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Five Things You Need to Know: Breaking News, Fed Says Housing Prices May Become More Volatile. Also, Durable Goods, China Exporting Inflation?, and Worst-Product-Ever Finally Discontinued

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What you need to know (and what it means)!

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Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Special Breaking News Update: Housing Prices May Become More Volatile, Fed Report Says

The rise in housing prices over the past decade "owes significantly" to falling inflation-adjusted interest rates and changes in the mix between rates and the "housing premium," which could mean more volatile home prices in coming years, according to a paper written by Federal Reserve economists, the Wall Street Journal reported this morning.

  • Hey there, Fed economists, glad you could join us.
  • The paper, written in April this year, is ominously titled: "A Trend and Variance Decomposition of the Rent-Price Ratio in Housing Markets."
  • We say "ominously," because we have no idea what the title means and things we don't understand frighten us.
  • The paper's Abstract says it has three main findings:
    1) "Variation in expected future real rents accounts for a small share of variation in our sample rent-price ratios; variation in real interest rates and housing premia account for most of the variability."
    2) "Expected future real rates and housing premia were so strongly negatively correlated prior to 1997 that changes to real interest rates did not affect the rent-price ratio. After 1997, rates and premia have been positively correlated, and the decline
    in the rent-price ratio that has occurred in almost every geographic area in our sample since 1997 reflects both declining real rates and declining premia."
    3) "In the recent housing boom, 65 percent of the decline in the aggregate rent-price ratio is due to a declining housing premium."
  • Uh, ok. What was number two again?
  • Actually, behind the professorial obfuscation the paper is not so far out.
  • The study looked at the ratios between housing rents and prices in two distinct periods, 1975-96, which the authors characterize as Pre-Boom, and 1997-2005, which they called The Housing Boom.
  • They then broke the price structure of the two periods down by three separate components: future rent growth, real interest rates and what they called the "housing premia", which is the return on housing investments above the yield of the 10-year Treasury note.
  • So, prior to 1997 housing premia "effectively moved to smooth valuations in the face of interest-rate volatility." After 1997, however, there was a break. If the break we observed in 1997 proves to be permanent, we should expect housing prices to be much more volatile in the future."
  • Why? Because since 1997 housing prices have effectively behaved like stocks and bonds.
  • Money quote from the Fed paper: "fundamentals", housing rents in our case, are of little importance for explaining the trend or variance of housing valuations. By definition, then, housing returns explain most of the trend and variation in valuations. In this way, the housing market is remarkably similar to the stock and bond markets."
  • Yes, stocks, bonds and housing are remarkably similar!!! Except for that one thing... what is it? What is that one thing that stocks and bonds have that housing doesn't have? It's on the tip of my tongue. Ah yes! LIQUIDITY!


2. Did You Know?

Look, we're not going to spend all morning banging our heads against a Fed paper (We didn't mention it above, but that paper was filled with stuff that looked like this: (Vt/Pt = it + Ë gt+1) without pulling something else from it we can use.

  • Did you know that according to the Flow of Funds Accounts of the United States, housing wealth accounted for about 40 percent of the overall net worth of households at the end of 2005?
  • Did you know that housing's share of household net worth has increased more than 10 percentage points since the start of 1997.
  • Did you know that while 40% of the overall net worth of households is tied up in their houses, the Personal Savings Rate has been negative now for five consecutive quarters, more than a year?
  • Did you know that the last time the Personal Savings Rate was negative for an entire year was in 1932 and 1933?
  • Did you know that US bank delinquencies of credit cards rose to 4.13% in the second quarter, the highest since the second quarter of 2004?


Personal Saving Rate Graph


3. Durable Goods? Not Anymore.

New orders for U.S.-made durable goods fell 2.4 percent in July, much greater than expected, the Commerce Department said.

  • Durable goods fell 2.4% in July, much greater than the 0.5% decline most expected, the first decline in three months.
  • But wait, the decline was largely due to civilian aircraft and car orders. Excluding transportation, durable goods orders rose 0.5%, exceeding expectations for a rise of 0.3%!
  • But wait, excluding defense items, durable goods orders actually declined 1.9%, which failed to meet expectations of a 0.5% increase!
  • But wait, excluding aircraft (have we excluded aircraft twice already?) non-defense capital goods (business spending) rose a larger than expected 1.5%, exceeding expectation for a 0.4% increase!
  • But wait, excluding the volatile categories of commercial and civilian aircraft, autos, motor vehicle parts, defense orders, non-defense orders, consumer orders, business orders and all big-ticket manufactured items, durable goods orders came in dead even!


4. China's Latest Export: Higher Prices?

According to the International Herald Tribune, as China's economy continues to grow, a new product is showing up in the country's many exports: higher prices.

  • According to the article, atop high prices for raw materials, Chinese workers are starting to demand higher pay, creating the classic conditions for rising export prices.
  • In the United States, data show that Chinese import prices, which have fallen since data collection began in 2003, are leveling off, as are prices from other low-cost emerging markets.
  • Meanwhile, the price of Chinese goods at the factory gates has climbed in the past four months, according to the purchasing managers survey taken by NTC Research in London.
  • As prices for raw materials remain high, central banks once again could be stuck with the painful dilemma that they faced in the early 1980s: to stop inflation by tightening credit, despite the potentially negative effects on economic growth and unemployment, the article says.
  • China's role in global inflation is likely to be a key topic at the annual conference of central bankers in Jackson Hole, Wyoming, which starts Friday, the article noted.
  • Also a key topic in Jackson Hole? Why do the central bankers go to Jackson Hole each year?


5. Worst-Product-Ever Finally Pulled From Shelves

Dell's Ditty (we swear that was the product's real name), a music player that was theoretically supposed to challenge Apple's iPod, has been discontinued after three painful years of existence.

  • Dell's Ditty, the last remaining product in the company's line of digital music players has been discontinued after unsuccessfully challenging the dominance of the iPod for three years, according to the Dallas Morning News.
  • Dell's Ditty was part of a group of music players and software programs that worked on a common platform designed by Microsoft.
  • The best part about the discontinuance of the Ditty is that the advertising campaign Dell built around the failed product has been discontinued as well.

The face of the Dell DJ Ditty. I swear.

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No positions in stocks mentioned.

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