Thursday, January 25, 2007

Me Count Pretty Some Day

I almost never talk about my job--a great relief to you all--but one of the things I do is monitor current economic news and try to correctly assess what that means for the future of both the economy and the stock market.

However, I was an English major, not an economics major, which means I can write much more stylishly about what I do than I can actually do it.

Probably the most-disputed segment of the economy right now is housing. There was a massive housing boom in this country that lasted for years. It created so much additional liquidity in the economy, both from people selling their homes for a profit or taking out home equity loans, that it took on a life of its own. And like most booms, toward the end it was being sustained by all kinds of dubious tactics--most notably, the gigantic increase in sub-prime and "alternative" loans.

The discussion about lending could be book-length in itself, but suffice to say that quite a few people have taken out home loans that they will only be able to pay off if their homes increase (rapidly) in value. And there are serious concerns that as more and more people default on those loans, they'll take sub-prime lenders with (already happening), have a ripple effect on the availability of credit, and lots of bad things could happen from there.

So as the housing market slows, people are still in severe denial that any of this is really a problem, and they're desperately wanting to claim that the bottom has already been reached (short version: it hasn't). Here's what came out this morning:
Sales of existing homes fell in December, closing out a year in which demand for homes slumped by the largest amount in 17 years... For the year, sales fell by 8.4 percent, the biggest annual decline since 1989...

There has been data coming out in this vein for almost a year now, and every time it does, realtors immediately claim that the market has bottomed. I read some of the most bizarre, amazing explanations from the realty industry. Here's today's gem from the realtor's "chief economist":
David Lereah, chief economist for the Realtors, said that even with the December setback, he still believes that sales of existing homes have hit bottom and will start to gradually improve.

He said that in 2005, 40 percent of the market represented purchases of second homes and investors buying homes looking to resell them for quick profits.

He said that speculators had now left the market and that should leave sales at a more sustainable level.

Okay, now I'm just a crappy English major, not a chief economist or anything, but let's take a look at this. Lereah is saying is that 40% of the real estate market in 2005 consisted of speculators, and that they've all left the market now.

Yet home sales only dropped by 8% last year? So 40% of the market--the speculators--were only buying 8% of the homes?


This guy should work as an executive in the gaming industry. He's a natural.

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