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Five Things You Need to Know: Housing More Affordable... in Theory


The problem is affordability is an expression of the potential to transact, not the desire to transact.


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

1. Consumer Spending Weak, As Expected

Nothing earth-shattering in the econo-news on this Friday morning.

Consumer spending increased 0.1% in February, according to the Commerce Department, while incomes rose 0.5%, slightly more than expected.

Scanning the headlines, it appears the news media is largely appreciative of a relatively muted advance in the so-called PCE Price Index. The Federal Reserve is quite enamored of this inflation index and considers the preferred range for it to be 1% to 2%. The PCE Index, excluding food and energy, rose 2% in February, at the top end of the Fed's preferred range.

2. Housing More Affordable... in Theory

The National Association of Realtors' composite housing affordability index was released yesterday and shows the index jumped (meaning housing is supposedly more affordable) to 135.2 in February from 131.3 in January.

This report simply measures the ability of a family earning the median income to purchase a median-priced home. What it does not measure, however, is how easy (or difficult) it is to get approval for a loan. As a result, as housing prices continue to decline we can expect homes to get even more affordable, perhaps more affordable than ever. The problem is affordability is an expression of the potential to transact, not an expression of the desire to transact.

3. Misleading Headline of the Week

The headline below gets our vote for "Misleading Headline of the Week"

Not exactly. See, the lack of "easier credit" is precisely the problem. Simply put, despite Fed rate cuts the money is not making it into the economy.

This situation is typically expressed in the media as a case of "banks hoarding cash." That is true, in a sense. But that statement doesn't explain why banks are hoarding cash, so we will below.

4. Why Are Banks Hoarding Cash?

Why are banks hoarding cash? Because they continue to hold on their balance sheets too many assets that are simply not worth the prices at which they are being carried. Say again?

Think of it this way. Suppose you own 10 trophies you purchased back in 1998 as an investment. The purpose of that investment was to sell the trophies in 10 years so that you could retire. Now, you paid $1,000 each for those trophies in 1998, but saw that an auction of nearly identical trophies conducted last year valued them at $5,000 each. Based on that data, you estimate your trophies to be worth $50,000 (10 X $5,000).

Now, in your mind, and perhaps even in the mind of the insurance agent with whom you have the trophies insured, they have to be worth somewhere around $50,000; after all, that's the last known price. Seems reasonable enough, right? It is reasonable, unless there is suddenly no more demand for those trophies.

Banks own billions of dollars of assets similar to those trophies and for which there is simply not enough demand. That's why they are "hoarding cash." But this hoarding is not like hoarding canned goods. The cash won't be stockpiled it the basement. It'll absorb the losses incurred by these assets as they are disposed. That's why the Fed's credit is not making its way into the economy.

5. Jimmy Cayne, Jimmy Saw, Jimmy Dumped His Shares

James "Jimmy" Cayne, chairman of Bear Stearns (BSC), sold his remaining stake in the firm for $61 million this week, just before a vote on the company's pending takeover by JPMorgan (JPM).

Cayne sold 5.66 million shares at $10.84 apiece Tuesday, according to regulatory filings with the SEC. The shares were once valued as high as $1 billion last year, when BSC stock peaked at $171.50.

Cayne, 74, served as Bear's chief executive for 15 years until January, when he stepped down in the wake of the crisis. We'll sure miss the Jimmy Cayne headlines.

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