And the world got wackier. The rest of the world did not take Australia day off. Instead, strange divergences in normal trading patterns continued to pop up around the globe. For example, bonds finally moved up as stocks went nowhere.
Bonds had been going down with stocks too, lately. The dollar was up against nearly everything except gold, which also closed higher. Uncertainty makes for strange bedfellows. We’ll try to sort out if it actually means anything in today’s Daily Reckoning.
For starters, stocks are looking pretty timid. Our own technician Murray Dawes is expecting a correction. And for the record, Wall Street has closed down four out of the last five days. It did not improve today, although the close on the Dow was negligibly negative.
Financial markets in the States have been pretty gloomy ever since President Barack Obama told the banks he was taking away their favourite profit toys, their proprietary trading desks. If earnings don’t come from the finance sector in the American economy, they will have to come from somewhere else. And just where will that be?
It will not be real estate, mortgage lending, and home building. That’s for sure. At least not any time soon. U.S. existing home sales by the largest monthly amount in forty years, according to the National Association of Realtors.
December existing home sales fell by over a million units and 16.7%, according to the NAR. The positive news, if you’re looking for some, is that sales per year were up 21% compared to 2008. And if you can believe it, the median sales price for an existing U.S. home is a rather humble (by Australian standards) US$178,300.
What a bargain!
Actually, what’s happening is pretty simple. Sales are up because the ass-clowns in the U.S. Congress introduced an $8,000 tax credit for first time home buyers. Sound familiar? It’s not a grant. It’s a tax deduction. But the effect is the same: to bring forward demand and support current prices.
In November, first home buyers taking advantage of the tax credit made up 50% of demand for existing homes. In December, it fell to 43%. Those two months were supposed to be the final months of the credit. The December decline shows that most people who intended to take advantage of the credit had already locked it in.
But what now? The credit supported prices and sent sales soaring. The Congress extended the credit through April 30th of this year. But we doubt it will lead to a huge recovery in home prices. Why?
There is 7.2 months supply of homes at the current sales rate. That’s a huge surplus inventory. It puts massive downward pressure on prices – and that’s before another likely wave of foreclosures hits the U.S. market. Hmmn.
Yes, we know what you’re thinking. In Australia there is not a surplus of homes. There’s a shortage! Yes, median prices are higher in nominal terms and as a percentage of median incomes. But it’s different here. There are immigrants. And there are other things which guarantee house prices in Australia cannot fall. Surely.
We shall see. The principle here is roughly the same. You can bring forward demand through lower interest rates or grants and tax credits. But this does not make housing more affordable. It DOES get the marginal buyer into the market, though, and that supports prices for a while.
Eventually, house prices have to be realistic relative to incomes. In the U.S., that means prices are finding a clearing level that reflects tighter credit, the surplus inventory, and a lower median-price-to-median-wage level. In Australia?
Well, you’d think immigration was a slender reed to lean on. Besides, according to a recent poll, 66% of Australians want the Federal government to cap immigration. Not that the government usually listens to “the people”. But the point is: immigration can be capped.
In fact, the best reason to cap it is generally that a high-tide of immigration lowers average wages by expanding the work force. That might not be the case in Australia, of course. A growing economy creates jobs at all wage levels. And to the extent that Australia is imported skilled workers (to work the mines in WA and Queensland) the wages there are much higher than the wages in the rest of the economy (this pushes WA house prices into the stratosphere).
Our point, though, is that all of these are peripheral factors. Houses can’t be so expensive that people are unable to afford them on the average wage. You can try to bridge the gap with tax credits, grants, and lending schemes. But eventually, prices are going to fall.
This brings us to a quote we saw in Bloomberg this morning. “There’s a looming risk of governments making decisions that adversely affect the economy,” said Tim Brunne, a credit strategist at UniCredit SpA in Munich. He referred to the policy changes proposed for the U.S. banking sector. But really, doesn’t that pretty much say it all these days?
If you want, proof, look to Japan. For twenty years, the government there has tried to cushion the effect of a real estate and share price crash by increasing public spending. The economy has chugged along at tiny growth rates. But at a price: an enormous public-debt-to-GDP ratio.
Yesterday, ratings agency Standard and Poor’s affirmed Japan’s sovereign credit rating of double ‘A’. But it changed its outlook from ‘stable’ to ‘negative’. S&P wrote that, “The outlook change reflects our view that the Japanese government’s diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures.”
This is the S&P’s way of saying it forgives Japan for its fiscal excesses…but frankly, it’s just not sure it can trust Japan anymore. Has it really changed? Or is it just saying it wants to change?
You know how relationships like this end. Outlooks go from ‘negative’ to ‘don’t ever call me again…I hate you…I don’t see what we ever had in common.’ Still, Japanese stocks look cheap. Our guess is they will stay that for awhile. The world’s love affair with equity as a way to get rich is getting strained too.
for The Daily Reckoning Australia