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UCLA Warns of Housing Bubble MoneyNews (Headlines - scroll down for complete stories)
1. Experts: Housing Prices False, Recession on the Way 1. Experts: Housing Prices False, Recession on the Way For a few years now, UCLA economic researchers have been warning that a bubble has formed around California's bustling housing market. And in their latest quarterly forecast, they predict that a housing decline could drop California into a recession and simultaneously arrest economic growth in the rest of the country. According to an article in the Los Angeles Times, these economists assert that Californians have assumed a sense of false wealth as a result of a 40% spike in home values over the past two years. Story Continues Below
But if the experts are correct and the housing boom suddenly slows, consumers will abruptly stop spending – and that could trigger a recession. And this scenario simply requires a leveling off of home prices. "This process will have a detrimental impact on the economy even if prices don't fall," said UCLA senior economist Christopher Thornberg. Bolstering this view, the Fed has recently noticed indicators of "froth in some local housing markets." And a recent report from Merrill Lynch claimed that home price stagnation in some major cities could slow economic growth by a whopping 1% next year, while the company determined that a number of large California cities maintained exceptionally high ratios of home prices to actual household incomes. According some frightening data from the FDIC, the top 55 housing markets in the United States – which have appreciated some 30% or more since 2002 – made up some 40% of the U.S. housing market's total value in 2004. So obviously, a housing slowdown would be a disaster of epic proportion. Of course, naysayers believe current housing prices are valid and due to both inadequate supply and the rapidly rising requirements of immigrants. And they don't see a potential slowing in housing prices as a any reason for concern. But bubble theorists insist the hot housing market has disguised some serious deficiencies in California's economy – they say that solid job growth is deceptive and incomes have made only insignificant gains. And all the while, people have been spending more based on an unfounded sense of wealth. "Your average Californian adult found him or herself richer to the tune of $40,000 on the basis of housing appreciation over the past two years," Thornberg said. But that amount was only about half what that same person took home in income for the same period of time. If the market comes to a halt, that statistic will surely come back to haunt a great many Americans.
2. Could Overbuilding and Speculation Mean a Housing Bust? More evidence of a bubble. Over the past year, there has been a 47% rise in the number of U.S. homes that were sold before they were ever even built, USA Today reports in a page one story Tuesday. And that has created worries that too much speculation (or "flipping"), coupled with a housing saturation, could lead to a housing bust. As of April, the Census Bureau reported that 88,000 homes were for sale – but they hadn't yet been constructed. That number was almost double the 2000 figure, and it represented the highest total since such information was first tabulated in 1973. While demand for homes is strong, a housing overstock could easily lead to a bust, according to experts. "Builders have a long pipeline for development that will be difficult for them to shut down, even when demand begins to weaken," says one economist. "They are geared for growth, and it will be hard for them to pull back."
3. Euro "Godfather": Italy Must Dump European Currency Italy would be better off dropping out of European monetary union and returning to the lira. That was the shocking suggestion offered up at a recent European Central Bank (ECB) conference by Stanford professor Ronald McKinnon, a top currency expert who is considered the "godfather" of the euro currency. McKinnon's words surprised many attending the conference, which had been swarmed by tens of thousands of Italians rallying for a departure from the euro. "There is some credence to the view that maybe Italy should be split off and have its own currency, even if we know it would all go wrong," McKinnon told the crowd. And Italian reformers agree with McKinnon. "The moment has come for us to flee before the whole edifice comes crashing down," said Italian reform minister Roberto Calderoni. "The euro will soon be waste paper." He and others have proposed a new northern Italian currency with a constant value that would fluctuate with changes in the cost of living. But skeptics insist that a move away from the European currency would be catastrophic for the Italian economy, as interest rates on the country's massive public debt (which is an astounding 106% of the Italian GDP) would become unmanageable. Italy is hurtling closer to recession every day as a result of increased labor costs and the economic improvements made by the country's German neighbors. Says Otmar Issing, chief economist of the ECB: "Several countries did not fully understand what signing the Maastricht Treaty and joining EMU would imply."
4. The Wilkinson Edge: ETFs: A Remarkable Evolution The bear market brought about a major change in investors' appetites. As stocks were exhibiting a seemingly endless downward slide, it became apparent that investors were also being duped by accounting shenanigans. But much of that has gone away now, as the market has shot back up and the mere whisper of accounting fraud sends single stocks sliding. And out of that stock market stupor has emerged a new breed of investments. Exchange-traded funds – or ETFs as they are now known – have quickly become a $240 billion industry. But it should come as no surprise as investors clamor for greater control over their individual investment portfolios. They're no longer willing to be roped into "the next big thing" by following their broker's whim and investing in some unknown company with a "cast-iron" business model. Today the investor is more astute, navigating the investment universe by targeting hot areas within the economy and investing in them. Investors are now able to target healthcare, utilities and oil-related stocks using a single investment that allows them to retain a diverse portfolio of stocks in a specific area within a single share of any ETF. While there are now more than 160 available ETFs to choose from, investors will be pleased to learn that fund managers are making plans to increase that number. You may recall that in past MoneyNews analyses, we have documented the year-to-date performance of the best- and worst-performing ETFs Thanks to strong customer demand, fund architects are rushing to launch new products designed to help investors build their wealth. The aim of an ETF is to perform in line with some specific index. For example, the mandate of the iShares Consumer Service ETF (IYC) is to match the performance of the Dow Jones U.S. Consumer Cyclical Sector Index. There are quite literally hundreds of sectors, sub-sectors and industries that can be tracked and replicated so that investors can take advantage of them – and that seems to be driving a customer craving for these funds, which trade throughout the day on the American Stock Exchange just as any other traded stock does. While investors are hardly fatigued by current offerings of growth, value or country funds, fund designers are diversifying their offerings with the launch of various unique services. For example, Rydex Investments is planning a fund that would allow investors to play fluctuations in the euro currency. Rydex's "Euro Currency Trust" will hold euros in a bank account and issue shares against it. Each share will represent 40 euros, and the price will be based on the noon buying rate from the Federal Reserve Bank of New York. This fund will allow investors the chance to speculate on rises and falls in the value of the U.S. dollar against the euro. So far this year, the dollar has gained more than 10% against the euro. The fund would make currency trading easier for traditional stock investors, as special accounts are generally required to trade currencies. The underlying global currency market regularly sees $1.9 trillion change hands each day in what is the world's largest market. Deutsche Bank AG has plans to launch a commodity ETF tracking its own commodity index, which is made up of crude oil, heating oil, aluminum, gold, corn and wheat. Commodities have created a red-hot investment arena in the last couple of years, as global growth has rebounded. Yet it's also a difficult investment for investors to expose themselves to. As with currency trading, a special account is required that often exposes investors to leveraged trades in the notoriously volatile world of futures trading. Deutsche Bank says it intends to execute those trades and issue shares in a trust fund, which is available to equity investors. Another especially hot area has been crude oil. Macro Securities Depositor LLC in New Jersey has plans to launch a fund pegged to the price of oil. Other ETFs that track securities linked to the price of oil have so far been successful in providing investors with exposure to crude price changes. But this fund would track the price of Brent crude oil as published in The Wall Street Journal. This fund would offer long and short wagers on the price of oil – allowing investors to effectively sell short crude oil. Barclays Global is set to launch the first ETF that tracks the price of silver, while Firsthand Capital Management of California wants to launch a technology shares ETF, which handpicks 30 tech stocks within the S&P 500 index, which it believes are set to outperform the index. PowerShares Capital Management has set a unique trend with its brand of ETFs. Not content with simply matching an underlying index, the firm attempts to beat it. PowerShares wants to launch three more ETFs to track dividend funds. The world of ETFs is maturing into a huge investment arena. Smaller companies are bringing new ideas to the table – and these require more active management, as opposed to simply staying apace with a standard index.
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