World View: Financial Reporters Spin Home Prices Report as Good Economic News

This morning’s key headlines from GenerationalDynamics.com:

• Japan and Taiwan have military confrontation with water cannons
• China says ‘Fascist’ Japan must ‘abandon illusions’ about Senkaku/Diaoyu islands
• China launches first aircraft carrier into formal service
• Media gushes over home prices, triggering great hilarity

Japan and Taiwan have military confrontation with water cannons

With China and Japan close to a military confrontation over theSenkaku / Diaoyu islands, Taiwan decided to stake its own claim.Taiwan sent 40 fishing boats and eight Coast Guard vessels fromTaiwan to the disputed islands, to establish the right tofish in the territorial waters. The Japanese Coast Guardfired water cannons on the fishing boats, in order to force themto leave, and Taiwanese Coast Guard vessels returned fire withtheir own water cannons. The Taiwanese boats left aftera few hours. 

This skirmish was the most dangerous so far, since water cannonsare far from harmless. Taiwan’s third party role in the Senkakudispute is an interesting development, because Taiwandoes not want to be invaded by China, which means that Taiwanand Japan are natural allies. Thus, we can imagine twopossible scenarios:

• One possible scenario is that Taiwan and Japan will come to a deal and make a unified stand against China, with the support of the United States.
• Another possible scenario is that Taiwan will join China in opposing Japan for this purpose of controlling the Senkaku islands, provided that China first promises not to take advantage of the situation to invade Taiwan. This situation would pose an issue for the U.S. since U.S. has defense treaties with both Taiwan and Japan.

VOA

China says ‘Fascist’ Japan must ‘abandon illusions’ about Senkaku/Diaoyu islands

As the level of anger between China and Japan over control of theSenkaku/Diaoyu islands in the East China Sea continues to escalate,Japanese and Chinese officials held a meeting in Beijing with thedeposits surrounding the island. However, China’s Foreign Ministryissued a very harsh statement following the meeting: 

On September 25, consultations on the issue of DiaoyuDao Islands were held by Chinese Vice Foreign Minister ZhangZhijun and Japanese Vice Foreign Minister Chikao Kawai in Beijing,during which the two sides had a candid and in-depth exchange ofviews.

Zhang Zhijun pointed out that Diaoyu Dao and its affiliatedislands have been China’s sacred territory since ancient times, ashistorical and legal evidences have shown. The Japanese side,however, has disregarded the repeated and stern representationsmade by the Chinese side, denied the important understanding andconsensus reached between the older generation of leaders of thetwo countries, and openly took the illegal actions ofevidences. These acts constitute a gross violation of China’sterritory. They are highly offensive to the 1.3 billion Chinesepeople, and gravely trample on historical facts and internationallaw. It is an outright denial of the outcomes of the victory ofthe World Anti-Fascist War and poses a grave challenge to thepost-war international order. Historical verdict can never beoverturned; consensus must not be rejected; and flouting people’saspiration will not be tolerated. The Chinese side will absolutelynot tolerate any unilateral action taken by the Japanese side thatinfringes on China’s territorial sovereignty. The Japanese sidemust abandon any illusion, face up to its erroneous actions andcorrect them with credible steps. It should recommit itself to theconsensus and understanding reached between the leaders of the twocountries and meet China half way so as to bring China-Japanrelations back onto the right track of sound and stable growth atan early date.

As time goes on, the following becomes increasingly clear:

• As the generations of survivors of China’s last generational crisis war, Mao’s Communist Revolution, disappear once and for all, younger generations are becoming increasingly nationalistic and belligerent, not only toward Japan, but toward the West in general, and are preparing for war.
• China will go to war with the Japanese over the Senkaku islands.
• The Chinese are furious that Japan defeated them in the conquest of Korea in 1894.
• The Chinese are furious about Japan’s 1931 invasion of Manchuria.
• The Chinese are furious about Japan’s 1937 Nanking massacre. (From 2007: “Chinese commemorate the 1937 Massacre at Nanking (Nanjing),”)
• The Chinese are furious that the Japanese used Chinese
• The Chinese would not be satisfied if Japan simply concedes the Senkaku islands to China. I believe that the young nationalistic Chinese generations want full military revenge against the Japanese, and are planning an invasion of Japan.

China’s Foreign Ministry

China launches first aircraft carrier into formal service

China sent its first aircraft carrier into formal service on Tuesdayin a show of force. The aircraft carrier is refitted from a shipbought from Ukraine, and will have a limited role, mostly for trainingand testing, until the planned launch of China’s first domesticallybuilt carriers after 2015. Reuters

Media gushes over home prices, triggering great hilarity

Home prices since 1987 (Case-Shiller/S&P)

On Tuesday morning, S&P released the July Case-Shiller homeprice report, showing a 1.6% increase, compared to the previousmonth.

The first story I saw was CNN’s coverage:

Home prices at 9-year highBy Chris Isidore @CNNMoney September 25, 2012: 9:08 AM ET

Home prices are back to 2003 levels in the latest sign of animproved housing market.

In another sign of a turnaround in the long-battered real estatemarket, average home prices returned to the best level in nineyears in July.

Unfortunately, this is typical of what passes for financial journalismthese days. Chris Isidore is apparently supposed to be a financialreporter, but he apparently doesn’t even know that there was areal estate bubble that peaked in 2007, as you can easily see from thegraph. Or maybe he doesn’t know how to read a graph. Or maybehe just wanted to help out President Obama in his reelectionbid, and purposed lied in the story.

An hour later, the story changed to:

Home prices rebound

By Chris Isidore @CNNMoney September 25, 2012: 10:11 AM ET

Home prices are back to 2003 levels in the latest sign of animproved housing market.

In another sign of a turnaround in the long-battered real estatemarket, average home prices rebounded in July to the same level asthey were nine years ago.

Here’s more hilarity. The Bloomberg story says:

Home Prices in U.S. Rose More Than Forecast in Yearto July

By Michelle Jamrisko on September 25, 2012

Home prices in the U.S. climbed more than forecast in July from ayear earlier, adding to signs that housing will spur economicgrowth.

And so, I guess that home prices rose MORE than forecast. But here’sthe Reuters story:

U.S. home prices rise less than expected in July-S&P

U.S. single-family home prices rose for a sixth month in a row inJuly, though the improvement was not as strong as expected, aclosely watched survey showed on Tuesday.

So I guess that home prices rose LESS than expected, not more thanexpected.

This is all so pathetic. What’s the real story?

I’ve written a number of times in the past that, based on my ownestimates, home prices will continue to fall to their levels in theearly 1990s, or possibly worse. You can see that by simply applyingthe Law of Mean Reversion to the above graph.

And it turns out that Gary Shiller, one of the authors ofthe Case/Shiller report, agrees with me. According to hismonthly “insight” client newsletter, he expects home pricesto drop another 20%. He gives several reasons:

• There are still about 2 million excess housing inventory units.
• Prices still have not fallen to anywhere near long-term historical averages.
• Home ownership in the U.S. is still plummeting. And there is a clear inverse correlation between the rate of home-ownership and the percentage of 25-34 year olds living in their parents’ homes (which is still skyrocketing).
• There are around 5 million delinquent mortgages and foreclosures that add to the supply, and there are millions of homes in the “shadow inventory” that aren’t currently listed for sale.
• The proportion of mortgages originated between 2008 and 2011 that are seriously delinquent (90+ days) is rising.
• Home prices need to drop another 22% to reach their 1890-2000 long-term average

So are the reporters who write these stories stupid or lying? I don’tknow. I report, you decide. 

These figures make it clear that you should not buy a house under almostany circumstances. Five years from, your house will be worth far lessthan it is today.

Standard & Poors and CNN andBloomberg and Reuters and Business Insider

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