Posted on 11/15/2005 2:52:45 AM PST by RWR8189
IT IS FINALLY HAPPENING--the much-predicted bursting of the bubble. Surprise: It is the gasoline price bubble that has burst, not the house price bubble. Prices of regular unleaded last week averaged about $2.34 per gallon, below the levels prevailing immediately before Katrina struck, and well below the $3.04 peak reached in early September. Crude prices also headed down from the $70 per barrel level to $57, a six-month low.
That did not stop indignant senators from hauling the CEOs of the major oil companies to public hearings, at which they were excoriated for "price gouging" and for failing to reinvest their record earnings in new production and refining capacity. (No matter that among the principle constraints on such investment are the laws these same legislators have passed, limiting drilling offshore and on federal lands, and turning the process for permitting new refineries into a bureaucratic nightmare.) The industry's leaders pointed out that it takes twice as long--eight years as compared with four--to get a refinery built in the United States as it does in China and other countries.
The temporary spurt in gasoline prices may be past, but its consequences linger. To the undoubted glee of America's critics, who argue that our gas-guzzling vehicles contribute to global warming, sales of full-sized pick-up trucks have plummeted, dropping 26.4 percent in September and 31.8 percent in October, compared with those months last year. Worse still for automakers, sales of highly profitable sport-utility vehicles have declined even more.
It will be some time before we know whether the fall-off in sales of these large vehicles is part of a permanent reaction to the higher gas prices that followed Katrina, or to the decision of automakers to reduce the massive discounts that have brought buyers trooping into showrooms. General Motors, which some analysts now give only a 50:50 chance of avoiding bankruptcy, has cut its average discount by almost $1,000 per vehicle, and is hoping that the robust job market will result in a company-saving sales rise at profitable prices.
THAT WILL DEPEND very much on what happens in the housing market. Last year, Americans "cashed out" some $600 billion of equity from their homes, funding almost 8 percent of their spending at the malls, shops, spas, and on vacations. If house prices decline, or even stop increasing, such equity withdrawals could fall sharply, and with them consumer spending. Worse still, if the housing market slows, the jobs market is likely to weaken. Xiuyue Zhu, a researcher at the Hudson Institute, estimates that almost 5 million workers are involved in the building, financing, and other aspects of the housing industry. That's one out of every 28 jobs in America.
That's why there were shudders among economy-watchers when Toll Brothers, a leading builder, reported that contracts for the purchase of its new homes (average price $679,000) failed to increase in its most recent quarter. As with sales of pick-up trucks and SUVs, it is difficult to tell whether this is a temporary blip in response to the pressure recent gas prices put on family budgets or a permanent reaction to higher interest rates and what Goldman Sachs' economists call a sharp worsening in "housing affordability."
Market data are not much help. The prices of new homes are declining in the face of rising inventories of unsold houses, and the need of highly leveraged builders to meet rising interest payments. The Washington, D.C. area is particularly hard hit, with listings up and sales down, according to Metropolitan Regional Information Systems, Inc. Some builders around the country are offering inducements such as free golf-club memberships to persuade hesitating buyers to sign on the dotted line. But prices of existing homes are firmer, as owners are in a position to sit tight rather than accept offers they consider too low.
Using the quite sensible economic proposition that "no tree grows to the sky," we can assume that the days of double-digit increases in house prices are over. But that does not mean that the housing market is likely to collapse.
Toll Brothers attributed its non-growth in good part to higher energy prices and a decline in consumer confidence. A few days after the company's announcement, gasoline prices turned down, as did natural gas prices, and the University of Michigan announced a rise in consumer confidence, although not to pre-Katrina levels.
That's the good news. The less good is that it is reasonable to assume that consumers will not tap into the value of their homes next year to the extent they have in the past. That means we have to count on business investment to pick up the slack. The business sector is clearly in a position to do just that. Corporate profits have been "on a five-year tear" according to Goldman Sachs. They grew at a double-digit rate in the first three quarters of this year, according to Thomson Financial, and will continue to do so into 2006, according to Banc America Securities. With unit labor costs rising at historically modest rates, and corporate "pricing power" on the rise, healthy bottom lines are the order of the day.
But companies are cautious. Fuel costs remain high. Interest rates are rising. Tightening labor markets may drive compensation up too fast to be offset by productivity gains. Debt-ridden consumers may finally rein in spending and start saving, especially when the shock of higher heating bills hits. The political situation is unsettling, with President Bush's waning strength threatening his ability to persuade Congress to make his tax cuts permanent. Most important, the Fed is determined to slow real growth, and few businessmen are prepared to bet against the Fed.
So the increase in business investment has slowed from the 12 percent to 14 percent range to the 8 percent to 9 percent range--not enough to make up for a sharp fall in consumer spending should consumers decide to refrain from tapping into the still-substantial equity in their homes as freely as in the recent past.
Confused? You're not alone. So for now stick with the Fed and assume that the economy will continue to grow at a rate of around 3.5 percent.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
My builder (we just bought a new home) said he hasn't seen the spike either, but he expects it.
I just looked at a chart of crude prices ...
Crude is right AT the widely-followed "200day moving average" ... if that's busted through down in the next week or so, many traders will exit post haste. These weeks coming up could be a major down move if the down trend continues, even today. Today would be a very good opportunity for a speculator on the downside to get into this market - but do it early.
>>I've seen it go down two times in the same day at some stations. I think we need to have another Congressional investigation.<<
hehehe!
Gasoline is below $2 a gallon for regular in Hampton Roads.
We lock in every year for propane sometime in the summer. The way that works, at least w/our supplier, is we pay market price even if it is lower than the cap. The locked in price rules only when the market price is above the cap.
This year, the cap was $1.53 or so. When I checked recently, wholesale propane was $.98. That should make the retail price around $1.47. That is still about $.47 above pre-panic retail of a couple of years ago.
Gas here in Western WI ranges from $2.21 at discount in the larger cities to $2.39 out in the small towns. I think it was around $2.34 when we drove through Madison yesterday. No real change in the past 12 days when we left for vacation. We have high gas taxes...around $.34, IIRC.
I had the choice of locking or capping my propane for this year. I went with a cap. Looks like I made the right choice.
Another sensible economic proposition is that when asset prices have been speculated to absurd levels (compare house prices to rents and incomes), they will drop or at the very least pause until fundamentals catch up. If one assumes a 5% rise per year in house prices, they will stay stagnant for about the next 10-12 years. OTOH, if they drop enough, the stagnation period could be shorter.
Its still 32 cents higher than it was last year at this time
"I've been wrong before, but the run-up to that 65/bbl range and "predictions of oil above $105 by brokers" seemed so much like a selling opportunity to me."
I shorted when I heard $105/barrel--it was pretty obvious that the folks saying it were running a pump-and-dump.
I know you weren't responding to me, but my gas is only about 15 cents higher than last year which is less than the difference in crude oil prices.
"What about all those experts who said oil was going straight to $100 per barrel? What are they saying now?"
Something to the effect of "I can't believe we got those idiots out there to buy long options at $70 a barrel!"
"Crude is right AT the widely-followed "200day moving average" ... if that's busted through down in the next week or so, many traders will exit post haste. These weeks coming up could be a major down move if the down trend continues, even today. Today would be a very good opportunity for a speculator on the downside to get into this market - but do it early."
First, we had the pump:
"Crude oil will reach $105 a barrel! WE'RE DOOMED! But you can profit handsomely..."
And, if you're right about what comes next...here comes the dump.
Just spin spin spin.
So then what...they get to pay out ridiculously high severance packages?
down to 1.98 in east tennesee
Of course gas is down over a $1.00 per gallon but it's because our demonRAT congress critters fixed the supply problem we had by voting for drilling in the anwr, and off the coasts and shale oil production in the central US. Additionally, the RATs approved of new nuclear plants, more refineries and tax free zones for all of the above activities. When you fill up and save money, remember to thank dirty harry and stone faced peelooser. What would we do without them. s/off
Funny you should ask. The very same economists at Goldman Sachs who predicted $105 crude are now predicting a plunge in the housing market.
Lowest I've seen:
$2.29 in Central Florida...$2.45 in South Florida.
"Funny you should ask. The very same economists at Goldman Sachs who predicted $105 crude are now predicting a plunge in the housing market."
In other words, start a panicked sell-off of REITs, and buy at the bottom of the trough.
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