Median Home Prices Down 15.9% in 3 Months.The US Commerce Department released statistics last Wednesday… … that median home prices at the end of July had declined to $203,915 from $218,270 in June for a monthly decline of 7% in one month. Median home prices peaked at $236,300 in April and thus are down nearly 15.9% in 3 months.

These key facts were ignored and journalists and or editors chose to and rather buried the details in articles such as
David Leonhardt, Rising US rents suggest housing boom is cooling, International Herald Tribune
Reuters, New Home Sales Hit Record, Mortgage Demand Drops, Reuters via FOX News

Once again the propensity of many journalists and editors in the business and financial press to attempt to spin financial and economic news and continually accentuate the positive and eliminate the negative was very evident in the treatment of this news. The US Commerce Department statistics are possibly the most significant economic statistics of recent times and have huge ramifications for the global economy.

There is such a thing as economic reality and the rose tinted macroeconomic fantasy of many of our 'pundits' will soon be confronted with this reality.

Alan Greenspan belatedly warned regarding the risks posed by the “pitfalls of excess dependence on overvalued assets.”
Here Greenspan, who retires in 4 months, is clearly putting on record that he believes various asset classes are overvalued and at risk of a market correction.

The Federal Reserve Chairman said that “The housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. . . . Such an increase in market value is too often viewed by market participants as structural and permanent.

History has not dealt kindly with the aftermath of protracted periods of low-risk premiums.”

Given the decline in median home prices as shown in the figures released by the Commerce Department, it seems Greenspan's warning are a little late and he should have been warning some months ago or at least raising interest rates at a faster rate.

Greenspan's comments were widely reported in the media in the US however in Ireland and the UK the media seems reluctant to even address what Greenspan said and bizarrely his comments were ignored by many in the business press in the UK and Ireland. This is probably due to a dawning realisation of how fragile our economies are and how dependent they are on continuing US growth. Advertising revenue in general and also revenue generated from glossy property supplements may also be a consideration.

Some have warned about overvalued asset prices prior to Greenspan's recent enlightenment and they have been childishly dismissed as being 'doomy' and 'gloomy'. Unfortunately, due to a failure to deal in economic reality and the major macroeconomic risks facing our economies and societies, consumers and investors have been lulled into a false sense of security which they will soon be awoken from.

We are not happy to be prescient or right in this regard but believe it is prudent and wise to deal in economic reality.

Opinions of the Week

“The housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. . . .

Such an increase in market value is too often viewed by market participants as structural and permanent,” said the 79-year-old Fed chief, who expects to step down in five months.

History has not dealt kindly with the aftermath of protracted periods of low-risk premiums.”
Alan Greenspan, Federal Reserve Chairman,

“Wall Street shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.

He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.”
Graham Searjeant, US heading for house price crash, Greenspan tells buyers, Finance Editor, The Sunday Times

“The turnaround appears to be another sign that the boom in house prices and sales is finally slowing, as homes have become so expensive in many big metropolitan areas that some people have decided to rent instead.

A government report on Wednesday also offered new evidence that the housing boom could be reaching a peak. The median price of a newly built home fell to $203,915 in July, from $218,270 in June.”
David Leonhardt, Rising US rents suggest housing boom is cooling, International Herald Tribune

“The median price of a new home dropped for the third consecutive month, down 7.2 percent to $203,800 from $219,500 in June and off 4 percent from the price a year ago, the Commerce Department report said. The July sales price was the lowest since December 2003, when it hit $196,000.”
Reuters, New Home Sales Hit Record, Mortgage Demand Drops, Reuters via FOX News

“The nightmare scenario that haunts global strategist Clyde Prestowitz is an economic September 11 — a worldwide financial panic triggered by a sudden massive selloff of US dollars that would lead inexorably to the collapse of economies around the world.

If that happens, Prestowitz predicts: “It would make the Great Depression of the 1930s look like a walk in the park.” Australia would be sucked into the vortex of such a recession, which would cause great hardship throughout the world, he warns.

Prestowitz is not a doomsayer, neither is he alone in his views. As president of the Economic Strategy Institute, a Washington think tank, he is in regular contact with the most influential US business leaders, some of whom — Warren Buffet and George Soros included — have taken steps to hedge their currency positions against the possibility of a cataclysmic plunge in the greenback.”
Bruce Stannard, Dumping of US dollar could trigger 'Economic September 11', The Australian

“The fact that America's economy has been able to shrug off higher oil prices mainly as a result of a housing and mortgage bubble is hardly a comforting thought. What happens when house prices flatten, or even fall? Consumers will then feel the full force of dearer oil. Come to think of it, a further spike in oil prices could even be what pops the housing bubble, if it unsettles consumers enough. So far, the rising oil price has done little harm; but worse may well be on the way.”
Editor, Oil and the global economy – Counting the Cost, The Economist

“High oil prices will knock Britain’s growth rate next year for the second successive year, forecasters say, pushing the economy even further away from Gordon Brown’s growth predictions. Professor Peter Spencer, economic adviser to the Ernst & Young Item club, which uses the Treasury’s model of the economy, said growth could slip below 2% next year if oil prices stay high.

“The Treasury model shows that every $10-a-barrel rise in the oil price hits the growth rate by 0.5%,” he said. “We could very easily get sub-2% growth next year.” “
David Smith, Oil price hike 'will hit growth in UK', The Sunday Times

“Ireland's economy could yet be driven towards recession if US-fuelled demand for our exports decreases.

Most people associate rising oil prices with economic bad times. Nothing surprising about that. Eight of the nine international recessions since the second World War occurred in the wake of sharp increases in oil prices, including each of the four most recent: the recessions of 1973-75, 1980-82, 1990-91 and 2001. . . .

As I read it, one of the biggest risks to the global economy and, by extension, to Ireland, posed by the recent oil price hike is that it is the straw that breaks the back of the highly-indebted credit-hungry US consumer, who has acted almost single-handedly as the locomotive of world economic growth in recent years.

An early warning in this regard may have been provided by the latest US consumer confidence figures, published last week, which showed a steep four-point drop in August. Watch this space.”
Jim O'Leary, US consumers may dictate impact of oil hike, Irish Times

“Industry figures pointing to a dramatic slowdown in housing starts could see construction activity decline significantly next year, raising the spectre of a “hard landing” for the economy. . . . “Any slowdown in the housebuilding market will have serious implications for overall employment figures,” said Danny McCoy, noting that 12.5% of the working population is employed in the construction industry. “In recent years, building activity has been able to soak up a large amount of the job losses that we have seen in manufacturing.” Not everyone agrees with the picture. Dan McLaughlin, the chief economist at the Bank of Ireland, noted that Ireland was moving from a relatively high three people per household towards the European norm of two and a half, which should act as a buttress for the overall housing market.”
Joe Brennan, Construction slowdown may signal economic decline, The Sunday Times

“The longest bull market in history” is a term that gets used a lot these days. Since 1990, the Dow Jones Industrial Average has risen some 8,000 points, from around 2,700 in January 1990 to nearly 11,000 today–a boom by anyone's standards, including Edward Chancellor's. In Devil Take the Hindmost, Chancellor takes an entertaining, albeit sobering, look at the history of speculative manias and the mass delusion that surrounds them.

Beginning with the “tulipomania” that gripped Holland in the 1630s, Chancellor chronicles the formations and irrational euphoria that can inflate markets, from shares of South Sea stock in England in the 1720s to real estate in Japan in the late 1980s. He characterizes the speculative spirit as one that

loves freedom, detests cant, and abhors restrictions. From the tulip Colleges of the seventeenth century to the Internet investment clubs of the late twentieth century, speculation has established itself as the most demotic of economic activities. Although profoundly secular, speculation is not simply about greed. The essence of speculation remains a Utopian yearning for freedom and equality which counterbalances the drab rationalistic materialism of the modern economic system with its inevitable inequalities of wealth.

But it's precisely such inevitability that always seems to win out, when “sharply rising prices followed by sudden panic without cause” bring speculative excess to an abrupt end.

Chancellor makes Devil Take the Hindmost especially relevant to today's U.S. investors by using his analysis of past speculative manias as a lens through which to view the current bull-market binge. No matter what his or her current investment outlook is–bull or bear–anyone with capital to invest would do well to spend a thoughtful weekend with this book.”
Editorial Review, Devil Take the Hindmost – A History of Financial Speculation by Edward Chancellor, Amazon

“The warning issued by the Chairman of the US Federal Reserve, Alan Greenspan, about the threat to the world economy posed by inflated property values deserves to be taken very seriously indeed by governments and policy makers everywhere. . . . . A property crash in Ireland, coming on top of the continuing loss of jobs in the manufacturing industry could undermine our booming economy in double quick time. . . . How the country could cope in such a situation would pose a real test for both our economy and our society.”
Editor, Economy Stacked Like a House of Cards, Sunday Tribune

“Looking forward, our loss over recent years of the fragile political coalescence around fiscal discipline, our currently projected 10-year fiscal deficits…our extremely low personal savings rate and high levels of personal debt, all suggest that the next Fed Chairman could face — at some point in the future, there's no way of knowing whether it is years out or sooner — an even greater need for the understanding and experience to deal with serious market difficulties.”
Robert Rubin, Former US Treasury Secretary, Rubin says Greenspan successor may face big problems,
Somerville, Reuters, 29-08-05

Opinions and Quotes can be found in articles in the Daily News and Commentary sections of www.gold.ie

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