Buyers' #1 Bugaboo?

Divining Buyer Psychology

What's keeping Buyers from buying?

I see three factors operating at the moment:

One. Can't qualify for a mortgage/bad credit.

If you don't have a job, or any money in the bank, you're not going to get a loan.

At least not one from a bank.

Sadly, a couple years of grinding recession has pushed more people into this category.

Two. Can't sell what they have.

You've got a job and some savings (Yeah!).

But you've also a got a house that you can't sell, or that may be underwater -- meaning you owe more than it's worth (Drat!).

Ultimately, to a Realtor, this is just another, less dire variation of Factor #1.

Three. Worried about home prices falling further.

I can't prove it, but I think this is the real bugaboo for Buyers at the moment.

Interest rates are in the basement, courtesy of the Fed; unemployment is apparently stabilizing (albeit at very high levels historically); and home prices have already taken a major whack almost everywhere -- meaning that payments for a decent home have seldom been this low.

Ever.

Lastly, signs of inflation -- historically a positive for hard assets like housing -- are becoming manifest in all manner of commodities and stocks lately.

Everywhere, apparently, except the housing market.

Deflationary Mindset?

Ironically, while inflation concerns appear to be dominant outside the housing market, inside it, there are signs that a deflationary mindset has taken hold.

Which means that many Buyers evince an attitude of, "my choices will be better and cheaper if I wait."

Unfortunately, there's only one, 100% guaranteed cure for that: a year or two of sustained gains in housing prices.

If enough people wait for that to happen . . . current Buying demand suffers, and lower prices become a self-fulfilling prophecy.

P.S.: If inflation expectations are on the rise, wouldn't interest rates be rising?

Normally, they would be -- and that would send a signal to the Fed to act.

Except in this case, it's actually Fed intervention that's suppressing interest rates.

Got that?

Always a smart idea to disable the brakes before you hit the gas . . .

Next: "Defensive Housing Plays"

Bernanke's High Wire Act

Disconnecting the Heart Monitor

In my post last week titled, "Approaching the Zero Bound," I characterized the Fed's plan to buy hundreds of billions ($600 billion, it turns out) in U.S. debt as a "hypodermic needle to the economy's heart."

Actually, that analogy is not quite complete.

The Fed's money-injection plan, also known as quantitative easing, is like administering a hypodermic needle to the heart . . . after disconnecting the patient's heart monitor.

That's because the Fed's injection mode of choice -- buying up U.S. securities -- suppresses a key market signal: interest rates.

How's that?

Normally, when inflation kicks up, demand for loans becomes overheated, etc., buyers of U.S. debt balk, causing demand to flag -- and interest rates to rise.

Now, enter the Fed, and quantitative easing.

With the Fed guzzling U.S. debt -- goosing demand -- interest rates stay low or even go down.

As Bloomberg columnist Caroline Baum puts it (my paraphrase): 'playing with the yield curve is like trying to fool Mother Nature. Instead of increasing demand for goods and services, printing money just raises asset prices.'

Sure seems like the stock market agrees.

Bubbles as Policy Tool

Grantham: 'Almost Criminally Inept Fed'

The Federal Reserve's asymmetric policy of stimulating stock moves by setting artificially low rates and then leaving the bull markets, when overstimulated, to bubble over, is dangerous. It is probably the most dangerous thing to inflict on a peace time economy with two possible exceptions – runaway inflation and a housing bubble.

--Jeremy Grantham

Leave it to Jeremy Grantham to lay bare exactly why the Fed has so many market watchers -- myself included -- baying at the moon in exasperation.

On the one hand, it denies any duty or ability to contain the damage from asset bubbles (or even recognize them!).

On the other hand, it pursues policies -- first zero percent interest rates, now quantitative easing -- guaranteed to inflate serial bubbles.

Grantham devotes most of his current quarterly letter (see, "Night of the Living Fed") to explaining why this is irresponsible, and -- in the case of housing -- especially dangerous.

Amongst other things, in their wake burst asset bubbles leave squeezed consumers, taxpayers, savers, retirees, pension funds, states, and municipalities -- and, when they are compelled to clean up the mess, ultimately a broke Fed and federal government.

Grantham again:

Distorted asset prices have been like the deliberately misplaced signal lanterns, which the Cornish, in the stormy west of England, used to lure ships onto the rocks for plunder. Individuals, as well as institutions, were fooled into believing that the market signals were real, that they truly were rich. They acted accordingly, spending too much or saving too little.

So what does Grantham prescribe, besides not inflating any more bubbles?

Noting on the one hand the "army of non-frictional unemployed ready to get to work," and on the other hand the country's "dreadfully deteriorated infrastructure and desperate need for improvements in energy efficiency" . . . Grantham thinks it's obvious.

You owe it to yourself to read the entire article.

A Tale of Two . . . Chairs

"Hedonics," Defined

After almost 13 years, I finally popped for a new (home) office chair yesterday.

The chair I retired -- actually, handed down to son #2 -- was an ergonomically correct, (then) state-of-the-art job purchased from a Relax the Back store in Manhattan for almost $800 in early 1998.

Truth be told, it was an engagement gift from my then-fiance (not very romantic, unless you consider functionality romantic -- which I do).

While still serviceable, the gas lift had worn out, leaving me literally deflated and my rear end only about a foot off the ground.

Chair #2

I replaced it with a Chinese knock-off of the trendy Herman Miller Aeron chair pictured above.

Office Max had it discounted from the usual $175 to only $99.

Based on my "challenges" assembling various Ikea products, I braced for a long evening parsing instructions, puzzling over seemingly missing and mismatched parts, etc.

Instead, I found the instructions to be clear and concise, and assembled everything in 20 minutes, tops.

Chair Buyers vs. Chair Makers

Using only these two chairs as a microcosm, what can you say about how the economy has changed the last 13 years?

A couple observations come to mind:

--Cheap, overseas manufacturing is a mixed blessing.

As consumers, we definitely benefit from cheaper, imported goods.

As taxpayers and U.S. citizens, though, the loss of U.S. jobs undermines our well-being -- especially if your job used to be manufacturing office chairs.

Call it "the Wal-Mart effect" in a nutshell.

--Prices of many goods, especially manufactured ones, have experienced marked price deflation.

In fact, the $800-to-$99 price drop understates the deflationary effect.

That's because $1 in 1998 is worth about half that in 2010.

--Advances in product quality and features make apples-to-apples price comparisons difficult.

Not only is my Office Max chair dramatically cheaper than my old one, it has features the other one lacked: lumbar support adjustments, tension settings, etc.

How do you track price changes when products actually become better over time?

This challenge has given rise to the pseudo-science of "hedonics."

Hedonics Example

To take another example, consider a circa 2010 car, selling for $25,000, that has anti-lock brakes, power steering, and front and side air bags as standard equipment.

Now compare it to its 1995 counterpart -- lacking those features -- that sold for $15,000.

The $64,000 question: did car prices go up the last 15 years, and if so, how much?

At least nominally, they did, because $25,000 is more than $15,000.

On the other hand, the 2010 car buyer got more for their (less valuable) $25,000.

The answers to the foregoing are far from clear, and the stuff of what economists spend their time arguing about (no doubt sitting in their $99 Chinese knock-off chairs).

Real Estate & Inflation -- Updated

A *Macroeconomic Overview

Back in April, I ran a post called "Real Estate & Inflation" that isolated wage growth as the key to whether any inflationary outbreak would help or hurt real estate (incidentally, that post is now ranked 18th in the world, according to Google).

Specifically, if inflation spilled over into workers' wages, it would drive up real estate; absent that, inflation would hurt real estate.

That's because static wages plus rising prices for everything else (food, gas, health care, etc.) would "crowd out" consumers' ability to spend on housing.

Six months later, how do things look?

Clearly, there is no inflationary pressure on wages. In fact, with unemployment at about 10% nationally and still rising, there is more downward pressure on wages than upward.

However . . . two other developments have come into clearer focus.

Coming Into Focus

The first is the Fed's apparently indefinite commitment to an easy (free?) money policy -- at least to banks that borrow from it.

Second, while wage inflation is nowhere to be found, asset and commodity inflation -- at least outside of housing -- appears to be rampant. (Hmmm . . . maybe the two are linked).

The Dow Jones is well over 10,000, gold smashed through 1,000 an ounce weeks ago, and oil appears to be poised for another run at $100 (and beyond). Meanwhile, the dollar is plumbing record lows against the Euro, yen, and other major currencies.

So, to return to the original question, what will an outbreak of inflation mean for real estate -- and specifically, the housing market?

Based on the foregoing, I've shifted into the camp that believes that rising inflation elsewhere in the economy will ultimately spill over into real estate, as well -- even if wage growth is flat (or negative).

If the economy can simultaneously experience recession and inflation -- a phenomenon dubbed "stagflation" in the '70's -- there's no reason why houses can't appreciate in a lousy economy, given what's happening to other asset prices.

P.S.: Peter Lynch has a famous line that if you spend 15 minutes a year trying to figure out macroeconomic factors . . . you've wasted 13 minutes.