'Used' is the new 'New' (Housing starts)

[cosmic]

news.ino.com/headlines/?newsid=6897755776681

New home sales slowest in at least 50 years. Translated, new home building is all but halted.

Technically, this is good. Obviously we're not having a population boom, so why build new houses when there are plenty of existing homes for sale at real bargains.

I feel little sorrow for home builders who blew the bubble sky high during the halcyon days. I don't cry for them today, I wonder why they didn't save their money for a rainy year or 5.

[huh?]

I am not so sure about the technically good part. Nearly everyone I know who is unemployed, underemployed or unemployed again for a second time after 2008/9 worked in the construction industry. (many of these are union employees).

I know some company owners in contruction related industries that are facing or in the process of closing their businesses now.

I wish that the FED had taken that QE2 money and stimulated new construction instead, even if they had to tear down foreclosed homes. Imagine how many unemployed might be working now in the construction industry.

This would have created or maintained jobs as well as improved housing values in many neighborhoods; neighborhoods that instead are seeing declining values because of the stimulus leaning more towards used home sales. I have bought and flipped foreclosed homes over the last few years and I have yet to run into a foreclosed home that is in even habitable condition. The foreclosed homes in my area (northern Indiana) are sitting for months and months vacant, through the winter with freezing water pipes, before they are even listed for sale. I know of a few that have been vacant for 4 months or longer and still no for sale sign is up.

The reason most of these foreclosed homes are cash deals is not just because borrowers don't want to borrow, but because no bank can lend money for a house that is in such disrepair. As for the homes that banks would loan against, those owners aren't selling because the market price is much too low. So the vicious cycle goes around and around.

If the government would have stimulated new home construction right away, I think that this cycle would have stopped within the first year or two, and many more people would be employed right now. These employed would in turn then be looking to build a new home...so on and so on. Would have been a much better cycle in my eyes.

[Clinton SPX]

Houses are just like widgets.

And no one needs that type of widget ATM

[cosmic]

Ok, I can agree on your cause-effect.

I disagree that QE2 should have been used in this way. I would have preferred that QE2 be handed out to every single American taxpayer. If we know the value, we can do the math, and we can inject that cash right back into the economy, lower overall debt levels, stop foreclosures, and stimulate the economy from the small business on up.

The biggest problem is small business which is the backbone of this country despite what WalMart would have you think. It is exactly this loss of entrepreneurial risk taking that is what we're seeing hit Main Street. Because if they big guys aren't hiring to protect their margins, that doesn't leave anyone left to do the hiring.

[huh?]

My wife and I have wanted to build since spring of 2009, and we have the cash for it. However we won't until we can sell our existing home for a decent price. We can get more for it than what we paid, and we have no mortgage, but why sell and take a bigger loss than necessary just to build?

And now that the government stimulated the market in the way that they did, commodity prices are just rising and rising making building home less and less likely. Basically used home prices still going down, new home prices going up...fewer and fewer are going to build at this rate.

[huh?]

I agree 100% on the small business aspect. I myself was a small business counselor for years and ran my own successful business until 2008. Was fortunate enough (and had some insight) and decided to sell spring of '08, just in time.

Hiring will not come back until small businesses start hiring again.

[brosin]

Mar 23, 2011 16:18:43 GMT -5 cosmic said:

If we know the value, we can do the math, and we can inject that cash right back into the economy, lower overall debt levels, stop foreclosures, and stimulate the economy from the small business on up.

That's exactly why the Fed did not do it this way - people would use the money to pay off existing debt; this shrinks the money supply and sends us into a contraction. The Fed would rather continue what it is doing in trying to ADD existing debt to keep the money supply increasing and the economy on an "upward path."

Of course the upward path is a relative term depending on how you view the "gains" seen in the real economy vs. the "gains" seen in the nominal one (equity market).

[cosmic]

Why does it shrink the money supply? (Remember, be nice to me I have a mental block on this stuff remember?) So far as I see it, if people reduce debt, they're more likely to buy new stuff.

[janedoji]

>>I would have preferred that QE2 be handed out to every single American taxpayer. If we know the value, we can do the math, and we can inject that cash right back into the economy, lower overall debt levels, stop foreclosures, and stimulate the economy from the small business on up.<<

The issue is that government initiatives do not go to every single American taxpayer-- there is typically a cap based on income--

Just like the reduction in home mortgage will not go to everyone.

If the government were to reduce my mortgage I would certainly purchase more and in that way also stimulate the economy--

sorry it that's a bit acidic, bit touchy on the issue

[brosin]

Mar 23, 2011 16:37:03 GMT -5 cosmic said:

Why does it shrink the money supply? (Remember, be nice to me I have a mental block on this stuff remember?) So far as I see it, if people reduce debt, they're more likely to buy new stuff.

Let's look at monetary policy - each $1 that the Fed creates out of thin air to put assets onto the balance sheets of the banks adds upwards of $10 into the money supply because bank 1 will make a loan to john johnson for $.90 ($1 minus the required reserve ratio [if 10% then $0.10]). John Johnson uses that money for whatever, and it will end up going to another bank, which has to hold 10% of that deposit ($.09) but can lend out the other 90% of it ($.81)... and moving on and on until you see that the amount of money the Fed created was $10 ($1 + $.90 + $.81 + $.72 . . . . . )

So when you pay off existing debt, the reverse happens. For every $1 in debt paid off, it shrinks the money supply by $10. As that happens, prices would need to fall dramatically as there is less money chasing the same amount of goods (DEFLATION). As prices fall dramatically, this is where deleveraging comes in since every company / bank / etc is using leverage and debt to increase profits.

[huh?]

There is where I see the problem, the loans.

First off, I am just not a big fan of the stimulus to equity markets. Equity markets should be a reflection of the business' profits or potential profits. Not the other way around. Higher stocks doesn't necessarily make higher profits.

I understand the idea behind what they are doing...people feel better because the markets are doing better and maybe their investments or 401K's look better. But many in 2009 sold their investments or cashed in or lost their 401K's because they were already out of work. Retired persons are definitely benefitting some, but they are not typically the big spenders anyway.

I just feel that stimulating the equity markets is making the banks feel much richer than it is the common working folk. This doesn't mean they will lend more, lending is restricted by the applicants and their financial situation...the common folk.

I don't believe that because Apple's stock is higher they will higher more people. I never hired people just because I thought that my company might do better soon. I only hired people when business turned up enough that I had to. And I never ran into a company owner that felt since they were making enough profit they would go out and higher more people. People are just too stingy. Small businesses only higher because they have to.

Sorry for the ramblings...makes me feel better though lol. And my wife doesn't want to hear it!

[cosmic]

Thanks everyone what a great thread! I actually learned stuff.

[cosmic]

Mar 23, 2011 16:55:34 GMT -5 brosin said:

Mar 23, 2011 16:37:03 GMT -5 cosmic said:

Why does it shrink the money supply? (Remember, be nice to me I have a mental block on this stuff remember?) So far as I see it, if people reduce debt, they're more likely to buy new stuff.

Let's look at monetary policy - each $1 that the Fed creates out of thin air to put assets onto the balance sheets of the banks adds upwards of $10 into the money supply because bank 1 will make a loan to john johnson for $.90 ($1 minus the required reserve ratio [if 10% then $0.10]). John Johnson uses that money for whatever, and it will end up going to another bank, which has to hold 10% of that deposit ($.09) but can lend out the other 90% of it ($.81)... and moving on and on until you see that the amount of money the Fed created was $10 ($1 + $.90 + $.81 + $.72 . . . . . )

So when you pay off existing debt, the reverse happens. For every $1 in debt paid off, it shrinks the money supply by $10. As that happens, prices would need to fall dramatically as there is less money chasing the same amount of goods (DEFLATION). As prices fall dramatically, this is where deleveraging comes in since every company / bank / etc is using leverage and debt to increase profits.

Anyone got a picture? I sort of get it... the creation seemed easy - I get that now. But the deflation part, not so much.

[huh?]

This monetary policy should work so long as the money finds its way 'downstream'. I don't think it is, at least for the most part. Look at the cash banks and companies are sitting on.

Acquistions simply push money across stream. These acquisitions typically result in layoffs also as they consolidate the two companies. Very few acquistions result in new and bigger employment, buildings, equipment ordering, etc. Acquistions are most often ways for companies to increases revenues and improve margins, decreasing overall expenses of the two now combined companies.

Definitely agree about the debt. But gotta create jobs to create more debt. A falling dollar might bring some jobs back here, but also increases materials costs. This in turn decreases spending which then decreases jobs. There is a very fine balance of diminishing returns with this scenario. Not a problem I would want to be responsible for. Poor Benny.

[huh?]

Guess I am just saying that the way the money is going into the economy might not be the most effective right now.

Build bridges
Create a new infrastructure
Build and tear down homes
Go to War (oops already did that)

lol

[jack]

Mar 23, 2011 17:44:43 GMT -5 huh? said:

Guess I am just saying that the way the money is going into the economy might not be the most effective right now.

Build bridges
Create a new infrastructure
Build and tear down homes
Go to War (oops already did that)

lol

Pfthhhhh!
...and here I thought the way to build wealth and stimulate the economy was by building a better mousetrap people just can't live without (or in the M.E.'s case having a commodity like oil doing the same.)

[jack]

Greg - why not just buy a few pepper plants and grow your own.

[huh?]

One way for us to become a large manufacturing country and exporter again is to have our currency go down versus others. And then hope that the other countries don't do the same. Unfortunately we are, and they are.

This is what I refer to as 'currency wars'. Seems to me like a race for each country to get their currency lower than the others'. My guess is that it won't end as well as everyone plans.

Another way would be to just simply stop importing so much. But in the way is the Free Trade Agreement and our international relations. Ramifications would be ugly. Also, businesses and their lobbyists aren't going to be pushing for a policy change to decrease their margins anytime soon.

[brosin]

Mar 23, 2011 17:37:44 GMT -5 cosmic said:

Mar 23, 2011 16:55:34 GMT -5 brosin said:

Let's look at monetary policy - each $1 that the Fed creates out of thin air to put assets onto the balance sheets of the banks adds upwards of $10 into the money supply because bank 1 will make a loan to john johnson for $.90 ($1 minus the required reserve ratio [if 10% then $0.10]). John Johnson uses that money for whatever, and it will end up going to another bank, which has to hold 10% of that deposit ($.09) but can lend out the other 90% of it ($.81)... and moving on and on until you see that the amount of money the Fed created was $10 ($1 + $.90 + $.81 + $.72 . . . . . )

So when you pay off existing debt, the reverse happens. For every $1 in debt paid off, it shrinks the money supply by $10. As that happens, prices would need to fall dramatically as there is less money chasing the same amount of goods (DEFLATION). As prices fall dramatically, this is where deleveraging comes in since every company / bank / etc is using leverage and debt to increase profits.

Anyone got a picture? I sort of get it... the creation seemed easy - I get that now. But the deflation part, not so much.

Just tried searching the web for an illustration, but couldn't find anything. Let's think it through though.

Say John Johnson pays off all his outstanding loans (totaling $X) with his bank, Bank A. John Johnson's checking / savings account balance will decrease by the amount that he paid off - this affects Bank's A deposit base (Bank A's liabilities) and shrinks it by that amount. *At the same time,* their assets (his loan) will shrink from $X since his loan is no longer outstanding. Bank A's assets have decreased by $X (loan paid off) and their liabilities have decreased by $X (John Johnson's deposits decreased).

However let's think about what that $X decrease in assets means for Bank A - since they can lend out $.90 for every $1 in deposits, John Johnson's paying off his $X loan decreases the amount Bank A can lend out by much more than $X.

The math:
If X = John Johnson's loan outstanding
If Y = Bank A's Deposit Base
If Z = Bank A's Lending Power = Bank A's total loans outstanding (assuming all banks are fully levered up; not the case currently, *excess reserves* very high)

-Prior to John Johnson paying off debt-
Z = (.9)Y ----- because the bank can lend out 90% of its deposit base

-After John Johnson paying off debt
Z=(.9)(Y-X)

Think of "Z" as your potential buying power - and think of banks as Institutions that will take their risk / leverage to extreme levels (Lehman, Bear Stearns leveraged over 30:1). Think of X as an independent variable based mainly on human action which is inherently unpredictable. As X drops,



That is only the beginning then - if the deposit base shrinks quickly, the bank will not have enough reserves and must borrow them from either other banks or the Fed in short term markets to keep their ratios in line. Chances are, if one bank's deposit base is shrinking quickly, a lot of them are. This is the deflationary spiral as banks all start to see their capital bases shrinking very rapidly like a domino.

[jack]

imho the entire notion of how we build "housing" needs to be reevaluated. The age of the stick-built house is, or should be, OVER. Housing needs to be industrialized.

And anyone who insists upon a "Colonial" can add that optional extra cosmetic package to their order.

[brosin]

There's something wrong with my above post - gotta fix it

[jack]

Mar 23, 2011 18:47:33 GMT -5 brosin said:

There's something wrong with my above post - gotta fix it

WEll while you are fixing that can SOMEONE put up the Bull/bear poll pls?

[janedoji]

Brosin,
The example you put up is really helpful, but there must be a point in which paying off debt is beneficial to the economy-- as opposed to creating money for banks to lend as a 1 to 10 multiplier.

[Cosmic]

Easy there Jack, poll is up

Thanks Bros I get it more now I think your illustration was pretty good. Not that I won't forget it in 3 2 1 !poof! but I'll try and retain some of it ;D

[brosin]

I added a few slight tweaks to it - I hadn't explained clearly that the bank's total loans outstanding should always = their potential lending power. It isn't the lending power by itself that matters that much - it is that the banks are always fulling lent out so that if their deposit base / "potential lending power" drops quickly, the amount that they are currently holding as required reserves becomes too low for the amount of loans they have outstanding. So they must borrow (costs them interest) or sell assets. If alot of banks are having to do that at once, fear starts to feed on itself.

Mar 23, 2011 19:04:19 GMT -5 janedoji said:

Brosin,
The example you put up is really helpful, but there must be a point in which paying off debt is beneficial to the economy-- as opposed to creating money for banks to lend as a 1 to 10 multiplier.

For individuals who have limits to the amount of credit they can get access to, definitely. But from a govt perspective, it chokes off the economy as whole: govt doesn't spend, so Fed doesn't print money to give to the banks to lend it out to us *to earn interest.* Choke off the engine / bank balance sheets, and you see it all come down. And then we bail them out so it's all coming out of our pockets anyways ;D

At least as far as I can tell, there is no time when paying off the national debt would benefit us. Probably why the system is designed that way? Not sure