Monday, August 24, 2009

Artificial Demand as Designed by the Government

Any Monday after a vacation hurts, but today was rough! Back to the regular routine after doing practically nothing for a week reminds one just how much energy it takes to work day in and day out.

Artificial Demand as Designed by the Government
I will concentrate on a singular idea this evening as several strands of thought seem to snake back to the same source.

Cash for Blank Coming Soon
In the comments section from the last post, loyal reader Watchtower observes that my prior post that forcasted a "Cash for BLANK" program to be unveiled:
I believe you called this one with your "cash for 'blank'" analysis : )

"Latest in Stimulus: 'Cash for Refrigerators'
Beginning late this fall, the program authorizes rebates of $50 to $200 for purchases of high-efficiency household appliances."

I'm waiting for the 'cash for canned goods' program, or maybe the 'cash for toilet paper' program, or how about 'cash for cash's sake' program?
Who would have ever thought that you could actually borrow yourself rich by buying disposable products, genius, pure genius.

I maintain my expectation that by November we will see an entire arsenal of "Cash for BLANK" plans put into practice.

Cash for Clunkers Ends a Huge Success
At midnight Monday August 24, 2009 the Cash for Clunkers program ends. The program, which allowed up to $4500 to be credited towards a purchase of a new car (with many caveats), is by all accounts a great success. This program has really bothered me from the beginning, and I would expect another run of it as car sales collapse once again.

I can think of two things that bear watching regarding the results of this program:
-As I had written before, I think banks that jumped to make these new car loans were doing so under the idea that because the government was behind the program, and will not want to look bad should things go south, the loans themselves are perhaps "protected". What I mean is should a high percentage of these car loans default, the banks can always say "Hey, YOU wanted us to make these loans! YOU now will have to cover them". A "Cash for Repossession" program does not sound very good.
-There is going to be fraud. There has to be. As the paperwork finally gets processed and checked, I would be shocked if over 15% of these sales were not fraudulent or gamed. Considering the good press the program has had, and the expansion of others like it, we may never really get the hard details reported.

Congratulations to all the new car buyers that made this deal. Just think, that $4500 will almost cover the instant depreciation of your new car the second you drive off the lot. Quite a deal indeed.

Frenzied Market for Cheap Houses
The home sales numbers released last week were widely celebrated as a sure sign of a turnaround in housing. Digging into the number revealed some very suspect details, but that would have taken effort to figure out. Barry Ritholtz of The Big Picture does all the work for the mainstream media in this post, and I would encourage you to check it out. Barry vibes:
In the past, I have gone so far as to imply the Realtors group are spinmeisters. This month, I will be more blunt: Their actual data has become untrustworthy, their spokesmen lie for a living, and their “news releases” is little more than misleading junk.

Investors who rely on the NAR version of the news do so at their own great financial peril.

I came across this Bubble Meter post that has some comments by Diana Olick of CNBC, and this table by the NAR:

As I am from Eastern Massachusetts, I have never seen a home priced under $200,000 since I started looking at homes. Under $100,000? You cannot even get a shed around here for $100k!

Still, the 38% increase in sales at the low end is pretty impressive. Is this a good sign? Is this a real turnaround? Sadly, the answer is no. It seems the government once again is in the artificial demand game once again.

The First Time Home Buyer Tax Credit is a program that allows up to $8000 to be used as a down payment towards a home purchase. Calculated Risk has some observations on the program, but one in particular jumped out at me:
Anecdote: I've spoken with two younger guys (30 ish) who told me they had no down payment, but edit: were looking to buy a house NOW. They are using the tax credit and FHA to buy. I think that conversation is happening in many places.

Now you already know that Economic Disconnect is a free market type. You know I would rather eat glass than tell people what to do with their lives. You are aware that I would prefer everyone make their bed, then have to lie in it. Of course the government sees things different, and they would try and support poor choices using tax dollars. For once, I am going to actually offer some advice and try and tell people what to do.

If you are looking to buy your first home (or your first buy in 3 years, as per the program details) and you cannot save up even $8000 for a downpayment (on a regular home of say $250,000, $8000 is only about a 3% down payment) then allow this to sink in:

Stay out of the housing market. You have no discipline. You have no ability to budget. You do not make enough money, or you spend too much. That $8000 up front you think is so great now attaches you to a huge mortgage that you will have trouble paying, as you cannot even save up $8000 to begin with. There are huge costs associated with owning a home (taxes, upkeep, major repairs) that you will not be able to afford. If $8000 is enough for you to put your credit at risk (should you default on the loan) than you are a gambler that will hurt the markets over the long term. If you think that a 3% discount on a purchase that would cost you 10-20% less before this is all done is a good deal may I suggest you stick to scratch tickets as your investment vehicle. Normally I could care less what you do with your finances, but as Fannie/Freddie/FHA are making all these loans I am going to have to pay for this at some point.

End rant.

Demand rises and falls. It has done so since time began across every asset type ever known. When the only people that want to buy a home are the sort that jump at a 3% tax credit discount thinking they are getting a "Sweet Deal" (thanks Casey Serin, I will never forget you!) there is a problem. Keynesian thinkers try to argue to support demand in and of itself, as if it exists in a vacuum, as if there are not real factors behind demand changes. Sadly, the US government over the past two years has enacted policy in support of such cloistered thinking.

Calculated Risk thinks the Tax Credit program will be extended (it expires in November) and I agree fully. I would expect this to become a permanent fixture of policy, and it will be expanded to include all buyers of homes. The Clunker Cash will morph into any new car purchase cash. TV's, refrigerators, computers, furniture, you name it, will soon have a demand enhancing program behind it.

Of course all of this has a cost. While we can argue whether the US can indeed spend money to support artificial demand across all these consumer areas, I think a key point is being missed.

The US dollar, and hence belief that the US to repay its debt is built on pure fantasy. While this has been accepted for a long time, the US has up to now behaved as if they at least understand they need to keep up the appearance of fiscal discipline. When the worlds biggest economy resorts to hand outs to stimulate demand from their "villagers" then the storyline begins to get laughable. While foreign creditors like to play pretend, they tend to not like being made a fool of.

Have a good night.


getyourselfconnected said...

great news! I would publish a user review of the RX-8 after you have had a chance to push it a bit if you are interested. I saw so many hot cars up at the beach last week, it was muscle car heaven! Best one, a restored 1969 Plymouth GTX (a personal favorite) that was fitted with the Tri power hemi. Black and red paint, very sharp.

GawainsGhost said...

Well, shoot me your email address to, and I'll send you pictures. Of course, first I have to trick it out with Cowboys accessories. Might take a few weeks.

Anyway, down here for less than $300,000 you can buy a 2-story, 3500 sf, 4 bed, 3.5 bath home, with 3 living areas and 2 dining areas, plus a study, carpet and hardwood floors, on a .25 acre lot with a wood privacy fence, in a gated community with clubhouse and pool privileges. I just listed one.

In fact, a couple of years ago, I sold a house like that to a couple who were relocating from the northeast. The wife could not believe the house she could get for less than 1/3 what it would cost where she was from. She freaked! She kept taking pictures of her new home and emailing them to her friends. The subject line read: Eat your heart out.

Okay, I'm kidding about the last sentence. Realistically, it all depends on where you want to live. Some areas are more expensive than others. But down here, you can get a very nice house at a reasonable price. If you can handle the heat. It's been 100+ degress for the last two months. And, since we're below sea level, that's wet heat, not dry heat like they have in Arizona. The humidity will kill you.

But you're right, GYC. If you can't afford at least 10% down, you have no business buying a house. I've always said the best financing is 20% down on a 15-year fixed rate mortgage (no PMI, lowest interest rate). Assuming you're buying a house to live in it.

But these idiot buyers won't listen to me. Oh, no, they have a friend who's a mortgage broker. They'd rather take out a 100% LTV, adjustable rate mortgage and roll over closing costs (move in with negative equity). Not much I can do about that. It's not my job to be a financial adviser. It's my job to sell the house. So I sell it.

Then wait about two years for the inevitable foreclosure, and sell the same house again. The former buyer's credit is ruined, the mortgage broker is bankrupt, the bank which approved the loan has been seized by the FDIC. The only one making any money is this scenario is me. And as long as that's the "new normal," it's fine with me.

watchtower said...

Awesome news on the RX-8, anxiously awaiting your driving impressions.

Not that anybody cares but 6 years ago I had my current house framed up and Sheetrocked.
Then my 2 brothers and my dad came over and helped me put down hardwood floors and the wiring.
Also I had one of my plumbing friends come out and help me with the plumbing.
I know that not everyone is in a position to do this but it really saved some money.
My wife and I sold our other house that we had already paid off and put that money on our new house and financed the rest at a fixed rate for 15 years.
Was lying in bed one night when I decided that I really didn't enjoy having a mortgage over my head so the wife and I buckled down and paid it off.
Now I'm lying in bed realizing that I still don't really own my home because of the taxes that are due every year.
It's kind of a bummer.

Will Profit said...

Hi, good to see yer back. I do feel the need to tell ya something you may have missed while on vacation. The gubmint screwed the pooch on Cash for Clunkers. Dealers were bailing out of the program in WAVES cause they weren't getting their cash. They also were having the paperwork rejected, 11 pages for each transaction, with no explanation of what was wrong with how they filled it in. As of last Friday, only about $148M out of approx $1.8B had been paid out to dealers. I don't believe ANYONE knows if the alloted fund is big enough to pay the dealers for all the vehicles they sold under the program. This program is a fine example for a gubmint that could run an efficient National Health Care system.
Regards, Will

GawainsGhost said...

Watchtower, that's like saying because you have to pay income taxes, the money you earn isn't yours. It's a false conception.

There are always taxes. What you have is real property. This is a fine distinction but an important one. Real estate is the land and the improvements on it. Real property is the rights associated with the land and improvements--the right to sell, to transfer, to build, to do nothing, and so on.

Simply because you have to pay taxes does not interfere with those rights. The President of the United States, the most powerful man in the world, cannot deprive you of those rights. Now, the lowly county clerk, him you might have a problem with.

watchtower said...

Thanks Gawain, I feel a bit better about it after your explanation.
I've never thought of it that way.

watchtower said...

This is the 2nd time I've seen KD (Market Ticker) comment on this and it has stuck with me:

"As I have pointed out repeatedly history on this point is clear: You can pull forward demand with such programs, but you cannot create true economic progress. The "Drive America" 2001 0% financing bubble urged by the Bush Administration arguably caused the failure of both Chrysler and GM by pulling forward demand and conning both firms into producing cars at a twenty million unit annual run-rate. This in turn created a need to allow 100%, 120%, even 150% "rollover" financing which took the place of 0% interest once that expired, which created monstrous embedded and inevitable losses for these firms when the consumer hit the wall on ability to pay."

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