The Virginia Fracas

I came across this interesting article on the WSJ covering an uprising at the University of Virginia.  From what I glean from the article here is that the University President was fired due to not following through with the trustee's plan to reduce costs.

I'm sure that UV is not the only university or college that finds itself in such disarray.  With the economic recession and lack of a robust recovery states have slashed funding to it's colleges and universities.   According to the WSJ piece University of Virginia funding courtesy of Virginia taxpayers has dropped to $8,300 per student from $15,300 in 2000.

Associated Press

University of Virginia's former president Teresa Sullivan in center.

Three Key Reasons Housing Not Coming Back: Demographics, Student Debt, No Jobs

Below is a post by Mish Shedlock who puts together some very daunting statistics in support of his thesis that housing is not coming back.

I will say that sooner or later for those who can qualify for a mortgage at these historical lows, it may prove better to buy a house vs. rent depending upon your specific situation.

Three Key Reasons Housing Not Coming Back: Demographics, Student Debt, No Jobs

Consumers Not Ready to Borrow Again

Ben Bernanke is trying like mad to stimulate credit and lending but to no avail. It's an uphill battle because of demographics, student debt, and lack of jobs.

Citing falling debt-service needs, some economists think consumers may be ready to go on a borrowing spree. They are badly mistaken.

I agree with Jed Graham on Investor's Business Daily who says falling debt-service needs is an illusion. Graham makes the case in Consumer Credit Impaired By Under-45 Job, Debt Woes.

Nearly four years after a borrowing binge gave way to financial crisis, have households slashed enough debt to take on new credit and start spending again?

Yes, says a growing chorus of economists, with some evidence to back them up. The Federal Reserve's ratio of debt service payments to disposable income is at its lowest level since 1994.

But that traditional measure is a poor guide today, as credit-hungry adults under 45 bear the brunt of the jobs, housing and student loan crises.

Considering where more of the income is coming from (government supports), who's earning a bigger share of wages (baby boomers) and which type of debt has been on the rise (student loans), re-leveraging may be a long way off.

Not Ready to Borrow



Graham's analysis is correct. Here are some points from the article that will explain why.

Demographics
The number of full-time workers younger than 45 has fallen by 9 million, or more than one in seven, Labor Department data show. 

• The number of full-time workers ages 55 and older has climbed by 8.5 million. 
• The 35-44 population has shrunk by 4.5 million over the past 12 years. 
• The huge baby boomer cohort has aged while Generation X is unusually small. 

Student Debt
Student debt has soared to nearly a trillion dollars. About two-thirds of it is held by those under 40.

• Among those age 30-39, 25% have student loan debt, with an average balance of $28,500. 
• New York Fed research shows that of 37 million student loan borrowers last fall, only 39% were paying down their balances.

Jobs
To Graham's analysis I would add the jobs picture is bleak.
Unemployment insurance has expired for millions: 200,000 Lose Unemployment Benefits This Week, Nearly Half From California

• Self-Employment desperation: 100% of U.S. Jobs Added Since 2010 Have Been Self-Employment, Contractor, or Other Jobs Without Unemployment Insurance Benefits
• Last two jobs reports have been dismal: Another Payroll Disaster: Jobs +69,000, Employment Rate +.1 to 8.2%, April Jobs Revised Lower to +77,000; Long-term Unemployment +310,000
• The 4-week moving average of weekly unemployment claims is at the highest rate of the year, at 386,250.

Those were points 7-10 in my analysis 12 Reasons US Recession Has Arrived (Or Will Shortly)

Housing

Let's put it all together and look at the picture from the point of view of housing.
Kids are graduating from college deep in debt with poor job prospects.

1. Those with too much debt and too little income are sharing apartments or moving back home, not buying homes and starting families.
2. Boomers are looking to downsize, not buy more toys and larger houses.
3. Shadow inventory of sellers waiting for higher prices is immense, yet generation X and Generation Y represent small pools of potential buyers

Factor in the rapidly slowing Chinese economy (China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009 coupled with Europe in the midst of a severe recession, and it's difficult if not impossible to see just where US growth will come from.

Nonetheless, I believe housing is bottoming. I made the case in New American Dream is Renting; Reflections on Renting Houses, Cars, Books, Clothes; Will Rentership Fuel the Next Boom? What About Home Prices?

However, even "if" housing is bottoming, don't expect either housing or the economy to go anywhere fast.  Prospects for family formation are fundamentally very weak and overall economic fundamentals are very weak as well.

John Mauldin's Weekly Newsletter: Daddy’s Home

Here is the link to John Mauldin's weekly newsletter.  Below are my highlights although there is a section of his newsletter that covers the European crisis and specifically what Germany is doing which is worth the read.

• So why did the Fed continue Operation Twist? Because the market (that amorphous, omnivorous blob) expected something from the Fed. This summer’s version of Twist and Whisper was about the least they could do.
• This is the economic equivalent of walking into a room full of your anxious children, patting them on the head, and saying “Daddy’s home; everything will be OK now.” It was basically all they could do short of another full-blown quantitative easing, and I believe they think they really need to save the QE psychological bullet for another time, when we may be in even more serious straits. (Which if you buy their rationale is the correct thing to do.)
• I have never been a fan of the phrase “the market is a forward-looking indicator.” What was it telling us the summer of 2007? It was certainly not signaling a recession within a few months. The NYSE index was only 3% off its low and climbing in 2000, and we were already in recession. Did we have a recession in 1998 or 1987 following those bear markets?
• Maybe I don’t have the volume turned up, but I just can’t hear the market telling us anything about the future that we can hang our hats on. Over the shorter term it is very good about giving us clues about current emotional drivers and momentum investing, but for the direction of the economy we need to look elsewhere.
• My last observation about Fed interest-rate policy is that it is punishing those who have worked and saved all their lives and had hoped to retire and be able to clip coupons. Unless you have a large amount of money, you can’t live off the interest income you get on what used to be the standard bond portfolio that was recommended for those who were either retired or close to retirement.
• But low rates punish savers and leave them with less money, so that hurts retirees’ final consumer demand – or that is the view from the cheap seats where I sit. And retiree income and spending is a growing portion of the economy. Hurt that, and it’s a sector big enough to have consequences. I know that economists can argue that the trade-off is positive, but it seems to me we are defrauding a generation or two of hard-working savers. You did what you were supposed to do, and your reward is a ten-year bond at 1.5%. Since you paid off your mortgage a long time ago, the lower rates don’t help you either! So you either cut back or move out the risk curve. While better yields can be had with some serious research and homework, it is not easy.
• It was not just in Wisconsin that voters said Tuesday a week ago that deficits matter. I think those municipal votes are highly indicative of a tectonic change, as voters look to the future of government deficits and start to say “Enough! Stop!” It can’t happen too soon, as our train chugs on toward the debt cliff.

New Housing Crisis: Not Enough to Buy

There is a common misconception out there regarding the housing crisis which is there are too many homes for sale.  Reality Check.....there aren't enough home for sales.


We have talked about this point in previous points and more specially I have personal experience when it comes to this issue.  When my wife and I were looking for a new house in Metro Detroit last year we were shocked to find the low level of inventories of houses on the market.


To find a house that was in a good neighborhood, good school district, and didn't need a major makeover was extremely hard to find regardless of the price range.  We were finding situations with houses that had multiple offers, houses on the market for days not weeks.


Speaking with one of my realtor contacts last week she had confirmed that he market was even tighter this year than last year.  My contacted noted that people were in for a rude awakening given the perception that it was still a buyers market.  In some areas bidding wars are back which isn't the headlines you necessarily read about.


So what gives?  This situation certainly does not mean that the housing crisis is over, far from it.  People are still upside down on their mortgages, people are still in the foreclosure process, but it is the banks who are still upon piles of houses that they aren't ready to release back into the market. If banks were to flood the market with inventory that would have to take the hits as actual loses which aren't showing up on their balance sheets currently.  It's the whole mark to market conundrum.


Diana Olick Real Estate Reporter for CNBC filed this report covering this very topic.

• There are currently 2.49 million for sale, a drop of 20 percent from a year ago. To make matters worse, supply is lowest on the low end, where so much of the investor activity has been over the past several years.
• The median price of an existing home, as reported by the Realtors, rose 7.9 percent in May annually, but NAR chief economist Lawrence Yun was quick to point out that this does not mean the average home owner gained that much equity; it is simply a big shift in the type of home that is selling. Sales of homes priced under $100,000 dropped two percent from a year ago, while sales of homes priced between $250,000 and $500,000 shot up nearly 29 percent (though still at low volumes historically). Again, this is due to lack of supply on the low end, specifically distressed homes.

NicK White | Cultura | Getty Images

• Fear is clearly a factor, as is negative equity. Between 11 and 12 million borrowers still owe more on their homes than they can sell them for, and many more borrowers in a near negative equity position; that means they can’t get enough equity out of their homes to cover the Realtor fees and the moving costs, nor to put down on a new home. That’s why the market is ripe for first time buyers, but they are not stepping up either, at just 34 percent of purchases. In a normal market, they would make up 45 percent. That, again, is part fear, but largely tight credit.