Paulson: Deny, deny, deny. Ok, but it's over!

Treasury secretary, Henry Paulson, is being lambasted for his glass-is-half-full approach to reporting on the state of the economy and the role of the financial markets going forward. While Mr. Paulson has been denying any serious problems in the capital markets, he's finally admitted that there was a problem, but that it's now over ...how convenient.

I'm very much aware that politicians need to put a positive spin on even the worst scenarios in order to keep people from panicking, but Mr. Paulson's approach has worked to to make him less than credible. I've been equally critical of Fed Chairman Ben Bernanke, but at least he both acknowledged and acted to quell credit crunch. Mr. Paulson has been adamant about denying the realities faced by both business and consumer until we reached a point in this down-cycle that appears, to Mr. Paulson, to be a turning-point. The reality, of course, is likely not all that rosy, which will only work to further discredit Mr. Paulson as reliable source for information on the state of the economy.

To be fair, Mr. Paulson is not saying that the economy is rebounding, but that the capital markets will play less of a role - replaced by the forces at-play in the housing and commodities markets.

"We are seeing signs of progress as capital and credit markets stabilize,'' Paulson said. "The markets are considerably calmer now than they were in March.''

He goes on to say...

"We will continue to look for additional tools to reach and help homeowners and to make existing programs work more smoothly,'' he said, cautioning that more declines may occur in months ahead. ``We know the correction has further to go, and so we should not be surprised at headlines that note rising foreclosures and falling home prices.''

So, at least he doesn't have a problem admitting that we do, in fact, have some problems in the housing market. As per my earlier posts, the Democrats are working to introduce legislation to help homeowners in much the same way as the Fed has helped financial institutions. The question will be wether it's too little too late.

The Media & Lying with Statistics

I'm continually amazed at how the media manipulates economic data to present whatever picture it feels will best attract viewers, listeners or readers. Today's housings statistics are a perfect example of just such manipulation.

All morning, the news has been a buzz with the jump in housing starts - everyone clamoring to talk about how this may represent the rebound for which we've all been waiting. With no more than a glance at one article on Bloomberg, however, it's easy to learn of the whole picture. This is an example of the statement to which everyone has been referring:

Total housing starts jumped 8.2 percent to a 1.032 million rate as construction of multifamily units rose 36 percent following a 35 percent drop in March.

Here's the paragraph that immediately precedes it:

... a Commerce Department report showed construction of single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded. Builders broke ground on 692,000 single units at an annual rate, the fewest since January 1991.

I know; I shouldn't be surprised. In some ways it is a positive thing that those with a voice work to rally the rest of us into a [hopefully self-fulfilling] belief that the economy is indeed OK. However, when we folks like Mr. Alan Greenspan, the former Fed Chairman, and Mr. Myron Scholes, the winner of the Nobel prize in economics for his work on option valuation, both referring to the current state of the economy as the worst since the great depression, it's time to face reality.

When news reports focus only one the one part of the housing segment that is doing well and neglect to mention that the industry as a whole is declining to almost two-decade lows, then something is amiss. With the average American saving less than ever before and average American debt at record highs, the rising unemployment figures spell doom for those who fall only hear the headlines and continue to spend themselves into future financial ruin. It's time for those with a true understanding of what is going on in the economy to help those who do not.

Housing Market Outlook

I'm still sitting on the fence, waiting for the right opportunity to buy my first home-sweet-home. With all the trouble in the housing market, I'm sure that my opportunity is not far away, but the question now becomes how low can the prices really go. As with any declining market, an investor wants the most bang for their buck and seeks to time their purchase for the absolute lowest low. With foreclosures being reported up by 65% this month compared with the same month last year, however, the supply of homes on the market is still very much on the rise. Consequently, prices are still very much on the decline.

Watching Jim Cramer's Mad Money on CNBC last night I heard the mention that the first real estate markets hit by the slow down in Florida are beginning to show signs of life. As with the recent bull runs in the stock markets, it's likely just a head-fake. The underlying problems in the economy haven't gone away. Business bankruptcies are still mounting. Unemployment is still rising. Foreclosures are, well, you get the picture. Before these underlying factors are addressed, there isn't going to be any rush to buy any homes. People certainly aren't going to be bidding against each other in this market and that's a necessary condition for prices to rise.

We will continue to hear about some homes being sold and some real estate markets around the country rebounding. I would tend to suggest that this represents localized feelings of a trough; this is unlikely to be representative of a more broad-based recovery. Too many things are just ugly right now and people are stuffing those bills into the mattresses to insure against more rainy days. I, for one, am still waiting for when I can un-tuck some of those bills.

The wait continues for future home buyers

It's been about two years since I first thought about buying my first home and subsequently decided to wait ...wait for the market to fall-apart. Well, it finally has (in the U.S. at least - we're still waiting here in Canada). In reading about all the foreclosures and other empty houses sitting on the market, I can't help but think how many other people there are out there like me - waiting for the market to bottom-out to get the best possible deal.

Yes, market timing is difficult, if not impossible, but everyone believes that what they're strategy can outsmart the market and I'm no different. I don't know when the bottom will come, but I'm pretty sure that we're not there yet. The fact that the Fed cut another quarter-point yesterday points to the fact that a lot of people (smarter than me) tend to agree. 

A cut in the interest rate, although there's no doubt that the cut was primarily motivated by the credit crunch, it's also clear that the Fed and all those economists aren't convinced that the current recessionary trends are significant enough to halt (or even hike) the rates. The time will come, however, when those rates will have to rise. Inflation, by all reasonable accounts is nearing double-digit levels ...regardless of what you hear in the news. To bring that sort of inflation under control and help boost the dollar, the rates will have to soar. When they do, so too will mortgage rates and that will most certainly take its toll on the housing market.

...that's when the market will bottom and when a lot of people sitting on their down payments will finally be able to buy their home-sweet-home.