re: Case-Shiller: U.S. Home Prices Keep Weakening as Eight Cities Reach New Lows

Yep. I'm just throwing the 4% number out there for fun, because I think it's in the high range of what is plausible at this point.

The best thing we could hope for with housing I think, would be high volume coupled with moderate inflation. Something like running inventory down a few months, having CPI go up 4%, nominal home prices go up 1%, and real home prices go down 3%.

And I appreciate the thread as a conversation starter. The only thing I object to is your assertion that there was a clear trend over the last 2 years that has now been broken. To me it seems like everything since 2009 has been unclear--a lot of seasonal ups and downs that amount to nothing more than sideways motion. And I think that's where we still are.

With consumer credit increasing, I think we'll just continue to see more buyers, and have those buyers absorbed with more sellers getting bold enough to put properties back on the market that they've been wanting to sell for a while.

So in a sense, things will probably just keep canceling out. On the other hand, working down inventory (both official and unofficial inventory) is the name of the game right now.

Yeah, that's what I'm saying. New sellers will mostly cancel out new buyers, running down inventory while prices remain in neutral. I think the net trend will be for nominal prices to drift up with inflation (I think we'll see 2-3% in 2011, probably closer to the 3% range, but maybe even 4%).

I know that in the past couple of years, high volume has often meant a decrease in prices (as sellers reluctantly lower their prices enough to make deals), but I think that the environment will be a bit more normal now--i.e., that listed prices are much closer to reality, and that S.A. volume will become much less volatile.

I'm seeing charge-off rates dropping, consumer credit finally turning from a bottom, and stock of money supply accelerating.

A lower net interest margin on loans made versus borrowing capital might just incentivize banks to expand their lending to maintain profits, especially with greater nominal GDP growth expected for 2011 than 2010.

Note that Nominal GDP growth for 2010 as provisionally calculated was only 3.8%, composed of 0.9% PCE inflation plus 2.9% real growth. That won't be too hard to top--2.5% inflation plus 2% real growth would do the trick.

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A lower net interest margin on loans made versus borrowing capital might just incentivize banks to expand their lending to maintain profits, especially with greater nominal GDP growth expected for 2011 than 2010.

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Dude, the banks have been in the most risk free banking operation ever the past two years with a cost of funds of 0-.25% and the interest margin was over 3% prior to "one time" writeoffs, additional reserve strengthening, etc that greatly reduced the margin, but no one believes the charges will not remain ongoing. I am saying they are still overburdened with questionable non or underperforming assets, not that they may not be to increase lending somewhat to those deemed credit worthy. Banking is still a shell game, that's what it is, plus the robosigning and GSE putbacks of illegal mortgages.

I think C-S is fuzzy because the housing data is cycling up and down on more than just seasonal adjustments. In addition to S.A., you also have the up-followed-by-down swings of the government's tax credit policy which makes the data much harder to read. Then you have to include an additional factor that can throw a monkey wrench into the data with the shadow inventory of bank-held foreclosed properties that could be reintroduced back on the market at any time. So essentially you are trying to read data that is in the midst of two different cycles, while also accounting for the reintroduction of new supply, the volume and timing of which is uncertain.

For the consumer credit picture, things are a little simpler, (1) because we're mostly only dealing with regular seasonal cycles, and (2) because we're looking at anti-cyclical trends (i.e., trends going against the grain) rather than pro-cyclical trends. Although there is the complicating factor of the recent credit card regulation that made revolving credit decline, for our purposes, we're looking at other types of consumer credit for larger purchases.

It is true that some of my reasoning behind asserting that consumer credit has turned relies on anecdotal evidence and evidence from other sources (such as the continuing lowering of charge-off rates and the very unusual rise in CPI inflation in December), but you could also reach this conclusion from the S.A. CC data itself.

Click on "History" on the link I gave and then click on "ASCII" under the Seasonally adjusted subheading, and you will get this: LINK.

In the left column, you will see that since Sep-08 to Aug-10 there were 22 months that saw decreases in total S.A. consumer credit oustanding, compared to only 1 increase (which was from Dec-08 to Jan-09). Then you had Sep-10, where there was zero change (unless you think -0.00034% is significant), followed by 2 consecutive increases in Oct-10 and Nov-10.

Factoring out the revolving credit affected by the credit card regulations, you get an even clearer picture in the right column of S.A. non-revolving credit. It hit a bottom in May-10 and went up 5 out of 6 months after that.

Also, from the inflation data, I think we can guess that S.A. consumer credit increased in Dec-10 as well.

I'm using it here in relation to seasonal cycles. I'm saying I tend to put more faith into trends derived from slumping data in summer or surging data in winter, rather than putting faith into trends derived from surging data in summer or slumping data in winter.

Hmmm, I'm not sure if I understood all of what you were asking there, but just to get to this...

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Do you think increasing CC (ignore long-term) is a sign of [at least US] recovery being medium-term (idk 3-5 yrs) sustainable (in a vacuum), or do you think its a sign of a peak and thus the end of a long and hard rebound from a really low base?

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I don't think S.A. nominal CC hitting a trough necessarily tells us a whole lot about the sustainability of medium-term future economic growth. It's just an indication in nominal terms that we are closer to being able to take the economy out of the ICU ward and have it start rehabilitating on its own again without needing life support.

It's great news if true. We need nominal growth--especially in the residential RE industry. It'll help relieve all the enormous pressure that's been on the Fed the last few years. But it terms of using it as a signal for the future real gains in business productivity and re-employment of workforce, it's just a prerequisite step.

It's the regulatory, legal, and tax stuff that really matters for long-term sustainable growth. You just have to wait for the job and real GDP numbers to come in, and then wait even further to make sure it wasn't all just a big misallocation mirage.