Monday, May 22, 2006

(Edina, MN) Two Americas in the Second America

by Tom Bozzo

Driving around this upscale Minneapolis suburb, you can't miss the signs of the late boom and incipient bust of the housing economy.

New high-end houses are springing all over from the foundations of what passed for affordable housing (i.e., affordable to the upper-middle class, not just the upper), even as "price reduced" is now as common as "sold" on the for-sale signs whose increased density is immediately apparent. The owners of the former may grit their teeth while filling up their Porsche Cayennes, but it's the fate of the owners of the latter that will tell whether Ben Bernanke is whistling through the graveyard in describing an orderly cooling of the market. The standard story is that we're seeing the return of normal supply-and-demand conditions, but the real question is whether the peak price levels are sustainable under such conditions.

That's of paramount importance to recent buyers who "solved" the affordability conundrum with advanced lending technology: among several warning signs reported in a Wall Street Journal article last week, recent studies showed zero or negative equity for 29 percent of 2005 mortgage originations and (not coincidentally, we'd suppose) increased delinquency rates for 2004 and 2005 mortgages. Barring a rapid turnaround, there aren't enough markets that haven't already peaked to give those owners unpleasant surprised should they need to sell in the near term.

But the consumer economy has been fueled to a remarkable extent by the consumption of rapidly growing home equity wealth through the bubble-like period, too. As a result, we're increasingly dependent on the 'fundamentals' of the economy. Eeeek?!
Homebuyers have been told by Messrs. Greenspan, Kudlow, etc. for years that it's fine to treat income as EBITDA, the same way TWX did throughout the 1980s (and still does, to some extent; paying Chris-Craft to take them over is still a liability, long after Steve Ross passed this mortal coil).

The result was summarized a few days ago by Ben Sargent.
Ken said: "treat income as EBITDA, the same way TWX"

Kim said: Huh? TWX is, I gather, an acronym for a stock, probably of a developer/housing company.

EBITDA just confuses me.
TWX = Time Warner Inc. -- Steve Ross is the guy who in effect created the modern media conglomerate.

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization, a measure of 'pro forma' corporate income, widely 'preferred' by some corporations to make them look more profitable than they really are. (Think how much nicer anyone's household bottom line would look if you reported the income while neglecting to mention the bills needing to be paid.)
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