk

As interest rates dropped to historically low numbers, the market clearly perceived lower risk. But people still lose jobs, hurricanes still happen, blight still occurs.

As the bubble inflated, more and more people pumped more and more air into it. As a bubble expands, it becomes more likely to burst.

And BURST it did.

It would be interesting to know what the money multiplier was during the early 2000s versus other 5- or 10-year periods. I would guess that it was rather high.

Technorati Tags: Alan Greenspan, Federal Reserve, the Fed, Fed, Wall Street, Mortgage Meltdown, Credit Crunch, interest rates, housing, recession

As in all complex things in life, there wasn't one specific cause. Here's my general thought process on this topic.

People who want to get to the root of any cause always use a root cause analysis to determine the true cause of any issue. One of the practices that process improvement folks use is the fishbone diagram, where if you keep asking "why?" to a question you'll get to the root of it.

But this simple approach often neglects the contributing factors to an issue or a failure. For example, a barn might have caught fire and burned to the ground. The root cause might have been determined to have been a spark from a passing-by freight train.

But the contributing factors were that there was damp hay in the barn, along with kerosene, dry timber, a poorly-maintained exterior, and weeds that had grown rampant over the course of several years.

All of these things led to the fire. Of course, the fire could not have started if not for the spark. But the weeds, hay, timber, etc. allowed the fire to spread at such a rate that the fire crew could not stop it before the entire barn burned down.

Such is the case with the economy. There were many contributing factors: Declining home values, rising bad debt, companies trying to stay afloat cutting staff, phoney financial instruments dreamed up by mathematicians rather than business folks, etc. The list is literally endless.

But what was the root of it all?

As in any mania, it was the madness of crowds. Adam Smith's "invisible hand" and "pursuit of self interest" was the downfall.

Home buyers thought, "If I don't buy this house now, somebody else will."

"Or, if I don't buy this house today, it will cost me $60,000 more to buy this house in 6 months." (By the way, this was the rate of price appreciation for a below-median home price in the Bay Area in California in 2003-2006.)

Lenders said, "If I don't fund this mortgage, somebody else will."

Insurers surmised, "If I don't insure this asset, somebody else will."

Bottom line:

If I don't _____ this, somebody else will!

It was all about getting "it" before somebody else got "it." Or, in other words, what I call "relative greed." It wasn't that everybody was greedy, in and of itself. It was more along these lines:

Scenario 1
You get a 10 percent pay raise. Your neighbor gets a 15 percent pay raise.

Scenario 2
You get a 5 percent pay raise. Your neighbor gets nada.

Do you know which one most people would take? Yeah, #2. It's getting "more" than your neighbor, co-worker, competitor. That's what happened here, in my humble opinion.

It's also "the market" filling in voids. If Bank of America doesn't do this mortgage, Wachovia will. And Wachovia did. And did, and did and did and did.

BofA saw this and said, "We're losing market cap. And we're the biggest and baddest bank around." So, they got into the game, and then some!

People did it, too. If I don't buy a house now, I may never be able to afford one.

"Investors" did it, too. If I don't buy this duplex now and flip it, I may never get another golden opportunity like this.

Do yourself a favor: Read Extraordinary Popular Delusions and the Madness of Crowds.

You only really need to read any one of the stories. They're all the same, really. Market goes up and up, creating self-fulfilling prophecy. Something happens. Market goes down and down, creating self-fulfilling prophecy. What stops it? Who knows?

Money isn't everything. It's the only thing. Wait. That's only for football.

Enjoy life. Spend time with your family.

There are two topics that immediately come to my mind: The financial crisis and the presidential election.

First, the easy one. The financial fubar we’re in will worsen as the year ends, compounding with a further reduction in the global stock and bond markets. As time goes on, and the few remaining big banks experience their own pain, stocks will shrink, sending the Dow down near 6,000 (yeah, you read that right) and sending bonds down with it. After all, who wants to own corporate bonds? The only “safe haven” will be Treasuries and they’ll pay next to nothing, if anything at all.

Sectors that will stay strong (i.e., won’t fall as far as fast) are staple industries, like food and beverage companies (e.g., Coca-Cola, Pepsi, and McCormicks, to name three).

There will be more bank failures, worse in Europe than in the United States, though the failures here will occur (but they may be quiet); we’ll call them “mergers.” I don’t think there will be many bank runs, but there will be some.

Inflation will stay in check, but it won’t feel like it because food prices and the seasonal upswing in energy prices will happen, just like they do every winter. Unemployment will rise to a nationwide 8- to 9 percent. This could get really ugly.

(It’s a good thing I’m independently wealthy.)
(What? I’m not? Oh, crap!!!)

The dollar will appreciate relative to the Euro, not because the US economy improves, but because Europe’s economy will decline relative to ours.

The US presidential election won’t matter. Really. Obama brings hope to roughly half the population. McCain brings Palin. Either way, we’ll feel better about things for a while.

I think Obama will win, but I’ve been wrong many times on these sorts of things. I thought Kerry would trounce Bush. That’s my most recent failure in picking these things. So maybe I’m due for a winning bet.

Either way, we won’t get that big tax cut both parties have promised. Nor will we get health care relief, war relief, or better corporate governance.

America is a huge ship, not easily righted. It cannot turn on a dime, nor can it be started quickly if stalled. We’ll — at best — muddle through. At worst, we’ll re-live the 1930s.

On this one, I hope I’m wrong.

Money isn’t everything. It’s the only thing. Wait. That’s only for football.
Enjoy life. Spend time with your family.