Car sales dropping off a cliff. Houses next?

The federal government cash for clunkers program is over, and as the pessimists predicted, the program merely borrowed sales from the future rather than generated sustainable growth.

September’s light-vehicle sales rate will fall to 8.8 million units, consumer auto site said. That would be the lowest rate in nearly 28 years, tying the worst demand on record.
After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once -- in December 1981 -- with records stretching back to January 1976.
“Many people regard February as the darkest month of the recession, but even then the SAAR was higher, at 9.1 million units,” senior statistician Zhenwei Zhou said in a statement.

The lessons we take away from this experience are dark for the housing market.
The housing market is currently being propped up by several government programs, several of which are about to expire.

1) The Federal Reserve is currently buying about $105 Billion worth of Mortgage-Backed Securities each week. If that continues they will max out there self-imposed $1.25 Trillion limit in four months. This program is designed to hold down mortgage rates.

2) The Treasury currently gives an $8,000 tax credit to first-time home buyers. This is set to expire at the end of November, but in reality it expires at the end of this month because people applying for this must have all their paperwork in before the deadline. The tax credit created about 350,000 homes sales that would not have otherwise happened.

3) The Federal Reserve's Treasury Buyback program will soon exhaust itself. It only has $15 Billion of capacity left. To give an idea of just how important this program is, it was involved in 50% of Q2 Treasury purchases. This program is designed to hold down interest rates.

4) State mandated foreclosure delay laws are temporary. For instance, California currently has a 90-day foreclosure moratorium in place, but about to expire. Other states have also used foreclosure moratoriums.

One or more of these programs will probably be extended. But if the cash for clunkers law will teach us anything, these programs do not create sustainable demand. They borrow from the future. So when these programs end, and they will all eventually end, demand will be that much lower than it would normally be. The only difference is a whole bunch of taxpayer money will have been spent in an effort to delay the pain.

Subject Meta: 

Forum Categories: 

on this fed post

I'm not surprised in the least about that. the projections for auto sales was a cliff, from here

auto sales projection, SF Fed

I put this analysis from the SF Fed because I think it's pretty much, more or less what we've been writing about, certainly what I would write up from my own peanut gallery activities...

and note, he doesn't have some major financial calamity in his data...he's assuming it's over.

Housing's Triple Whammy

It looks like the rest of the media is catching up with me again.

The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.
“Things could get ugly,” said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, D.C.-based government-controlled mortgage- finance company. “We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”

don't be surprised that they are reading EP, you

Seriously. I've notice this extensively that when the blogs, people pick up on something that is either from first principle analysis, or pulling together factoids from a variety of sources....and it's good juju i.e. credible, cited, logical, insightful....a couple of weeks later is seems to get picked up on by the MSM.

I've kind of blasted Bloomberg for the rah, rah recovery cheer headlines, but overall, I think they do a reasonable job quite often. I especially am thrilled they are going after the Fed's $2 trillion to disclose who got the money through a FOIA. That takes some bucks to go to court over it.

But yes, midtowng, feel proud because I've noticed on a lot of posts you're "ahead of the curve" a good two weeks. i.e. this isn't the first time I've seen something hit the MSM that you were writing about, and pretty much alone in doing so, two weeks previous!

But we need to keep ourselves honest, clean, police ourselves to make sure we're writing credible stuff. So far so good and that's why people are reading EP. We're making a huge effort to be accurate or if we write a Populist political blast, rant, that there is some real meat behind it.

End of Fed MBS purchase program could bump interest rates 1%

And it could jump pretty fast.

If the Federal Reserve were to abruptly stop purchasing mortgage-backed securities (MBS) and agency housing debt, mortgage rates could climb a half to a full percentage point in a hurry, according to Peter Hooper, chief economist at Deutsche Bank Securities.

you know what we need

is weighting. So, in other words, we are now recognizing all of these events, such as the coming option arms expiring, now the Fed no longer propping up MBS, the seasonal adjustments, the $8k homeowners tax credit...

and take any scenario like this. But what I do not know, which is now bugging me, is how to weight these elements to determine which one is going to affect the bottom line most.

i.e. will a jump in interest rates further repress home prices and by how much? What's that ratio?

Ya know...then we have distressed sales, something like 42% or something of home sales going to 1st time buyers...

I, at least, haven't really weighted these events to see the consequences.

i.e. it's a multi-variate equation and even if linear, each element has a scalar associated with it to predict the total effect. What are those scalars (if they are even linear).