KeNo's Housing and Economic Portal: Tuesday August 25 Housing and Economic stories

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Cash for Clunkers Is Just a Broken Windshield – (Caroline Baum at www.bloomberg.com) Now that the U.S. government is in the auto business, with a 61 percent ownership stake in General Motors and 10 percent in Chrysler, it wants to move inventory. So it came up with a plan, gave it a catchy name and wrapped it in a patina of environmental do-goodism. “Cash for clunkers” was touted as a huge success, with cars tearing out of auto showrooms, the program running through its $1 billion appropriation in one week and government servers crashing in response to overwhelming demand from dealers filing for rebates. (At least it wasn’t the drivers that crashed.) Was the program to induce drivers to turn in old gas- guzzlers for a more fuel-efficient vehicle a success? That depends on how you define success. Consumers got a “discount,” automakers sold more cars and trucks last week than they would have, and all that “stimulus” -- spending begets income begets spending -- has to be good for the economy, right? With success like that, why limit the rebates to $4,500? Why not give everyone a $10,000 or $20,000 rebate to turn in an old clunker? And why stop at the cars in the garage when you could get rid of a garage full of accumulated junk, with the government providing rebates to households for unloading what they’ve been meaning to get rid of for years? A reductio ad absurdum, to be sure. Sometimes reducing a proposition to absurdity is the easiest way to expose its flaws. The government is transferring money from -- guess who? -- we, the taxpayers, to car buyers. Those buyers would have traded in their cars anyway, albeit at a more leisurely pace, according to Jeremy Anwyl, chief executive of Edmunds.com, an auto information Web site. Knowing their cost would drop on July 24, buyers postponed sales so they could cash in on the program, he says. Sight Unseen: Transferring money from taxpayers to car buyers is exactly that: a transfer. The money taken from taxpayers can’t be used for something else. This is the lesson of Frederic Bastiat’s essay, “That Which is Seen, and That Which is Unseen.” Bastiat, a 19th century French political economist, tells the story of a shopkeeper who has to hire a glazier to repair a broken window, providing work and income for him in the process. That’s what is seen. What is unseen is what the shopkeeper would have done if he didn’t have to pay the glazier. He might have bought shoes for his children, providing income for the shoemaker, who in turn could buy leather to produce more shoes. The glazier’s gain is the shoemaker’s loss. There is no net gain, no job or income creation, from this transaction. Broken Window Fallacy: The “broken window fallacy,” as it is known, can be applied to all government spending. The $787 billion fiscal stimulus enacted in February transfers money from taxpayers to the government to allocate as it sees fit. The effect of the government’s expenditures shows up as growth in gross domestic product. Auto manufacturers produce more cars to meet the juiced demand, adding to GDP. This is what’s seen. What is unseen is what would have been produced by the private sector had the government not confiscated future revenue via taxation. An additional $2 billion to extend cash for clunkers -- the measure passed by the House of Representatives and is awaiting Senate action -- is a drop in the bucket compared with the trillions the government has spent, lent or pledged during the crisis. Just think of all those broken windows, or windshields, as the case may be. Cash ‘n Trash: Cash for clunkers requires that trade-ins be scrapped, whether they are fully depreciated or not. How is destroying something good for the nation? James Hamilton, professor of economics at University of California, San Diego, says cash for clunkers adopts the worst of the New Deal policies and adapts it to today’s circumstances. The Agricultural Adjustment Act of 1933 “paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier,” Hamilton writes on his blog. “And yet, here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.” What’s more, the U.S. has effectively adopted Japanese- style industrial policy, or a government-business partnership. In the case of GM, it happens to be partnering with itself. What about other industries that are constrained by bloated inventories? Why not offer a rebate to homeowners that trade in older, oil-heated houses for new ones using gas heat or solar panels? The government could even mandate that trade-in homes be scrapped (in this case scraped), paring inventories in the process. If President Barack Obama and the Democratic majority in Congress think these programs are putting us on a path to wealth, they better start looking beyond the 2010 mid-term election. Then again, what better way to demonstrate the benefits of fiscal stimulus than a parade of new, fuel-efficient vehicles cruising down a newly paved road?

Half of US Houseowners Will Be Underwater by 2011 - (finance.yahoo.com) Last week, Deutsche Bank analyst Karen Weaver published a report that shook up the "housing is recovering" crowd. She predicted that, by next year, nearlyhalf of American homeowners with mortgages will be underwater. Before we go into the details, here's a basic refresher on the US housing market: There are approximately 110 million households in the U.S. About 75.5 million of these are homeowners. Approximately 68% of the 76 million, or 51.6 million, have mortgages. 14 million U.S. homeowners, 27% of those with mortgages, were underwater at the end of Q1 (DB estimates) DB estimates that nearly half of the 52 million mortgagors will be underwater by the end of next year. (Note that this is half of those with mortgages, not half of all households) DB's estimates are based on city-level projections of where house prices will bottom. DB made these projections before the startlingly good Case Shiller numbers last month. If the Case Shiller numbers herald a recovery, as many bulls suggest, then DB's "underwater" forecasts may be too aggressive. On the other hand, if the June Case Shiller numbers were just a head-fake, as we and other analysts suspect, then DB's estimates will probably be right on the money.

Cities Turn to State for Pension Relief - (www.statejournal.com) The pension crisis has reached critical mass in West Virginia. Cities like Huntington are out of cash and begging the state (taxpayers) to bail out foolish promises that cannot be met. Huntington and other cities are looking to the Legislature to help come up with a plan to deal with massive pension obligations. City officials from around the state say their communities can no longer afford to cover the benefits of retired police officers and firefighters, so they are asking the state Legislature for help. Specifically, they want state lawmakers to redirect a portion of state surcharges on insurance premiums to helping cities cover their retirement pension obligations. They also want to enroll new hires in new pension plans that help them save money. If nothing changes, cities such as Huntington could have fewer police officers and firefighters on the streets as they are forced to cut back staffs because of increasing pension obligations. The city’s last six police and fire department retirees will likely draw $1.5 million each in pension benefits over the course of their retirements, even though each person made less than $900,000 during his or her career, according to Deputy Mayor Tom Bell said. “What happened here is we just can’t afford to dedicate that amount of money” to pensions, Bell said. Huntington is in the worst shape, but other cities around the state also are struggling to cover their pensions. Collectively, city governments are facing $700 million in unfunded liability thanks to what officials say are the generous benefits paid out of the firefighters and police officers. The West Virginia Municipal League, which represents the state’s cities, wants state lawmakers to meet in special session either in August or September to consider municipal pension reforms. “The benefit package was a package that was designed by the Legislature back in a time when cities were flourishing and they had larger populations,” said Lisa Dooley, executive director of the League. “The economy was doing well, and there was expected to be growth in the cities.” But cities such as Charleston have been losing their populations in recent years. There is a possibility that after the 2010 census, no city in West Virginia will have a population of more than 50,000, a rarity among states. State requirements also help drive up the cost of covering pensions. For example, police and firefighters can retire with full benefits at age 50, the reasoning being both lines of work often involve physical activities that become more stressful the older people get. But people now live much longer than they used to, so it is not uncommon for retirees to live more than three decades past their retirements, Bell said. “The problem is the state couldn’t add enough money to pay for these lucrative pension benefits,” he said. “What we have to do is close that to new hires and adopt a more conservative pension plan.” The so-called “Huntington plan” would let cities do just that. It also would give them a 40-year re-amortization of their existing pension debts, meaning they would pay back the debts at higher rates but have more time to do it. In addition, cities want lawmakers to redirect one-tenth of 1 percent of a state surcharge placed on property casualty insurance premiums to paying for the pensions. The money was directed to the state’s Teacher Retirement System in the 1990s. So far city officials have had little luck getting a pension reform bill passed the Legislature. Gov. Joe Manchin would need to call lawmakers into special session if they are to take up the issue before the end of the year. While Manchin has indicated he would consider that option, the governor’s office has not said whether he would actually do that.

Specialist says foreclosure flood ahead - (www.heraldtribune.com) Convinced there is a larger tsunami of foreclosures poised to hit the Southwest Florida housing market, Keller Williams Realty of Greater Manatee is opening an office in downtown Sarasota led by the seven-member Troy Funk Team. Funk -- a distressed-property specialist -- said he and his team have sold more than 100 properties in the last seven months and have done just under $20 million during the last year, despite the poor housing market, by focusing on foreclosures and short-sales. "I've been in the business here going on 23 years," Funk said. "I was involved in foreclosures during the last down cycle we had, so it was easy for me to reconnect with those people." Funk said he is tight with 18 lenders, representatives of which have told him they are sitting on massive numbers of foreclosures and short sales. "The banks have been stalling the short-sale and foreclosure process and it's a dam that can't hold," he said. "They have pretty much all said the same story: Get ready. Get ready. That next wave, it's coming." Funk predicts that the number of distressed properties on the market will increase three-fold in short order. "The banks can't hold onto all those properties and they are going to start flooding the market, we've been told." After what seemed like a reprieve earlier in the year, the rate of foreclosures in Southwest Florida picked up speed in June, with both Charlotte and Manatee counties posting increases of 50 percent or more.

US Payrolls Less Than Meets The Eye - (Mish at globaleconomicanalysis.blogspot.com) In today's Lunch With Dave Dave Rosenberg shows how US Payrolls Less Than Meets The Eye. Today’s employment report is being treated as a ‘green shoot’ of major proportions. While it was by far the best jobs performance of the year, much of the better-than-expected tally in nonfarm payrolls reflected the bounce in auto production as well as the distortion from the federal census workers. Combined, these two influences effectively “added” 100,000 to the headline number, so net-net, the consensus view of -325,000 was not as far off the mark as the market believed at first glance. The auto sector added 28,200 to the industry payroll in July, which was the highest tally in 11 years. To show you just how big that really is, it is a 69% annualized surge. Normally, the industry, which is in secular decline, posts job losses of between 20,000 and 30,000 consistently, so this alone represented roughly a 50,000 swing. We estimate that there was about a 30,000 swing in the rest of the manufacturing sector due to the spillover from the current inventory adjustment in the motor vehicle industry. The 0.3% MoM increase in the workweek was also skewed by the 4.1% MoM jump in the auto sector. As we mentioned, there have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today’s report that 12,000 federal workers were “hired” in July. Again, mathematically, this contributed about 20,000 to today’s headline number. In other words, and we have no intent on raining on anyone’s parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front. Yes, the income number was also firm; average weekly earnings popped 0.5%, but again, this reflected the bounce in the auto sector as well as the 10.7% increase in the minimum wage to $7.25 an hour. Again, this is a non-recurring item and does not at all reflect an improvement in underlying income fundamentals in the personal sector. We had a similar bounce in the summer of 2008 when the minimum wage was last boosted. To be sure, the drop in the unemployment rate was a surprise, but it was all due to the slide in the labour force — the employment-to-population ratio gives a more accurate picture of the slack in the labour market and the hidden secret in today’s report was that this metric slid to a 25-year low of 59.4% from 59.5% in June and 61.0% at the turn of the year. Of those unemployed, 33.8% of them have been unemployed now for over 27 weeks — a record amount (was at 29.0% in June and was at 17.5% at the start of this recession). I talked about the participation rate this morning in Jobs Contract 19th Straight Month; Unemployment Rate Inches Lower to 9.4%. Taking one time auto sector anomalies and manipulation of the participation rate into consideration, today's job report was much weaker than looks at first glance.
As I said earlier, "The BLS stopped counting".

Treasurer Fear of Credit Freeze Seen in Cash Hoarding - (bloomberg.com) Two years after credit markets seized up and caused the worst financial crisis since the Great Depression, companies are hoarding the most cash in at least a decade. “Every action we take or contemplate taking is measured by its impact on our balance sheet and liquidity,” Mark Jacobs, the chief executive officer of Houston-based RRI Energy Inc., told analysts and investors on Aug. 3. The company sold its Texas retail electricity business and the Reliant brand name in May, helping triple cash and equivalents from a year earlier to 18 percent of assets, according to data compiled by Bloomberg. Even as government reports show that the first global recession since World War II may be easing, corporate treasurers are raising cash as fast as they can, wary of losing access to capital. Corporate defaults reached 10.7 percent worldwide in July, the highest since 1991, according to Moody’s Investors Service. Credit markets that started to freeze in August 2007, have now triggered more than $1.5 trillion in writedowns and losses at the world’s biggest financial institutions. Cash and short-term investments accounted for about $1.98 trillion, or 8.2 percent, of assets at the end of the second quarter for companies in theStandard & Poor’s 500 index, up from about $1.6 trillion, or 6.4 percent, a year earlier, Bloomberg data show. Cash reached a record $2 trillion in the first quarter, 8.3 percent of assets. ‘Cash is King’: “Cash is king,” said Paul Kasriel, the chief economist at Northern Trust Corp. in Chicago. “Businesses are in survival mode right now.” While companies sold a record $837.9 billion of bonds this year and raised $109.8 billion in stock offerings, the increase in cash shows they are following the lead of consumers, who pushed the U.S. savings rate to a 14-year high of 6.2 percent in May. “There’s going to be a generational psychology shift as to how you and I and the rest of the world think about finance,” said Jonathan Fine, a managing director on the investment-grade syndicate desk at Goldman Sachs Group Inc. in New York. “People will keep cash on hand so long as what happened in the last two years remains so visible in the rearview mirror.”