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Report – GRX Quarter 3 2010

In La Bourse on October 1, 2010 at 3:21 AM

The Georgia Real Estate Index (GRX) is an economer-original index composed of 3 publicly-traded companies headquartered in Georgia: Beazer Homes USA, Inc., Cousins Properties, Inc. and Post Properties, Inc. Together the companies construct a market capitalization-weighted approximation of the Georgia real estate market. Read the previous article — GRX — for an explanation of the index. With third quarter results in, here is the fourth inspection inside the Georgia Real Estate Index.

Measured from June 30, 2010 through September 30, 2010, the GRX index has increased 19 percentage points over the past quarter; and 37 percentage points in year-to-year terms since September 30, 2009. Favorable direction of improvement in the index nonetheless accompanies considerable uncertainly in the economy as we enter the month of Brumaire, a hyper-volatile time period for equities, e.g., see the Bloomberg depiction of the VIX historically. Referenced below in the following figures, the 3-component index is conventionally referred to as — GRX[3]. Time-series numbers comprising the underlying data for the graphs are provided under the section on the home page entitled — Indices.

Moreover, also provided here is the 7-component market capitalization-weighted index called GRX[7]. The corollary GRX[7] index is composed from the 3 original components in the GRX[3] and a few residual younger real estate investment trusts (REITS): Invesco Mortgage Capital, Inc. and Roberts Realty Investors, Inc. Included are buildings contractor Servidyne, Inc. and buildings operator Piedmont Office Realty Trust, Inc., representing SIC codes 1540 and 6512, respectively.

Interestingly, an important, leading driver encouraging corporate companies’ propensities to invest in the future has been uncovered in a recent NBER paper by Chaney, Sraer and Thesmar (read NBER Digest, September, 2010). According to the authors, quantatatively, “using data from 1993-2007, they find that when the value of a firm’s real estate appreciates by $1, its investment increases by approximately 6 cents.” Economically, this variety marginal impact on household consumption spending has been referenced as the “wealth effect” previously by many, so it is now interesting to see some measured numbers associated with encouraged firm-level investment spending.

For a view closer to home, the AJC newspaper has recently catalogued some household wealth findings released by the Census Bureau — read “Metro Atlanta and Georgia Households Take Income Hit.” One may find it interesting to compare a small sample-size view of median househould income in Georgia measured against Georgia home prices. Information in the graph below is sourced through the Census Bureau and the Federal Housing Finance Agency (FHFA), comparing just that.

Interpretation reads, for every 1 percent increase in Georgia house prices, there is an associated 0.77 percent increase in Georgia median househould incomes on average, holding all else constant. According to the data provided, the largest decline in the Georgia home prices index on record occurred in 2007/08, pairing with a 5 percent decline in Georgia median household wealth over that same interval.

Given the uncertainty generalized in financial headlines and major world events, it is interesting to concentrate one’s mind on economic prescriptions being recommended by a few major, respected economists. Interestingly, currently Nouriel Roubini, the New York University professor, and Robert Reich, the University of California, Berkeley professor, have come out suggesting more consumer-targeted stimulus measures. In particular, they are both advocating passage of expectation-controlled, temporarily-issued tax reductions for individuals earning under $250,000 per year. Reich is also discussing implementing a government subsidy program for individuals on unemployment insurance who would be willing to take a lower-paying job in exchange for an interim subsidized period with the goverment covering the income gap when deemed economically mutually cost-effective for both parties, a sort of “PPIP Part II,” with a more classical, demand-side economic attack.

Home prices are still languishing in unkown territory. According to Mortimer Zuckerman, chairman and editor in chief of U.S. News & World Report, writing just this past month in a Wall Street Journal op-ed, “A well-balanced housing market has a supply of about five to six months. These days the inventory backlog has surged to about a 12 1/2 months’ supply. This explains why average sale prices have been declining for so many months.”

Market particants like John Geanakoplos of Yale University and a hedge fund investor, as well as Bill Gross, managing director of Pimco, are similarly encouraging more federal engagement/stimulus particularly in resolving housing stabilization projects, e.g., federally assistive mass mortgage modification organizing prescribed by the former, and continued government assistance for the Fannie Mae and Freddie Mac organizations over the next 10 to 15 years prescribed by the latter. Read “The Great Debt Drag” and “How to Fix the Economy: An Expert Panel” for respective viewpoints.

For a fresher theory-centered presentation/justification of conditions under which a fiscal stimulus will generate the biggest “bang for the buck”, read Christiano, Eichenbaum and Rebelo’s recent paper entitled “When Is the Fiscal Spending Multiplier Large?” The NBER concisely summarizes their findings as follows, “A key determinant of the size of the multiplier is the state of the world in which new government spending comes on line. If it comes on line in future periods when the nominal interest rate is zero, then there is a large effect on current output.”

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