Don't Doubt the Bernanke: Big Ben Works His Magic Again

So last month I was wondering why in the world Bernanke would decide to go through with QE2 when nominal consumer credit had finally made a turn, when the double dip in prices after the termination of the home buyer tax credit never really materialized in full force, and when food and energy prices around the world were starting to shoot up.

Well now I know.

Last month I looked at some home price trend lines, and predicted that the 20-city C-S HPI for Dec-2010 would drop 0.56% to 142.99. In actuality, it dropped 0.96% m-o-m to 142.42.

Okay, so that's a little worrying, but not that significant, right? Wrong.

On the next day, Thursday, February 24, out comes the NAR data for January 2010, and it was a real shocker. From CNNMoney: " Existing Home Sales Inch up in January." "At the same time, the median home price fell 3% to $158,000, compared to a year earlier." (See also, NAR webpage.) Incredible.

As some might recall, the $8000 home buyer tax credit program was extended to June 2010. The dropoff in the volume of sales for existing homes was predictable:

Existing Home Sales from NAR
(S.A. annualized volume in millions, median sales price in thousands of dollars)
2011-Jan, 5.36, 158.8
2010-Dec, 5.22, 168.8
2010-Nov, 4.68, 170.2
2010-Oct, 4.38, 170.6
2010-Sep, 4.41, 171.5
2010-Aug, 4.24, 177.4
2010-Jul, 3.86, 182.0
2010-Jun, 5.23, 182.8
2010-May, 5.68, 174.6
2010-Apr, 5.80, 172.4
2010-Mar, 5.44, 169.5
2010-Feb, 5.02, 164.6
2010-Jan, 5.09, 164.9
2009-Dec, 5.44, 170.5
2009-Nov, 6.49, 170.0
2009-Oct, 5.98, 172.0
2009-Sep, 5.60, 175.9
2009-Aug, 5.10, 177.2
2009-Jul, 5.14, 181.3
2009-Jun, 4.89, 181.8
2009-May, 4.75, 174.8
2009-Apr, 4.70, 166.5
2009-Mar, 4.61, 170.0


What was very surprising (at least to me), was that volume shot back up in the cold, snowy winter months of December 2010 and January 2011. Seasonally adjusted, volume for these months was higher than it was for 2008, 2009, or 2010...

Existing Home Sales from NAR
(year, volume in millions, median sales price in thousands of dollars)
2010, 4.907, 172.9
2009, 5.156, 172.5
2008, 4.913, 198.1


In other words, the market is finally moving, without the old tax credit subsidies, and prices are dropping back down toward the price levels where they "should" be. The entire point of pursuing extraordinary fiscal and monetary stimulus measures is to provide enough price inflation to keep volume moving. But if volume is moving, and price inflation is around the corner, then I think the main policy goal has been accomplished.

Some Data Courtesy of the Federal Reserve
Quarterly Charge-Off Rates for the 100 Largest U.S. Banks, Seasonally Adjusted: LINK. (peaked in 2009-Q4)
Consumer Credit Outstanding by Month, Seasonally Adjusted: LINK. (bottomed in September 2010)
Money Stock Measures: LINK.

So when I heard about QE2, I was against it, because I thought that inflation was already coming, but what I failed to see was the enormous drop in nominal home prices as investors FINALLY were assured enough to enter the distressed home market in sufficient force (and on the flip side, that institutional sellers were assured enough to actually finally get rid of more of their distressed portfolio). We've already seen this effect a lot in the last few years, where high volume often translates into significant price drops (in accordance with Keynesian theory on "sticky" prices during periods of asset deflation), but the magnitude this time around is beyond what ever happened before, seemingly indicating that a seismic shift has occurred in future expectations.

As the CNN article notes, there was an usually high proportion of distressed investors in the December & January markets:

quote:

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"Buyers have been constrained by unnecessarily tight credit," said Yun. "As a result, there are abnormally high levels of all-cash purchases, along with rising investor activity."

NAR reported that all-cash sales went up to 32% of the total, up from 26% a year earlier. It estimated the percentage of investor purchases hit 23%, up from 17% a year ago.

"Unprecedented levels of all-cash purchases -- primarily of distressed homes sold at deep discounts -- undoubtedly pulls the median price downward," said NAR president, Ron Phipps.

Whatever the source of the sales, they do have a welcome impact on supply. Inventory dropped 5.1% to 3.38 million units, a 7.6-month supply at the current rates of sales. That was the lowest inventory level in more than a year.

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Undoubtedly, this is good news. And I think the huge dropoff from a median sales price of $168,800 in December 2010 to $158,800 in January 2011 just shows how much slack there really is in real estate assets. If we want real home prices to continue falling back down to normal, while allowing for high sales volume to continue, then we need to go ahead and allow for more monetary inflation to grease the process. And that's exactly what Bernanke planned ahead for, and apparently the expectations of future nominal inflation helped push a lot of investors into the market during these normally low-volume winter months. So give Bernanke his due; it looks like he knew what he was doing all along ... again.

And on top of all that, he kicked Mubarak and Qaddafi out of power to boot. Not bad work...