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For Housing Crisis, the End Probably Isn’t Near

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April 22, 2009 – Comments (5)

The NYT, which has some serious financial problems of its own (see article: Times has only $34 million left in bank), published a great piece today on why home prices are likely to continue falling by at least another 15% even though they are close to "fair value" in terms some metrics like their relation to rent and income.

The author contends that one can only see the real story with housing by visiting real live auctions and seeing the extremely low prices that homes are selling for right now.  Here are a few typical examples of homes that were sold at the auction that was described in the piece:

Yet as soon as the auction began, it was clear that the pitch wasn’t working.

The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000...

On Sunday, my colleague Carmen Gentile went to a larger auction, in Miami, to see if my experience had been unusual. It wasn’t. The homes there also sold for just a fraction of what they would have even a year ago. The rate of decline in Miami hasn’t even slowed noticeably in recent months, according to data kept by Real Estate Disposition Corporation, known as R.E.D.C., which runs the auctions.

A recently transplanted New Yorker named Michael Houtkin won the bidding on a one-bedroom condominium on the outskirts of Boca Raton, a few blocks from three golf courses, for the incredible price of $30,000. “Things were almost being given away,” he said later.

Banks are still overwhelmed with foreclosed properties.  After holding off for a while to see what sort of assistance the Obama administration was going to provide homeowners, banks have ramped up foreclosures again.  Home prices will likely continue to fall until the rate of foreclosures slows.

Goldman's chief economist, Jan Hatzius, believes that home prices will drop another 15% nationally before they hit a bottom.  This is bad news for banks because as JPMorgan's CFO recently put it banks will continue to be under pressure “until home prices stabilize and unemployment peaks.” because defaults will continue to rise and their value of their toxic assets will continue to fall.

For Housing Crisis, the End Probably Isn’t Near

I also came across an outstanding report from Wachovia titled The Unsustainable Healthcare Spending Path that's a must read.  It seems to me as though healthcare companies might be a good short going forward.  Here are a few highlights:

National health expenditures account for about 16 percent of GDP. This number, the world’s highest, is increasing every year because expenditures are growing at a faster pace than the overall economy.

Medical goods and services account for an ever-rising share of personal consumption. Expenditures on medical care and goods represent over 20 percent of total spending, far more than housing, the next largest category (Figure 3). That is, for every $100 spent, $20 goes to healthcare—in the 1960s this amount was closer to $6. In consequence, other industries suffer at the hands of the healthcare behemoth because consumption in those sectors is being crowded out. Other types of discretionary spending and especially nondiscretionary outlays are fighting for a portion of a smaller pie, which hurts the dependent industries. Healthcare is not only the largest sector; it is also the fastest growing (Figure 3). In this way, healthcare spending adds up significantly—to a point that has become unsustainable. By the end of the projection period, 2018, it is estimated that healthcare expenditures will be one-fifth of GDP or $4.4 trillion. The trend can and will most likely continue, but not indefinitely.

The most recent data available put annual per-capita healthcare spending at $7,421.5 This distinguishes the U.S. healthcare system from other nations because the figure is greater than $2000 higher than even the next highest country, Norway, making the U.S. an extreme outlier.

I definitely want to talk about the rising cost of healthcare and possible shorts in the sector more, but I've got to run for now.

Deej

5 Comments – Post Your Own

#1) On April 22, 2009 at 7:26 PM, angusthermopylae (39.26) wrote:

This is the "reverberation" that I sometimes refer to--the shocks to the system (housing prices), initial damage (banks, mortgages, etc), and then the traveling waves of damage, destruction, and adjustment that spread and rebound throughout the economy (banks "say" they are doing better, then they try to unload all the foreclosed properties they are stuck with, causing another dip in the economy.)

Ever take a barrel or bucket full of water and tap or bang on the side?  If you time everything one way, you get fairly smooth and stable oscillations in the water....

...bang on it too hard, too often, or at random or improperly spaced sides and timing, and the waves start to interfere with each other, making the surface choppy.  The center starts doing some strange things, too--spitting out water, spashing, causing other counter-forces that destabilize the whole thing.

That's our economic situation in a nutshell--all the shocks and countershocks are piling up...causing a chaotic and destructive surface.  Let things settle how they may, and the system will reach a known state that can again absorb some pretty big shocks.

Wait until Bailout II, to be quickly followed by Rise of the Undead Fed Rate:  He Grows and Grows.

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#2) On April 22, 2009 at 7:41 PM, DemonDoug (80.36) wrote:

National health expenditures account for about 16 percent of GDP. This number, the world’s highest, is increasing every year because expenditures are growing at a faster pace than the overall economy.

I definitely want to talk about the rising cost of healthcare and possible shorts in the sector more, but I've got to run for now.

Deej

--------

Deej, make sure you take demographics into account.  A lot of blame is being put on the "system" when it is a matter of simple demographics that is main cause of the rise in health care.  The baby boom generation is getting older, and therefore, sicker, and creating this boom in demand for health care.  This is something that many have seen and known for quite some time; in my own profession within rehab services, it had been touted as one of the jobs that would be growing and in demand over the next 20 years, and based on my current patient census, it certainly is.

This problem is going to only get worse.  There are certainly many factors affecting the cost of healthcare, but they ALL stem from the crushing demand that an aging baby boom population is putting on the health care industry.  dwot has mentioned this quite a bit, especially regarding pensions, but it applies to healthcore more than any other sector.

Just consider, deej, you are a car guy right?  When the boomers were in their prime earnings years, (1975-2005, ballpark), demand for cars shot up through the roof.  Now that those people are slowing down, don't need a van/suv to shlep the kids around, and aren't bringing in the income to afford that new BMW every other year, it shouldn't be surprising to see that slowdown in car sales.  dwot and others have actually pointed this out in regards to the stock market - boomers will likely be selling their stocks to fund retirements, and the question is are there enough people in subsequent generations to fill the demand for their buy orders?

Regarding the healthcare cost issue, I'd like to point something else out.  When demand starts outstripping supply, especially in a heavily regulated industry, the costs start to skyrocket, especially if that demand is inelastic.  (Ah yes, that archaic economic term, elasticity.)  With an inelastic demand, the consumer of that service generally has their cajones in a vice grip.  Consider that overall healthcare spending would be going up, even if prices of health services were held at the same levels as 10 years ago, simply due to more people accessing the system.  Add on top of that increased prices, and you have that recipe for disaster that is the current cost of health care.

One final thing I'd like to note about health care issues is that reforming or even tackling health care policy is, IMO, the HARDEST thing to do.  The Iraq War is like baking cookies in comparison to solving the health care crisis.  There are so many considerations one must take into account, not just cost on the basic level, but ethical decisions concerning illegal aliens showing up at hospitals, children with severe disabilities that will never be productive in society but will drain public dollars, severely ill elderly people who generate hundreds of thousands in medical bills for end of life care, prescription drugs, and even things most people don't talk about like the expense of requiring 24 hour nursing for all inpatients with certain ratios of nurses to patients, or requiring rehab services on weekends and holidays (your truly often works on christmas, and knows plenty of MD's who bite that bullet on a yearly basis).

This is not even to begin to talk about malpractice insurance, lawsuits, the cost of medical school, modern advances in drugs/medical technology that are more expensive, on and on and on...

The only thing I know for sure is that demographics tell us that things are going to get worse, possibly way worse, before they get better.

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#3) On April 23, 2009 at 6:08 AM, TMFDeej (99.43) wrote:

Very good point, Doug.  I have been paying a lot of attention to demographic trends lately.  The fact that Baby Boomers have passed their peak spending years is one of the reasons that I am fairly sure that we are headed for a period of much slower growth than we have experienced over the past decade.

The aging U.S. population is a tailwind for many healthcare companies.  Having said this I still think that the system has some major inefficiencies that need to be wrung out of it.  Finding outwho will be hurt in the process is the tricky part.

inVentiv a company that I've identifiedas one that benefits from an inefficient part of the system, pharma marketing.  I wrote about it the other day.  The problem is that its stock has already been crushed so I would be hesitant to short it in real life.

inVentiv has gotten absolutely hammered, but is it cheap enough?

Deej

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#4) On April 25, 2009 at 10:04 AM, decampkev (79.34) wrote:

You all bring up very good points about health care.  I am very interested in demographic trends and I am constantly trying to figure out what the aging baby boomers are going to mean long term for health care, medicare, our future economy, etc.  I am actually a young CAT scan technologist who deals with many of our health care issues on the frontline every day (usually 7 days a week).  Tackling our health care problems is undoubtedly one of the most difficult and most important issues of our time.  I do not claim to fully understand all the complicated dynamics that exist within our current system, let alone the dynamics of a future "better" system.  However, I must say that as I gather more and more information on a daily basis (both from experience and research), I feel that it is useful to look at the positive things that come out of the aging baby boomers in contrast to the (more obvious) negative things.

From my perspective the demographic trends in the U.S. are a good thing because, to put it simply, it pretty much means job security.  In the context of our current economic situtation the health care field is obviously very important in keeping people employed.  Although the hospitals in general have been severely hurt by the economy just as everyone else, the employment situation has remained relatively stable compared to the widescale layoffs seen in other industrys.  I have been out of school for 6 years now and I cannot emphasize enough how drastically the employment landscape has changed because of technological advances.  The list of radiology niches has gotten longer and longer including growth in MRI, CAT, nuclear medicine, PET, radiography, mammography, ultrasound, bone densitometry, and angiography.  These specialties and subspecialties in medical imaging have become more in more important in patient diagnostics and have thus created more and more jobs.  In our current economic situation I have obviously become more aware of how lucky I am to be in this field, not only for the obvious security in bad economic times but also because of the continuing loss of jobs to overseas workers as the global economy continues to evolve.

Thinking forward to the drain on the system that our nations demographics will have on the medicare system, we cannot forget to consider the economic implications of all the people that will be employed to take care of this enormous population.  One of the things that our current economic situation reminds us of is how important employment is.  Applications to the radiography school that I attended have increased substantially which is a demonstration of how populations adapt to employment situations.

In terms of illegal aliens being an issue, I can attest to this because I scan hundreds of them a year.  My hospital absorbs these "freebies" and they probably increase our health care costs overall.  However, trying to look at the bright side I believe that they are an important part of our economy and that the few that stay and settle down and have a family will be important to our nations future because their kids will be the ones that will be contributing to my medicare withdrawals (among other things).  I read somewhere that we are one of the few developed nations that is actually increasing in population which is incredibly important to future economic growth and we have these immigrants to thank for this.  As a side note, just think of what the unemployment rate would be if we actually accounted for all the illegal immigrants that lost their jobs due to the housing collapse or just imagine if there were no illegal immigrants in the housing industry and all those jobs lost were legal, on the books, american workers.  The numbers would be much worse.  Their existence makes our economy much more productive and resilient.

 Obama's health care goals definitely make me a little nervous, but I am trying to believe that the employment situation that I have touched upon will be seriously considered in any of these plans and the implications on this situation of a total socialized system will be taken into account.  I need to learn more about his goals because obviously this is important to my future.  Has anyone taken an in depth look at this?  What is he seriously considering changing and what is just rhettoric?

 

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#5) On April 25, 2009 at 10:09 AM, decampkev (79.34) wrote:

You all bring up very good points about health care.  I am very interested in demographic trends and I am constantly trying to figure out what the aging baby boomers are going to mean long term for health care, medicare, our future economy, etc.  I am actually a young CAT scan technologist who deals with many of our health care issues on the frontline every day (usually 7 days a week).  Tackling our health care problems is undoubtedly one of the most difficult and most important issues of our time.  I do not claim to fully understand all the complicated dynamics that exist within our current system, let alone the dynamics of a future "better" system.  However, I must say that as I gather more and more information on a daily basis (both from experience and research), I feel that it is useful to look at the positive things that come out of the aging baby boomers in contrast to the (more obvious) negative things. 

From my perspective the demographic trends in the U.S. are a good thing because, to put it simply, it pretty much means job security.  In the context of our current economic situtation the health care field is obviously very important in keeping people employed.  Although the hospitals in general have been severely hurt by the economy just as everyone else, the employment situation has remained relatively stable compared to the widescale layoffs seen in other industrys.  I have been out of school for 6 years now and I cannot emphasize enough how drastically the employment landscape has changed because of technological advances.  The list of radiology niches has gotten longer and longer including growth in MRI, CAT, nuclear medicine, PET, radiography, mammography, ultrasound, bone densitometry, and angiography.  These specialties and subspecialties in medical imaging have become more in more important in patient diagnostics and have thus created more and more jobs.  In our current economic situation I have obviously become more aware of how lucky I am to be in this field, not only for the obvious security in bad economic times but also because of the continuing loss of jobs to overseas workers as the global economy continues to evolve.

Thinking forward to the drain on the system that our nations demographics will have on the medicare system, we cannot forget to consider the economic implications of all the people that will be employed to take care of this enormous population.  One of the things that our current economic situation reminds us of is how important employment is.  Applications to the radiography school that I attended have increased substantially which is a demonstration of how populations adapt to employment situations. 

In terms of illegal aliens being an issue, I can attest to this because I scan hundreds of them a year.  My hospital absorbs these "freebies" and they probably increase our health care costs overall.  However, trying to look at the bright side I believe that they are an important part of our economy and that the few that stay and settle down and have a family will be important to our nations future because their kids will be the ones that will be contributing to my medicare withdrawals (among other things).  I read somewhere that we are one of the few developed nations that is actually increasing in population which is incredibly important to future economic growth and we have these immigrants to thank for this.  As a side note, just think of what the unemployment rate would be if we actually accounted for all the illegal immigrants that lost their jobs due to the housing collapse or just imagine if there were no illegal immigrants in the housing industry and all those jobs lost were legal, on the books, american workers.  The numbers would be much worse.  Their existence makes our economy much more productive and resilient. 

Obama's health care goals definitely make me a little nervous, but I am trying to believe that the employment situation that I have touched upon will be seriously considered in any of these plans and the implications on this situation of a total socialized system will be taken into account.  I need to learn more about his goals because obviously this is important to my future.  Has anyone taken an in depth look at this?  What is he seriously considering changing and what is just rhettoric?

 

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