A brief column from today's Wall Street Journal (on the back page of the 'Money and Investing' section):

If the Obama administration were managing a company, it might have hoped the latest gross domestic product numbers would be greeted with cries of 'great quarter, guys!'

At least the stock market obliged [yesterday, but not today!--LeRoy], rising on the back of better-than-expected GDP data Thursday morning. But then bulls have become used to looking to Washington for inspiration. Zero rates and stimulus programs boost economic data as well as nudge money toward riskier assets.

Fully 2.2 percentage points of the third quarter's 3.5% growth figure related to vehicle purchases and residential construction, both juiced by government support. Federal spending added 0.6%. [Leaving only about 0.7% of that growth figure that could be attributed to things going on purely in the private sector--LeRoy]

If these GDP data were company earnings, they would be what analysts euphemistically call 'low quality'. Investors buying into the market off the back of them are ignoring weekly unemployment claims data that came in above 500,000 again on the same day. [The market seems to have gotten that wake-up call today--LeRoy]

The danger is that all these short-term fixes leave the economy dangerously addicted to taxpayer-funded steroids. The circularity in the housing market, whereby Washington provides tax breaks to first-time buyers, guarantees most of the mortgages written, and then buys most of those, beggars belief, and suggests a worrying case of amnesia following the bursting of the housing bubble. [I LIKED this paragraph--LeRoy]

Another idea that has been floated is to give tax breaks to firms to encourage them to hire. Yet with earnings besting forecasts so far, it doesn't look like firms are exactly short of funds to pay workers. What they lack is a clear sense that the economy is on a stable footing. Distorting the cost of money, durable goods order demand and labor productivity won't help that, but merely serve to build up further problems.

LeRoy: That column was written by Liam Denning. Pretty well-said. The GDP numbers are becoming ever-more artificial, and are giving precious little evidence of the true state of the economy. Which is in a shambles.

Yes!!

GDP is merely some bureaucrats' effort to estimate spending. It no longer measures or indexes "product"; but it does have some validity within and confined to its components such as "manufacturing," although that area might be now dominated by burgers and chips. Take away the recent drastic price increases on chips and who knows?

Anyway, a person would be foolish to do anything based on weird numbers like GDP.

Until around JC-time, GDP was valid.

If some economystics like NBER announce "recessions" nowadays, it's pure BS.

Note that Chinese imports to USA are subtracted in dollars, which drastically undermeasures the amount of imported product and overmeasures exports.

That must have been the phrase you liked. I fear that Obama is in danger a couple years from now of becoming a universally ridiculed president, perhaps as George W Bush was, and for much the same reason. He is not delivering on his promise of change we can believe in just as Bush didn't deliver on his promise of being a uniter, not a divider and foregoing the nation building. The problem is, Obama inherited a moribund economy, and has given his team carte blanche to try anything which works--"whatever it takes", as he put it. So we get $1.4 trillion deficits and $9 trillion projected deficits over the next decade. We get a stimulus program which costs on the order of $200K or $300K per job added or saved. <link>

We get govt. practically buying houses for people and keeping them in those houses--though Mish today cited an interesting report on that concept, revealing that the motivation often is to save the bankers the trouble of repossessing these houses more than it is to help the individual homeowners:

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Some excerpts:

In calculating whether to buy or rent, a potential homebuyer should compare the net cost of owning to the net cost of renting a similar home over the expected period of occupancy. The costs of owning include the interest-only portion of the loan payment, property taxes, maintenance, homeowners insurance, and transaction costs upon selling, minus the expected appreciation and cumulative tax savings over the planned period of ownership. As a rule of thumb, a potential homebuyer is generally better off renting when the home price exceeds 15 or 16 times the annual rent for comparable homes...historical home prices have hewed nationally to a price-to-annual-rent ratio of roughly 15-to-1. At the peak of the market, however, price-to-rent ratios reached 38-to-1 in the most inflated markets, and the national average reached 23-to-1. [Today the national Case Shiller index for 20 cities has fallen nearly 30%, bringing price-to-rents down to about 16].

The cited article makes some noteworthy points about the asymmetry between home-borrowers and bankers. Of course the bankers come out on top because even when they suffer--in many cases well deserved--losses from defaults, govt. and the Federal Reserve are there to bail them out and in many cases buy their toxic loans at above market prices.

The market did not fail, government policies to promote housing in conjunction with loose monetary policies at the Fed is what failed. Fannie Mae, Freddie Mac, HUD, the FHA, and the Fed all failed. Every one of those agencies should be abolished.

Of course I've been railing here for years about the malinvestments caused by the tax loopholes long given to housing and increased in 1997 (whence commenced the housing bubble), the artificially low Fed Funds rates, the securitization, the Housing ATM, the even lower FF rates in 2008 and 2009, and the endless and gargantuan bailouts to the financial sector. Today of course the govt. is borrowing half of what it takes in in taxes. I beefed back in the early 1980s when Reagan borrowed 20% of what the govt. took in. Unless and until Obama truly has the courage of his change convictions, things will only get worse, and he would practically have to become a benevolent dictator in order to effect real and needed change. Obama was the Queen of Spades in the game of Hearts: only valuable if we got all the hearts (Congress). But since being elected Obama has not acted as the Queen of Spades ought. So we continue with the slow-mo train wreck. The nation might have been better off electing John McCain and thus eventually repudiating the GOP's policies. I say this with full acknowledgement of the ignorance of his running mate. Now Obama and the Dems must take the hit for what Bush caused, and so far, I must say that it couldn't happen to a nicer bunch of people. For the most part they don't come across as being sympathetic to the people, but to the corporations, so why should the people feel sorry if they get blamed for Bush's bad economy? A pox on both their houses! True, that may well set us up for a future Ronald Reagan like tyrant who could be even worse (if more decisive) than Obama, but I've come to accept much of this as being the fate of an empire in decline. Few such empires go down gracefully. From my vantage point as an expat what stands out is the arrogance and insularity of both parties as they borrow and spend the country into oblivion, and it will take a wake up call from America's creditors to put a halt to this. The US is the new subprime nation, and China, Japan, and the petro-states its bankers. who will bail them out?

You have again failed to suggest that it might be wise to compare the cost of home ownership with the cost of renting "over the planned period of ownership", accounting for the expected annual increase in rental rate and including home-owners insurance (there is a version meant for renters), which covers personal property and liability. I realize that isn't the main thrust of your current post, but it needs to be said.

As to McCain, I have the opinion that somebody who is shot down, captured, and imprisoned for five years is a loser, rather than a winner. And - I would guess that his ignorance rivals that of his running mate. My choice, as I mentioned during the campaign, was Hillary. She's probably as irritating as me, and I appreciate that in a public figure. It means they are sticking to their path longer than is politic.

Accounting for the expected annual increase in rental rate and including home-owners insurance (there is a version meant for renters), which covers personal property and liability.

Were you aware that rents have recently been falling in most locations? What annual increase in rents would you use in your rent or buy calculation? As for insurance, the homeowners' version covers more and is of course more expensive than the renters' version. Even a homeowner with zero furnishings would still be expected to take out fire and perhaps flood insurance. As for your locale, how many homeowners have a decent earthquake policy? Not bloody many.

Here's a blast from the past, entitled 'New math on homes':

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The authors favorably cited by the NYT no less assumed in 2006 that home prices would rise 6% into perpetuity (instead they have fallen over 6% annually in the intervening 3 1/2 years). Mish points out, "Long term prices of houses simply can not rise above people's means to pay for them. Gary and Margaret Smith are simply making the classic mistake of projecting into the future what has happened over the last 10-20 years as if it that period is the norm. That is the same type of mentality used to justify the Nasdaq bubble in Spring of 2000."

Since home values have consistently risen during the postwar era (from 1946 to 2006) with only a few regional and temporary reversals, such as Texas in the late 1980s and California and Hawaii in the early 90s, and in fact rose well above their historical price-to-rent norms, reversion to the mean should in fact see an overshoot, and we may get P-to-R values of 12 or even 10--just as stocks became extremely cheap in 1982 and PEs dropped to 7, about half of their normal levels.

How would I estimate both annual price increases in home prices and rents? I would take a look at inflation, but more importantly, employment and salaries. I'd also look at projected interest rates. It would be possible that Bernanke manages to engineer inflation--say, even double digit inflation above 10%. That would be good for home prices. But it would also probably entail higher interest rates because our long-suffering foreign creditors would simply go on strike otherwise. Ten percent inflation with 15% mortgages--as during the late 70s and early 80s--would probably be too much for the economy, which is not as resilient as it was thirty years ago. Indeed, the economy couldn't even handle interest rates of 5.25% three years ago. Bernanke is an imbecile if he thinks he can generate 10% inflation without even worse consequences. But without 10% inflation, many more homeowners will simply walk away. They purchased overpriced homes with the expectation of 10% inflation in home values. Indeed, the govt. encouraged them to treat their homes as de facto pension plans. Well, America, your retirements are underfunded across the board. That's the basic reality. America's bank account is overdrawn. This does not necessarily augur price increases for homes, particulary when other countries are becoming magnets for new talent as America's privileged classes become concerned with rentier pursuits--while government aids and abets this. Sure, select localities may continue to see price increases, and their price levels may continue to be many times the national median, but these places are not immune to state and national budget deficits, recessions, and even social unrest.

Mish also mentions global wage arbitrage that is working to suppress wages in the US and the baby boomer retirement as additional factors that could depress US home values. If govt. can't provide promised Social Security and Medicare benefits to senior citizens, they may decide to pull up stakes and retire to Ecuador or Mexico (respectively voted the number 1 and 2 retirement nations) where they can maintain their accustomed middle or upper middle class status. This holds a fortiori for the more precarious working class Americans like myself and perhaps Leroy.

Hillary is looking pretty good in comparison right now, but the way she was pandering on the gas tax holiday (along with McCain) led me to think she wasn't prepared, either. Obama simply won by default. John Kerry is looking better to me than either one, but he has an annoying habit of making gaffes and getting stuck with the elitist label. I don't think we really had a choice because the American people aren't yet mature enough to face the facts and the oligarchy won't allow real change and regeneration.

I saved the Smith's paper, although I have to admit it will be some time before I get to read it. It got me thinking that a preliminary question which needs to be answered before an analysis such as theirs is attempted is "what drives rents?" I guess there is an even more basic preliminary question: "what are 'normal' times?" Rents may be dropping in some areas at the moment, but this is most likely due to the competition among holders of mortgages on foreclosed houses to do something with them that generates income. Even it if garners little rent, it probably affects valuation for 'mark to market' determinations that will withstand auditing.

Ignoring the assumed 'profit' from owning a home, I think the longterm cost comparison between renting and buying is a perfectly valid one. It just has to be done well. As W. C. Fields said in one movie, "everybody's got to be somewhere". Multigenerational housing will be tolerated here for some time, but not permanently. It is too great a cultural shift.

A variety of factors have contributed to the decline in the rental sub-indexes. There are a record number of vacant housing units - the vacancy rate for the third quarter 2009, is 11.1%- the highest level since the Census Bureau began collecting data in 1956. It is almost certainly the highest vacancy rate since the Great Depression. The rate exceeds 15% in 10 of the 75 Metropolitan Statistical Areas, including Atlanta, Austin, Indianapolis, Phoenix, Cleveland and Richmond. Overbuilding during the housing bubble has created an excess supply of both single family homes and apartment units (some of which developers have converted from condominium projects). High unemployment has resulted in younger tenants doubling up, some returning home to live with parents and a slower level of household formation. Tax incentives for first-time buyers as well as enhanced housing affordability due to falling prices have made homeowners of some renters. All these factors have contributed to increased rental vacancies, putting downward pressures on rents.

There has been a clear downward trajectory in rents and owners' equivalent rent over the past three years. That trajectory and momentum are unlikely to reverse as long as the unemployment rate climbs. Most economists believe that the unemployment rate will exceed 10% in early 2010 and thereafter decline. Increasing rents and falling vacancies are likely to lag the peak in unemployment by several months while the newly employed tentatively enter the housing market. If rents stay flat in the coming two years, core CPI would almost certainly fall below the Fed's target range. If rents were to further decline for a year or two, there would be a serious threat (35% to 40% chance) of outright deflation in the core index. At present, the most likely scenario is that the rental indexes will be flat for at least a year.

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