June 21, 2006

Greenspans Bubble Legacy ‘Now Playing Out’

Public Radio takes a look at the legacy of the former Fed chairman. “World financial markets have been on a wild ride recently. One group of fund managers and commentators is fingering a more surprising culprit: They accuse Alan Greenspan.”

“One economist called him ‘the greatest central banker who ever lived.’ But one London fund manager begs to differ. Tony Dye says Greenspan was a disaster.”

“‘The reason for it was the mistake about puffing the bubble up and not taking the punchbowl away, because that’s what I think central bankers should be doing, in the mid to late 1990’s,’ Dye said.”

“Dye argues that Greenspan inflated the stock market bubble of the 1990s by holding interest rates too low. He failed to take the punchbowl away when the party got started. And then when the stock market crashed in 2000 he had to slash rates to rock-bottom levels and keep them there for more than a year.”

“‘Cutting rates to one percent was basically to try and paper over the cracks of all the problems that would have arisen from the stock market bubble bursting. And it’s just created more problems,’ he said.”

“The ultra-cheap credit, say Greenspan’s critics, inflated another bubble, in US house prices. And fueled an American consumer boom that sucked in yet more imports and massively inflated the US trade deficit. And by making it cheaper to speculate he also set off a tidal wave of hot money sloshing around the globe.”

“Andrew Hilton of the CSFI think tank: ‘There have been grotesque, positively grotesque imbalances in the global economy. And perhaps the US ought to have bitten the bullet earlier.’”

“Greenspan could have exercised more restraint, says Gideon Rachman of the Economist Magazine. He could have pushed up interest rates a bit higher, a bit earlier. But hailed as ‘the Maestro’ at home, popularity may have gone to his head.”

“‘Rather than taking tough and unpopular measures, Mr. Greenspan preferred to keep putting more alcohol into the punch to keep the party going, to keep his popularity growing,’ Rachman said.”

“Greenspan’s supporters say he was a great central banker because kept the US economy humming, but says author Peter Hartcher, in the process, Greenspan sidestepped a major challenge.”

“‘His challenge was, what do you do when the economy is in the grip of a mania, a bubble? He didn’t deal with it. The historical legacy will record that as his failing.’”

“That legacy, say the critics, is now playing out, as interest rates return to more normal levels.”




Bay Area Housing Market ‘Rebalancing’

Dataquick has new numbers for northern California. “Sales of Bay Area homes declined for the fourteenth month in a row in May as prices continued to slowly edge up. A total of 9,064 new and resale houses and condos were sold in the nine-county region last month. That was up 8.4 percent from 8,358 for April, and down 19.8 percent from 11,308 for May last year, according to DataQuick. Last month was the slowest May since 2001.”

“‘This is a market that is rebalancing itself after several boom years. What we’re seeing is stable core demand, and a decline in speculative and discretionary buying. These trends should continue through the summer buying season. There is uncertainty about the market after that, tied to broader economic trends,’ said Marshall Prentice, DataQuick president.”

“The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $3,091 in May. That was up from $3,048 in April, and up from $2,646 for May a year ago. Adjusted for inflation, mortgage payments are 22 percent higher than they were at the peak of the prior cycle sixteen years ago.”

“Many prospective home buyers are being sidelined by the combined effect of high home prices, more expensive mortgages and stubborn sellers.”

“‘As interest rates have gone up homes have become less affordable, and we’re at a point where people are not yet willing to cut asking prices, so there are fewer sales going on,’ said Cynthia Kroll, an economist with the University of California.”

“The once blazing hot Coastside housing market ain’t what it used to be. Inventory is up. Sales are down. And recent data suggests that even housing prices might be taking a modest dip.”

“‘I find it interesting when what people think is going on isn’t really going on,’ said Mike Schelp, a broker associate in Half Moon Bay. ‘Starting in January, inventory was already 45 to 50 percent higher than it was a year ago. People feel the market slowing down and they want to put it on Devil’s Slide, but it’s been happening for a long time.’”

“While the high inventory and longer sales cycle is bad news for sellers, it is giving buyers the opportunity to bid on places that would have been out of reach or a matter of hot competition in the last two years. Sales prices may be a bit more flexible, but are unlikely to crash, Realtors say.”

“Broker Denise Aquila said that the Bay Area won’t get the kind of price drops seen in areas like Sacramento that have a lot of land and new construction. ‘The truth of the matter is, prices aren’t going to go down to the point that people consider affordable,’ said Aquila, a board member with the San Mateo County Association of Realtors. ‘Here in the Bay Area, we are pretty insulated. It’s just a function of where we live.’”

“This is not the year for sellers to push the market, said Steve Hyman, broker in Half Moon Bay. ‘I’ve seen homes come down $50,000 to $75,000 because they were priced too high,’ he said. ‘Sellers need to listen to their agent carefully, drive around and look at the competition. It will probably be an eye-opening experience for them.’”




Revisiting ‘Condomania’ In Chicago

Chicago Business looks at a past and current condo craze. “Sara Benson acquired her first condominium in the city at the peak of the boom, back when speculators traded condos like stocks and the value of some units doubled in as little as a year. It turned out, she paid too much: $24,000.”

“That became clear when she sold the one-bedroom walkup in Buena Park for $13,000 four years later, after the Chicago condo market crashed. ‘It was a bloodbath,’ recalls Ms. Benson, a residential broker who was working as a property appraiser at the time. ‘So many developers got caught up in the excitement and frenzy of the market. During the price plummet, ‘there were owners in tears,’ recalls Ms. Benson.”

“The Chicago area led the nation in condo conversions, with almost 70,000 units converted during the 1970s. At the peak in 1979, buildings sold out in a single day. Some people bought units without seeing floor plans. The condo market ‘became the same type of cocktail-party chatter that we have today,’ says Herb Emmerman.”

“Speculators intending to quickly flip units got stuck, either selling at a loss or renting them out. Developers were forced to hire auctioneers to sell off excess units in the glutted market. ”

“After adding 13,820 condos to the downtown market in the 1970s, developers added just 5,429 in the 1980s. The nation’s top converter in the 1970s, Chicago-based American Invsco Corp, which aspired to become the ‘General Motors of real estate,’ saw its far-flung empire shrink to a fraction of its size as the market tanked. ‘In ‘80 and ‘81 it was a disaster,’ recalls its chairman, Nicholas Gouletas. ‘Before that it was wonderful.’”

“More than a quarter-century after the city’s first condo craze, or ‘condomania,’ as it was called at the time, Chicago is several years into another condo boom fueled by low interest rates, the growing appeal of city living and plenty of speculative activity.”

“In one respect, however, the market is riskier today. Most developers back then were converting apartments into condos, adding little to the overall supply of housing stock. Today, condo developers mostly are building new high-rises, adding more than 26,000 units, excluding conversions, to the downtown market since 2000. Another 8,600 units are on the drawing board for this year alone.”

“The question now is whether they should be worried about the supply of new condos. ‘There’s a lot out there,’ says appraiser and broker Mr. Howey, ‘and prices are going to have to adjust. It’s a commodity.’”

From Realtor Magazine. “Destin, Fla. based Condo Cruise Lines, which has sold out its first luxury cruise ship condominium project, says it’s already working on converting two more medium-sized ships.”

“The first ship’s condo prices started out at $349,000 and went as high as $529,000 last January. But after two price increases, the condos that are left range from $562,000 to $1,280,000, says Thomas Blackburn, the company’s senior VP.”

“‘We didn’t sell a single $349,000 suite as most people were looking for the higher rental income from the larger suites,’ he says. ‘So we eliminated the small, single suites and converted them to larger three-room penthouses and sold out.’”




‘The High-Stakes Game Of Musical Chairs’

Business Week looks at the homebuilder numbers. “It looked like there was finally a bit of good news in the housing sector, when the government announced a rebound in home construction for May. But dig into the data, and the picture for housing is only getting worse.”

“Permits for construction; a better indication of where the market’s headed; continued to decline. Homebuilders are getting increasingly pessimistic, according to a survey that is more up-to-date than the government data. And homebuilder stocks are continuing to slump.”

From Danielle DiMartino. “After I had mulled over the troubling 5 percent rise in May housing starts, a brilliantly simple explanation hit my inbox. ‘Builders with no starts are ‘unemployed,’ wrote James Bandy of Dallas, ‘and they will never be voluntarily unemployed.’”

“Mr. Bandy said he recalls Texas in the mid-1980s well enough to recognize the sequel to the high-stakes game of musical chairs. Given that we all know how the game ends, it’s hard to see why so many builders continue to be willing participants. Yet they play on.”

“Inventories of new and existing homes are at the highest levels ever recorded. Wouldn’t it be smarter to show a bit of restraint and shelter what profit margins do remain? It’s not as if retaining sales volumes to keep up appearances is still a legitimate excuse. Wall Street long ago pummeled homebuilder stocks.”

“Rather than pile on more incentives to stanch plummeting demand, those with an eye on survival could simply cancel, or at least postpone, groundbreakings.”

“Besides, there’s something to be said for the greater good here. ‘A declining housing market could be more damaging than estimates, because the housing sector boom accounted for over 40 percent of the jobs created in the current expansion,’ (economist) Asha Bangalore told her clients.”

“And then there’s the vulnerability of so many young homeowners who’ve been hoodwinked by the lending community. Why worry about a mortgage blowing up, after all, if you can immediately sell it in the wide-open collateralization market?”

“In 1992, 40 percent of those tapping adjustable-rate mortgages had high incomes. Only 25 percent were among the lowest earners. Today, those figures have flip-flopped.”

“It’s painfully apparent that, somewhere along the way, the industry abandoned concern for its customers’ long-term well-being.”

“Maybe builders just don’t appreciate how critical a role they play. Oversupply is but one issue when viewed in isolation, as is the risk to the labor market, as is the threat to the banking system. Add them together, though, and we’re talking about a seriously brutal session of musical chairs.”




‘People Don’t Want To Be A Homeowner’ In Boston

The Boston Globe reports on the latest Census figures. “Boston lost 30,107 residents in the first half of this decade, a precipitous drop that ranked the city among the biggest population losers of any major municipality in the country, according to US Census Bureau estimates to be released today.”

“In May, a Globe survey of 524 people who left Massachusetts last year showed the top reasons people gave for moving was a better job, followed by the cost of housing. Economists said that the high cost of housing in Boston, compared with other US regions, is one of the main reasons people are leaving the city for more affordable housing outside the state.”

And the Globe looks at the rental market. “Rents are rising around Boston for the first time in five years. The average monthly rent in Greater Boston climbed to $1,355 this spring, up 3.6 percent from a year earlier, according to a survey. The rental rate is now the highest it’s been since 2001 and halts four years of declines. The national market also peaked in 2001 but has started to rise again recently, too.”

“Surging mortgage rates, high home prices, and a belief that prices may tumble are driving more people to give up on or postpone buying a home and to rent instead.”

“Kevin Mulrenin, a police officer in Amesbury who once built his own house and later sold it for a profit, considered buying a house or condo but said he couldn’t ‘get over the fact I felt I was being completely ripped off by the building industry.’ So he rented a one-bedroom apartment in Amesbury.”

“He currently pays $750, his half of the rent for a two-bedroom Colonial he shares. While he doesn’t think house prices will crash, he said renting is his best move, because prices will fall and provide a better buying opportunity later.”

“New luxury apartments with steep rents are rapidly coming on line. As luxury apartments are leased in the suburban market, they pull up average rents. In the past year, 8,730 apartments were taken by renters in Greater Boston, compared with just 1,578 the prior year, and about $20 billion in apartment projects are under construction, said Tom Meagher, president of Northeast Apartment Advisors.”

“‘In the face of tepid job growth and a condominium market that hasn’t died,’ he said, ‘the fact the rental market has done this well is remarkable.’”

“Buying property ‘is less attractive than it was a year ago,’ said Meagher. In a housing boom, he said, people ‘make sure they don’t miss the train when rising prices might freeze them out of the market. It works in reverse if prices are in decline. People don’t want to be a homeowner.’”




‘Pendulum Is Now Swinging The Other Way’: California

The LA Times looks at the new UCLA report. “The UCLA Anderson Forecast said in its latest quarterly outlook to be released today that home prices probably would not fall much from current levels. ‘Absent a recession, the price of a home five years from now is not likely to be substantially lower than it is today,’ UCLA economist Ryan Ratcliff said.”

“The slowing housing sector has placed California’s economy ‘at a tipping point,’ UCLA economist Ratcliff said. Because real estate has been a major driver of economic growth, its retrenchment is bound to have some consequences.”

“Nonetheless, the latest DataQuick data was the strongest indication yet of how the balance of power in the region’s real estate market has shifted from sellers to buyers in recent months. ‘The pendulum is now swinging the other way,’ said David Burger, an Encino-based real estate agent. ‘A year ago there were lots of offers. Now we have more homes and fewer deals.’”

“He should know. For the last five weeks, Burger has been trying to sell a three-bedroom house for a client in Burbank for a recently reduced price of $875,000. The house on Olive Street is competing with 94 other listings in the vicinity, about four times what was for sale there a year earlier. ‘This house a year ago would have sold in about two weeks,’ he said. ‘Two years ago, in a day.’”

“This year 50% more homes have come on the market regionwide versus the same time a year ago. The number of transactions that closed in May fell 11.7% from a year earlier, the slowest May since 1999. It was the sixth consecutive month that sales volume declined, DataQuick said.”

“All but one county saw a drop in sales last month, with Orange County posting the biggest year-over-year decline at 31.6%. The markets that were first to see their prices skyrocket six years ago are now showing the weakest price gains. San Diego County, for example, gave up a year’s worth of gains in May.”

“Tiprin Follett knew the housing market was downshifting when she put her South Pasadena home on the market nearly three weeks ago. So she listed her four-bedroom house at $1 million, which was below the neighborhood’s average price. She figured that tactic would attract loads of prospects. It did. More than 150 people have streamed through Follett’s home since it was listed. But not one offer.”

“‘It’s as if they’re waiting for something better or less expensive to come up,’ Follett said.”

“Wes and Brooke Gavins have been shopping for a home for the last six months but are reluctant to make an offer. Prices seem too high, they say, and with more homes to choose from, there’s no pressure to act hastily. ‘But it’s still tough to find deals,’ said Wes. ‘You don’t want to be the one to overpay.’”




Bits Bucket And Craigslist Finds For June 21, 2006

Post off-topic ideas and craigslist finds here! Links to webpages with homebuilder incentives are also appreciated.