‘Housing Boom Is Coming To An End’: WSJ
The Wall Street Journal has this look at the housing markets ‘landing.’ “Home prices in some parts of the country are falling. Builders are scaling back. Bubble or not, the biggest housing boom in recent U.S. history is coming to an end. Now here is the big question: How bad will the aftermath be?”
“‘We could be underestimating the dark side,’ says Mark Zandi, chief U.S. economist at Moody’s Economy.com and among the first to seek to quantify the housing boom’s broader effects. ‘Euphoria could turn into abject pessimism very quickly.’”
“Economists, however, have few clues on which to base their predictions. Today’s housing boom differs radically from its predecessors. For one, it has been bigger and longer-lived. House prices are still more than twice the level of 1991, when the boom began.”
“Much of the recent increase has been driven by an unprecedented flood of cash into U.S. capital markets. Global demand for U.S. mortgage bonds, competition among big national lenders and the advent of exotic loans have made it easier than ever to borrow money to buy a house, and to turn rising home values into cash.”
“There is reason to believe home builders will have to pull back more sharply. That is because the leveling off of house prices changes the equation of homeownership. Inflation-adjusted mortgage rates, the interest rate on a typical 30-year mortgage minus the percentage rise in home prices, are on track to turn positive for the first time since 2001.”
“When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50%, says economist Ian Shepherdson. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. ‘It’s a 15-year bubble unwinding in two years,’ Mr. Shepherdson says. ‘It’s going to hurt.’”
“Economists can’t quantify some risks, including the biggest: the chance that a sharp drop in house prices, what economists call a ‘disorderly downturn,’ would leave many homeowners owing more on their mortgages than their homes are worth. If that led to a wave of foreclosures and losses on riskier mortgage-backed securities, banks and investors could get spooked and cut back on all kinds of lending, a move that could snuff out economic growth.”
“‘For me, the risk of a disorderly downturn is the greater one,’ says Jan Hatzius, chief U.S. economist at Goldman Sachs. ‘That’s a scenario that people would worry about a lot, because typically recessions are the result of a general unwillingness to lend.’”
Thanks Ben…….
Yo! And add to this ” unwinding” the coming/continuing oil shock and we have ourselves a classic stagflation recession. Big blocks of Govt. cheese for everyone!
It is very convenient for the politicians that the Middle East issues and the oil issues are happening at the same time. This credit bubble would have exploded regardless of those issues. There would have been no one to blame but the fools giving the money (everyone with money in a bank or wrapped around MBS for starters without giving a thought to the risk) or the lenders lending it.
Now, there are many other things to blame it on which will ensure that it can happen again sometime in the future. If the actual truth came out (maybe it will on blogs, but surely not the MSM), maybe people would take the time to educate themselves instead of believing what they hear some “expert” say. This is going to be very bad, and those with holdings in US $ are going to pay for it. Sad, but true.
It took quite a long time for the housing bubble to come to a head, but the unwinding will happen very quickly. It is the difference between greed and fear.
It would be the same regardless of any issues in the Middle East. All past mania events have had their scapegoats, and this would have been no exception. It will be blamed on anyone and everyone else. Nobody wants to hear that their own poor judgment is the primary cause of their problems. Even on this blog people create villians every day out of all sorts of people.
Once the money spigot was turned on this bubble was predictable and inevitable. It’s following a set script that has been repeated many times. No amount of education, realtor codes, banking reforms, or government regulation would have changed it in any significant way. The script now calls for scapegoats and we’ll get them, I’m sure.
That’s the kind of talk I like.
Nice post.
(Still lurking.)
From the article:
“Even after the recent decline, June’s rate of home sales is 40% above the 20-year average.”
Does anyone else wonder whether the recent rate of home sales has reached a permanently high plateau?
I believe that rising interest rates are creating a sense of urgency among some buyers to “buy now or be priced out forever by high interest rates”.
My wife and I occasionally visit an open house to sort of “take the pulse” of the market from the ground level. When we leave, we always tell the Realtor®, “thank you for your time, but we are concerned about the direction of the housing market and are just going to hold-off and ‘see what happens’ for a now”. We always get the same response, “You know, prices might come down a little, but interest rates are rising and you might never be able to afford a house”.
It will be interesting to see what happens if the Fed pauses tomorrow. If rates stabilize, the sense of urgency among some buyers could also disappear. NAR might want to be careful about what they wish for.
The next time a realtor tells you that ridiculous line, go ahead and ask them “So what happens when everyone is priced out forever? What comes after that?” I turned my wife on to that one, and she loves using it on the idiots that propagate that nonsense. The response is usually a really classic stupid gaze looking right back at you.
Why even bother? You’re just trying to get a rise out of them. Just let the markets give them the lesson they so richly deserve.
I agree with you.the come home wit My wife and her sister just get a kick out of going into sales offices and messing with the sales agents head. They come home with all sort of stories of mischief. I personally just use this on people that have been told this line of crap to get them thinking for themselves how idiotic it is. It always cool to see the “think for yourself lightbulb” turn on when you ask them the question, and then have them respond by saying, “Oh yeah, that doesn’t make any sense.”
My favorite “turns on the lightbulb” response is to the “I need to buy a bigger house for the tax deduction,” meme. My response is: “Then why don’t you shop around for the highest interest rate that you can get?”
I don’t know what the heck happened to that second sentence in my reply post. Caffeine needed, bad!
Jim A,
I am one of the need to spend a little more to get the tax deduction…. Your comment makes no sense. Why would I want to pay higher interest? Wouldn’t you rather have a nicer home with more bells and whistles or a vacation home?
With that said, we are waiting this out and have the interest from two vacation homes to use in the meantime. Just because we want to get a better tax write off doesn’t mean we’re stupid.
Broadly speaking, you’re spending $1.00 to save 35¢. Now if you’re saying that paying a net 65¢ makes makes buying more house worth it to you, than go ahead, but nobody NEEDS to spend more money to get a deduciton on their expenditure.
Ummm, you do understand that for every dollar in interest you paid so you get to write it off you don’t actually get that full dollar back, right? So how is getting a bigger tax deduction saving you anything when it’s just costing you more?
If you can afford a big house with all the bells and whistles that’s fine, but I agree with Jim that people don’t understand how the write off works. My brother in law told my wife and I once to get out of our condo with a tiny mortgage into a bigger house so we can take advantage of the tax deductions. No way around it, that is a stupid comment.
Correct me if I’m wrong, but I do not think that the IRS lets you deduct the interest on TWO vacation homes.
So no, wanting to get a better tax write off doesn’t mean you’re stupid, but writing off stuff that you can’t, would.
LizzieBeth — Jim A. was pulling your leg.
Ummm, you do understand that for every dollar in interest you paid so you get to write it off you don’t actually get that full dollar back, right? So how is getting a bigger tax deduction saving you anything when it’s just costing you more?
If you can afford a big house with all the bells and whistles that’s fine, but I agree with Jim that people don’t understand how the write off works. My brother in law told my wife and I once to get out of our condo with a tiny mortgage into a bigger house so we can take advantage of the tax deductions. No way around it, that is a stupid comment.
____________________________________________________
THis one just blows my mind. Seems like 97% of the population think this way, allegdly intelligent or not. What’s so hard to understand about pay $1, get 18cents back. That’s negative savings. It’s not a handout, it’s a discount on paying something, you’re getting an 18% discount on paying, but you have to pay. Most of them just use it as an excuse to justify being shallow yuppies, but at the same time, most of them think they’re actually getting something for free. And hand in hand with that argument is people who actually want to carry a mortgage just for the deduction. If anything, it has to be mostly people who pay an accountant to do their taxes, and there’s a lot of them. Just totally naive and downright dumb.
I pay an accountant to do my taxes… and then go over it with a fine tooth comb when I get them back. I’m probably going to switch to doing it myself in a few years, but for right now I pay for the security.
It’s pretty simple in my view, you are either paying money to the bank (interest) and the government (taxes–effected by the mortgage deduction), or to a landlord (rent) and the government (taxes–not effected by a mortgage deduction). You can do the math to see if the mortgage deduction makes you better off, or worse off.
I’ve had people say to me “Without a mortgage, aren’t you getting killed in taxes?”. The answer (fortunately, since I have a good job), is yes, I’m getting killed in taxes, but I pay very little in rent relative to what my AFTER-TAX home-ownership cost would be in the same house. And in the meantime, I have the downpayment (so old-fashioned) to invest elsewhere.
Appreciation is the one thing that doesn’t come into play in the above analysis.
The right decision boils down to an expected return on the home investment, a number (which is roughly the after-tax monthly savings by renting PLUS the expected monthly return on the external investment of your down payment, all divided by the home price, annualized; multiplied by 12)–x%. If you expect the appreciation on your home to be more than x% per year, then it is a better financial decision to buy. If you believe that x% is not likely to be acheived, then it is not necessarily a good financial decision to buy.
Of course, there are other reasons to buy, but if you are buying for those non-financial reasons, then the financial side of things (including mortgage interest deduction) should be less relevant.
Blows my mind, too. I’ve tried to convince people with math and pencil and paper and they still don’t get it. They think they’re making money somehow no matter how it’s explained. It only helps somebody if they’re buying something they have to buy - a lawnmower for their rental or something. This stuff seems easy, but considering the people who don’t understand it, it must not be.
Speaking of stupidity, one of my friends signed up for one of those I/O, 100% loans that can go up TWO full percentage points per year once the teaser period is over.
When I inquired how in hell they were going to pull off the higher payment once it adjusted upward, their response was “oh please, I’m not even going to NOTICE a 2% increase in my monthly payments!”.
People wonder how stupid one has to be to purchase a home right now. Well, now you know!
“oh please, I’m not even going to NOTICE a 2% increase in my monthly payments!”.
That quote made my day, Thanks!
“oh please, I’m not even going to NOTICE a 2% increase in my monthly payments!”.
Oh , wow. Really? They actually said that? Hmm, oh man.
That’s gotta be the most amazing thing I have read in all my bubble blog reading.
I am speachless.
“oh please, I’m not even going to NOTICE a 2% increase in my monthly payments!”.
And did you explain it to him?
Do you think he actually believes a 2% rate increase, is only “a 2% increase in my monthly payment”? Could he be that fuzzy?
No…I didn’t have the heart. I learned a long time ago to just keep your mouth shut. Even now, I refuse to say “told ya’ so”.
Living well is the best way to get even.
JJNLA,
Just checked with the hubby, we write off the interest on one as it is claimed to be our primary residence(we spend more than six months a year in it) and the other we take the depreciation as we do rent it out. I am not a financial expert, I only know that we would rather pay the bank the interest for a home than get slashed even more in taxes. We have enough money to pay cash for a home, but my husband who is the financial expert(what he does for a living) believes this to be the best resort. Believe me, because of SEC regulations, my husband would never do anything illegal. Just my ignorance.
“I only know that we would rather pay the bank the interest for a home than get slashed even more in taxes.”
So you would rather give your money to the bank than the government? Sounds fine, but at least you get a highway or something from the government. In a stagnant or falling market, you get nothing.
As long as your total monthly cost is somewhat close to renting, fine. But when owning is 3x the cost or renting (in LA…a market that is consistently labeled as “screwed” by every industry insider), one would be a fool to buy right now for a tax deduction. I’d rather give Uncle Sam an extra $10K or so rather than give a bank $30K for the privelege of borrowing morey on an asset that’s value is falling.
If I invested that extra $20K a year for a few years until the market stabilized, I’d be FAR better off.
Seriously, first it’s the priced out forever because money is so cheap, now it’s priced out forever because money’s getting more expensive. How about priced out til prices drop like a lead balloon. Oh yeah, that’s right, the realtors mantra is prices always go up in a straight line and leave the cautious behind. Ok yeah, so with that logic, now that the price is 900k, then it’ll get locked in at 900k (because it never goes down), but now that money is getting more expensive you’ll be doubly locked out FOREVER. 900k AND it’s expensive to borrow money. Of course there’s always viable multi-millionaires out there that can afford it and snatch it up if you don’t, so you better buy it now. No, the only ‘average’ person out there making an average income is the guy that’s going to get ‘priced out forever’, everyone else is a multimillionaire that will be the lucky ones to get an ARM now so that they’re not priced out forever.
Whenever a RE agent tells me that prices always go up I just respond by asking if their RE firm will gaurantee an inflation adjusted annual return in writing. This always shuts them up.
That made me laugh….Those are great follow up questions.
Very true. Also, the FED does not control the long-term rates. A pause could cause the dollar to drop and/or have inflation become worse. The bond market would sell off driving yields (and mortgage rates) higher. In my opinion, housing is cooked no matter what the FED does. I hope Bernanke is a lot like Volcker and does the dirty work that needs to be done (curb inflation and rid the economy of the funny money). This mess is to big to fix all at once.
“Also, the FED does not control the long-term rates.”
How do you know?
Touche, Getstucco
And even Volcker has gone on record as saying he’s glad he’s not in Bernanke’s position right now.
The Fed probably won’t pause tomorrow.
If they did, they’d show weakness.
Not yet.
OT. Yesterday morning I was having breakfast at a local diner (Voorheesville NY suburb of Albany). A woman (mid to late 50’s) blonde, Ivanna Trump wannabe was 2 seats down at the counter talking to the guy next to her about her winter home in Fort Meyers Beach FL. She mentioned her H.O. insurance went from $2000 last yr to $6,000 this yr. She listed her house at $580K 6mos ago and dropped it to $500K 3 weeks later (advice from her realtor). She then refi’d to “get her money out” and relisted the house at $525K to cover the refi expense. She mentioned that listings have multiplied since she went on the market and blamed a local realtor (not hers) who has 80% of the local listings for the bad mkt. I left shaking my head. I guess my 5th grade social studies teacher was right when he said “stereotypes are stereotypes because they’re true” LOL.
>
Un-fricking-believable. Cluelessdoesn’t begin to describe it. It’’s got to be willful disregard of any responsiblity or consequences. Let her have it, Mr. Darwin!
Is that an ‘Ivannabe’?
You must be an Austin Powers fan.
Ivanna started this whole housing mess in the first place;
Dahling,
Ivanna big house
Ivanna big Mercedes
Ivanna fur coat……….
I vanna new face!
Is that near Hooterville??
Ft. Meyers may well be the worst market in the U.S. right now. She may have to hock some of her jewels.
Can’t imagine an Ivana wannabe in a diner…that in itself is a sign of the times.
Who on earth is doing a cash out refi for her after the house has been listed for sale on the MLS?? I thought that was still one of the underwriting standards that remained. I guess not.
“Underwriting standards”? What are those?
Underwriting standards (even normal ones) don’t really care what the seller is doing with regards to equity extraction, just so long as they can turn over clear (and insurable) title to the house.
So it’s perfectly fine from a lending/selling point of view for the seller to yank her money out of the house, though it’s admittedly a very stupid idea. That’s just one more bit of equity that she won’t get when it comes to the cloing table, and it increases the chances she’ll be upside down in the sale.
Which brings the question: What recourse does a buyer have, once they’ve invested the time and money for inspections and title searches, if at the losing table the seller can’t bring a check big enough to cover the shortfall? Seems hard to sue to complete the sale, I would think, or even to recoup costs from the seller who has no spare cash.
Hmmm.. maybe from a buyer’s perspective, it’s worth checking how deeply in debt a seller is, if only to avoid undue aggravaton as closing approaches. (Again, from the mortgage company’s perspective, as long as they see a clean title, they don’t care what happened to get to that point.)
Actually, one of the big no-no’s in lending is to do a refi on a house that’s been listed for sale in the last six months. If the underwriter sees that, it’s an instant decline. If the house truly was for sale when the appraisal was done and the appraiser stated that in the appraisal, the person that underwrote the mortgage was asleep at the wheel
Not always true, some lenders will do a refi if the house was just taken off the market the day before. Granted they are subprime lenders, and they will not accept an appraisal that comes in higher than the list price of the house.
“Economists can’t quantify some risks”…
Probably true, as many of these risks are simply too new for historical values. Falling properties values, and the underlying fall in MBS’s will catch an eye or two. Lending is also an activity external to the housing market.
‘Please, sir. Buy my bonds ( that will be worth less each passing moment) so I can live it up in my economic fantasy land’ should be a harder sell, you think?
Economists can’t quantify or qualify anything. It’s a pseudo science. It’s as serious as astrology or cristal ball gazing.
You and Alfred Nobel share that opinion despite the dubiously titled Nobel prize in Economics.
His heirs are fighting the Swedish central bank’s award that lifts the Nobel name for their prize.
As the host of a local Sacramento financial radio show put it:
“God created economists to make astrologers look good”!
That one goes in the archive.
IMHO a quote from John M. Keynes.
Hansen & Mclane, local financial investor radio show in Sacramento said on Sunday people should not buy a home for two years until the market has settled. I think I noticed that were not any realtors advertising on their time slot as has been in the past. They have been very bearish on housing. I’m sure the realtors don’t like their commentary very much. They are a very popular radio show in Sacramento.
I’m not a fan of Keynes, but I believe that he did in fact coin it.
from university: “an economist is someone who is good with numbers, but doesn’t have the people skills to be accountant.”
Heck, the Chairman of the FED even stated that economics isn’t an exact science. Hello? No kidding it isn’t. You simply can’t try to manage the massive fraud that has been undertaken. Imagine trying to run a household of 4 people with the deception these people are pulling off. It would be a full-time job. Now multiply that by a huge number, and you can get a sense for what these people are trying to do.
This baby will be the Superbowl. Unfortunately, we’re all going to have 50 yard line seats, and won’t care what the athlete superstar has to say after the game.
Economists are really good at making up reasons as to why things happened in the past. They’re also good at making incorrect projections for the future, and then making up reasons as to why they were wrong after the future proves them so
clouseau
“Economics is the art of predicting the past”
–great quote, not sure where it originated.
‘It’s a 15-year bubble unwinding in two years,’ Mr. Shepherdson says. ‘It’s going to hurt.’”
I hope he is right. Let’s get it over with already!
ginster, I agree wholeheartedly. I just want this dang thing to be over. That would be awesome if it unwound in two years. I’ve been really bummed out by projections that say the bottom won’t be reached until 2014. Whew! I’m already getting bubble weary.
Hi Palmetto, I was down in Tampa this week and found a couple of capitulators already approaching my $100 sq. ft. buy target (my wife won’t let me wait the bottom out) - anyway, the price drops are really starting to happen in Tampa.
what 15-yr is he talking about. i thought the last downturn bottomed in 1995-96? another fudged data for the uninformed?
Yeah. The top of the last bubble was 1989 and the bottom was around 1997 in southern California. So this bubble is almost 9 years old.
Be careful what you wish for; you just might get it! -
And yet I still see/hear people doing backflips to buy right now. Or taking more money out against their homes because, well you know - the value will just keep going up!
Around here I really think people, if they are even paying attention to the growing media coverage of the upcoming bust, are of the mindset that it is happening/will happen - but only in CA, FL, etc. since those are the areas that are primarily focused on in the stories. I think a lot of people are in for quite a rude awakening. Or else I am.
its not an upcoming bust.it is happening now.
WSJ is a little bit late in announcing the “coming” real estate bust. It already started a long time ago. The official media is soo funny and incredibly stupid and sheepish. So you must ask yourself. When will it be a good time to buy real estate?
When Time Magazine, the Economist, Business week, USA Today and Newsweeks put on their cover page.
“The real estate bust and armageddon has started. The end of the world is coming! Repent!”
We are not there yet. Far from it.
Indeed. All the gloom predictions now are based on backward looking data. This “disorderly downturn” they speak of possibly happening IS happening.
I agree. The mainstream press conservatively waits until a downturn is undeniable common knowledge among the well-informed before they feel sufficiently confident to risk the kill-the-messenger effect by spreading bad news.
What’s alarming about this “landing” is the rate of change in the numbers. Here’s some more quotes from the WSJ article:
“In June, total single-family-home sales fell 8.7% from a year earlier, to an annualized rate of 6.9 million — the sharpest year-to-year drop since April 1995.”
“The government’s report on second-quarter real gross domestic product, the inflation-adjusted value of the nation’s output, showed that fixed investment in housing by companies and individuals declined at an annual rate of 6.3% in the quarter. That was a sharp change from a year earlier, when it was increasing at an annual rate of 20%.”
Horrifying rates of change are also taking place in the number of foreclosures. While the numbers are currently operating off a small base, the comparisons to prior periods show a rapid uptick, sometimes a doubling of the numbers within short periods of time.
When things turn this quickly it is not a good sign. Continuing with the “landing” metaphor, even if the plane lands safely in the end, if it suddenly plunges, there’s going to be a lot of mayhem and praying in the aisles and its going to take an awfully good pilot in the cockpit to bring about a smooth landing. Even then, some of the passengers will never want to fly again.
And we have got a pilot who has never landed one of these things before.
Yikes!
gpp comparison to 1990 ?
employment in 2005 was 9.8% RE
I’m thinking 7% is the mean
Reversion to the really really mean.
“disorderly downturn”, I love it. Its like “controlled crash”. These things are by their nature chaotic and difficult to predict. Its kind of like watching a jet hit the ground, you never really know how its going to do it, but you can always try to calculate the size of the hole it will make if that helps you to feel better. Idiots.
(Economists can’t quantify some risks, including the biggest: the chance that a sharp drop in house prices — what economists call a “disorderly downturn” — would leave many homeowners owing more on their mortgages than their homes are worth. If that led to a wave of foreclosures and losses on riskier mortgage-backed securities, banks and investors could get spooked and cut back on all kinds of lending — a move that could snuff out economic growth.)
haha, READ THE PAPER, it is happening.
It’s amazing how well people in finance get paid to follow the herd.
After lending to anyone with a pulse (and some without a pulse) for a half-decade, there is every possibility we’ll end up with a credit crunch because no one will lend to anyone on any terms.
> we’ll end up with a credit crunch because no one will lend to anyone on any terms
The FED? They don’t have to defend a gold standard anymore as in 1931.
But I do hope that you’re partially right - if the lenders lend only to me, I have less competition when house hunting.
Regards,
Peter
“because typically recessions are the result of a general unwillingness to lend”
Oh, I see. So what would drive such a sharp reversal in mood? I mean, the overwhelming sentiment over the past 5 years has been, “LEND MORE THAN BORROWERS WANT REGARDLESS OF CREDITWORTHINESS”.
An unwillingness to lend is a perfectly predictable response to the reckless lending over the past 5 years. Even a return to historical norms in lending practices with pop the bubble hard and fast. You can bet on it.
A return to normal lending practices will be an unwillingness to lend by comparison to how the practices have been lately.
“A return to normal lending practices will be an unwillingness to lend by comparison to how the practices have been lately”
The danger is that the lenders will overcompensate (which they will).
Imagine a world 2 years from now where you need a 50% downpayment and an income above $150,000 to buy a $300,000 home.
that would suck.
clouseau
Not really. Today’s 300K home would be 80K in that world. And today’s 1,000K home would be 300K.
I suspect that part of the problem is that the Fed treated the mild contraction of credit in the wake of the stock market bubble almost as if it was a near collapse of the banking system. They pumped huge amounts of liquidity that inflated the housing market in response to a crisis that really wasn’t there.
Exactly. Then there was piling on with Freddie and Fanny extending portfolios and private equity fund purchases in a race to capture the high risk borrowers. Almost has to end badly.
The deflation boogey man raised its ugly head. BB blames the Great Depression on the FRB not acting decisively. The fact is, there is nothing that any FRB governer can do when a credit bubble develops other than let it unwind. There are many more tools available to prevent it from happening, but politicians are patsies to the finance industry.
Ever notice how Glass-Stiegal was repealed just before the credit bubble really got some legs under it?
Exactly, and who’s really doing the lending? Foreigners, they’re going to want AA ratings and high rates before they invest in a shitty pennystock like the US dollar.
Exactly, and who’s really doing the lending? Foreigners, they’re going to want AAA ratings and high rates before they invest in a shitty pennystock like the US dollar.
I guess some folks are so tied into their paper wealth that the can’t let go. It brings to mind the images of people on the deck of the Titanic holding on as the ship pitches bow first into the sea. Those folks only let go when the sheer physics of gravity made it impossible to hold on. I see the same situation here. There will be a lot of stickiness in prices because to admit the ship of yoy appreciation has reversed course is simply too much for them given what it means in terms of risk and loss. What I cannot fathom (pun intended) are those who would jump on a sinking ship and buy now.
Stickiness only lasts as long as it takes for the first one or two to capitulate. All you need is a lot of inventory, sellers that HAVE to sell AND have the equity liberty to drop their prices substantially. Then the expectation is set for prices at least as low and likely lower as a new trend is established. That’s MO…mentum heading the other way.
I agree wholeheartedly. That is the “sheer physics of gravity” in this scenario and those who must sell will be the first ones sliding down the deck. Others who do not have the equity liberty will hold on as long as they can or jump ship. In the latter case the bank will sell and reset the comps. The momentum is the ship pitching and this one is certainly going down.
Is Tenn. the next bubble as people leave the coastal areas because of rising insurance premiums?
I hope you’re kidding.
I’m serious. It makes sense since I have had no fewer than four people in the last month, that do not know one another, tell me about the blessings of East Tenn. property.
Miami
Nissan just moved their North American HQ there.
40% of Nissan’s employees left Gardena and moved to TN.
That is a good amount of equity locusts for you.
Yeah,and 58% of them did NOT move. Nissan has several very important product launches in the next few months. Each of these must go exactly right or the company will suffer badly.
Now, with this ill-advised and poorly timed move,many product teams have been gutted. I’d sell my Nissan stock now.
This move has been quietly devastating for Nissan,no matter how the L.A. Times spins it. They may be locusts,but many are not happy insects.
It is a gamble and every other automaker is watching closely but Ghosn’s got the track record.
So 58% of the formerly employed by Nissan people are looking for work?
Are there other automakers hiring in So Cal?
Don’t think so, the whole sector is also poised for the proverbial ass-pounding.
It could be. I was in east Tenn a couple of weeks ago and there is a serious inflation trend going on there. I mentioned RE bubble to a couple of people and they looked at me as if I were crazy. The stores are packed, folks buying whatever, price no object.
In the future, Tennessee will be the coastal area.
Doesn’t matter, everyone will be underwater
LOL.
It is worth meditating on the sidebar graph, captioned “As mortgage rates rise…,” which shows only two periods out of the past thirty years when thirty-year mortgage interest rates less the annual appreciation on homes went negative. The implication of owning a home over such a period was to enjoy a household-level version of the hedge funds’ carry trade, as the interest payments on a home loan were exceeded by market value appreciation, resulting in a positive real return to home ownership (what I have often suggested is akin to money growing on trees).
The first such period was brief — it lasted roughly from 1977 through 1979 — and violently ended with Paul Volcker’s appointment to the Fed. Apparently, the return to this “personal carry trade” decreased from 5% to -15% over the period from 1979 through 1983, as home price appreciation went into reverse and interest rates went through the roof.
Fast forward to the next period when this “personal carry trade” proved to be a profitable investment strategy, which was brought on by the Fed’s lowering of interest rates to negative real levels in 2002 and, according to the graph, has continued up to the present. We have recently seen the first signs that home price appreciation has given away to price declines in some of the formerly hottest markets (e.g., Boston and SD), and chartists would have a hard time ignoring the similarity between the appearance of the chart at the point in time when Paul Volcker took over, and its present appearance in the first year of Bernanke’s tenure. With a new Fed chair trying to establish his inflation-fighting credentials, a wave of monetary tightening sweeping across the international community of Central Bankers, rising Middle-East tensions (esp. with Iran) driving oil prices sky high, and a futures market anticipating a 5% drop in US home prices over the next year, it is hard to argue that the situation today looks much different from that in 1980.
> (With) futures market anticipating a 5% drop in US home prices over the next year, it is hard to argue that the situation today looks much different from that in 1980.
In 1979, there was large wage inflation, now there isn’t. That makes the difference in the required response of the FED.
Wage inflation now is somewhat overshadowed by asset price inflation, which the Fed says is not a matter of concern. Nonetheless, asset price inflation appears to be spilling over into the measures the Fed officially categorizes as inflation indicators, especially core CPI. And unless the Philip Curve has been abolished, then currently low US unemployment figures suggest higher wage inflation is in the pipeline.
“Based purely on recent inflation data, it would be reasonable to think that, of the two central banks (BOE & Fed), the Federal Reserve should be the one tightening monetary policy. US consumer price inflation stood at 4.3 per cent in June whereas UK inflation, on a similar basis, stood at 2.5 per cent. Wage growth in the US has also been picking up a bit in recent months whereas, in the UK, wage growth has been remarkably moderate.”
http://news.independent.co.uk/business/comment/article1217449.ece
And unless the Philip Curve has been abolished, then currently low US unemployment figures suggest higher wage inflation is in the pipeline.
The Philip Curve has not been abolished. Unfortunately it has been expanded to include 2 billion Indians and Chinese who will work for $1/day and a kick in the teeth.
> currently low US unemployment figures suggest higher wage inflation is in the pipeline
If that happens, the FED will raise, rely on it. It might not happen, however, if the economy is going into a recession, dragged down by the housing bust and the credit bubble.
I noticed another glaring similarity in those sidebar graphs between conditions in 1980 versus the present. The bottom-right panel (”And the surge in home sales tapers off”) shows only two points in the past thirty years when the rate of home sales exceeded the long-term average by over 40%. The first such point was in 1978, which was followed by a crash to -40% deviation below long-term average by 1982. The second such point was in 2005, which many who post here believe marked the point when the housing bubble made contact with a large pin. The graph shows a sharp turning point to the downside in recent months which is eerily reminiscent of the appearance of the graph around 1979, when Paul Volcker took over at the Fed.
But no worries — I am sure this recent softening in the pace of home sales is a mere statistical blip, and we will soon move back up to a permanently high plateau rate of sales at 40%+ deviation above the long term average
So, If I read the chart in the lower left correctly “A slowdown could pinch GDP growth…” Goldman Sachs is predicting housing to cause a ~1.5% reduction in GDP growth by Q3 ‘07. Given that GDP is at 2.5%, a prediction of a drop to 1% GDP growth is quite scary. It’s scary mostly because they are predicting it more than a year in advance. It’s scary because it only takes into accound direct and indirect effects of housing. I believe it does not discuss collateral damage to other industries.
just looking at the price level, we had something similar in the Netherlands.
In 1980, the long-term trendline was exceeded by nearly 100% which was erased quickly with a -40% price crash.
Currently, home prices are about 800% above the historical trendline (or 400-500% if you believe the heavily distorted national averages). But the pin to prick this bubble is still missing; let’s hope a US housing crash does the job.
Despite ECB rates going from 2.0 to 3.0% within the last year, homeprices keep surging ahead proving that it’s all about crazy lending. The banks and government have already assured the audience that the latest ECB rate increase will have hardly any influence on EU mortgage rates, just like the previous ECB steps
Tn is already in a bubble, maybe not as extreme as some other areas. Prices in many cities have doubled in past 5 years though the median increases are less. Based on incomes, things are just as crazy. Many are in over their heads. From what I hear, the frightened coastal people are going to Georgia, better job opportunities. I don’t think theyre leaving because of the insurance costs though, probably just had it with the hassle.
Ringgold Georgia’s seeing some serious appreciation. I bought a house in December at $100.00 a square foot. A house in my subdivision (30 homes) just sold at $139.89 a square foot. This buyer was from out of state. I’ll guarantee that the 2 spec homes being built right now here in this subdivision won’t be priced at $110.00 square foot. I’ve already called my Realtor. If I can feasibly get $125.00 or more a square foot, this house is going on the market! I never expected in a million years to see this happening here in rural Georgia.
Farmer’s just announced cancellation of TN earthquake policies. Everyone forgets New Madrid and the fact that yes, we are in earthquake country. Sooner or later, boom…Add Farmers to State Farm, and others who no longer want to provide earthquake ins. here. I don’t know what area is truly safe from the skittishness of insurers.
Tenn has taken its time getting wind of the bubble - I like the analogy some commenter here posted about little flares on the perimeter after the main fire (or bubble) is contaned, but I suspect that once the crash on the coasts is in full swing, it will have a dampening effect everywhere. Assuming employer stability (knock wood), I think our family will be able to get a true steal on a house - maybe sooner than later, as TN and Memphis have recorded statistically higher rates of foreclosure during the good times.
Don’t have time to find citations, but do a little digging and you’ll see that high foreclosure stats for the 50 states pretty much track with the lists out there of “undervalued” markets relatively unaffected by the bubble. Make of this what you will; for me and mine it means high rent relative to home prices, as landlords don’t buy for investment/appreciation.
At least New Madrid earthquakes are extremely rare events, unlike catastrophic Florida hurricanes.
I know I broke my promise never to engage over at the OC Register’s RE blog, but I did.
The topic this weekend was Insurance and earthquake insurance.
85% of homeowners in OC have no earthquake insurance.
Check it out here.
http://blogs.ocregister.com/lansner/archives/2006/08/insider_qa_insurance_advice.html#comments
If I do say so myself the most salient point is below.
By defintion, when insurance coverage is available and people elect not to buy said insurance (for whatever reason), that is an election to self-insure.
I am having difficulty understanding the RE bull’s argument in light of this earthquake insurance discussion.
RE Bulls maintain that it is no problem at all for people to afford $500K-1.5M homes in OC, because the “fundamentals” support such pricing.
However when it comes time to insure the aforementioned assets 85% of them cannot afford $1,000/yr for some catastrophic insurance coverage and/or elect to self-insure?
Upside down on a house=bad. Upside down on a pile of rubble=much worse.
If you can get me $1,000/yr for reasonable coverage I’ll buy it in an instant.
You’re looking at $3-$5K to start thinking about insurance, and even then you aren’t insuring your entire replacement cost due to the high deductible.
My self-insurance is self-funded enough to cover minor to medium repairs. In the event of a total loss it will cover a nice trailer to park on the lot and I’ll be damn pleased if my non-replaceable family survives.
My Father-in-law spent 40 years in the insurance industry and lives in San Francisco. His take on Earthquake Insurance? Don’t bother.
It’s not that earthquake insurance isn’t available. It just represents a very bad deal. Very low coverage and very high deductibles at a very high price. It just isn’t worth it. No real choice but to self-insure.
If you read my post over at OCR. I wasn’t stating that earthquake insurance was a good deal, just wondering how much of the 85% of the population is financially savvy, fiscally disciplined and diversified enough to self-insure.
I say it is a pretty low number.
I don’t think it’s the best deal in the world, but we have it on our Craftsman bungalow and the granny flat in back.
With the Allstate Deluxe policy, it’s under $1k for earthquake for both.
We do have cash reserves to cover the high deductibles, but we do wonder, sometimes, if we are just throwing our money away. Until the big one hits.
Most people I know who don’t have EQ insurance assume that if the damage is great enough (more than the deductibles on most EQ policies), FEMA will kick in. We’ll see how that plan works out…
OT, but the latest, always gripping Bob Casagrand report is out for July in San Diego. Doesn’t look like July was pretty, that’s for sure…
http://tinyurl.com/cy9eu
Excerpt …
July 2006: San Diego Housing Market - single family attached & detached homes: Homes sales continue to decline, sales for July were 2,396 versus 3,779 for last July. This is a drop of 37% from last year and a 19% decline from this June. July Pending sales were a dismal 2,310, which is a predictor for a continuing decline in home sales
From the article:
If Messrs. Hatzius and Shepherdson are both right, the effect of the housing slowdown on construction and consumer spending alone would subtract more than two percentage points from economic growth in 2007, bringing it well below 2%.
And that’s being optimistic…
Folks, we’re in for a world of hurt. I think the cut will be more than 2% as the impact of reduced tax revenue impacts jobs. Not to mention any growth company in a bubble market must consider expanding in a non-bubble market to attract talent.
Since this will take years to correct… expect the mass migration to occur. What’s sad is that not all jobs will stay domestic.
Neil
> Since this will take years to correct… expect the mass migration to occur.
Who do you think will migrate where?
> Since this will take years to correct… expect the mass migration to occur.
Who do you think will migrate where?
(Is Tenn. the next bubble as people leave the coastal areas because of rising insurance premiums?)
It’s only a bubble if the price goes up, but I have read of retirees heading to the mid-south instead of coastal Florida, including Memphis: according to the latest issue of AARP magazine, Memphis ranks as one of the top five places to retire in the country.
Not as nasty as the deep south, not as cold as the Northeast and Midwest, not as dry as the Southwest, and no hurricanes or earthquakes.
Actually, catastrophic Florida hurricanes are very, very rare. I’ve lived here most of my life, and there have only been two in that time: Donna in the 60s, and Andrew in the 90s. The last two years were flukes, with several hurricanes hitting, but none were catastrophic.
Well, the last series of devastating New Madrid quakes were in 1811-1812, so rather less common I think.
well, you only need one to realize that it is something you cannot ignore.
(Farmer’s just announced cancellation of TN earthquake policies. Everyone forgets New Madrid and the fact that yes, we are in earthquake country.)
Well, I guess I forgot too!
That is to say, none WAS catastrophic. Sorry for the grammatical error.
Housing Boom is coming to an End?
Is?
In the future some time?
Oh No.
Have they set a date?
Do I still have time to flip a few properties before then?
IS?
No.
DID!
Housing Boom CAME TO an END.
A while ago.
Same idiots who finally ran an article stating that NASDAQ may be getting ahead of itself - at 5100.
It’s all over but for the crying. Oh , and the filing. As in BK.
It’s just a matter of how bad the burn is. Gut says real bad.
Validation is sweet.
The jerk who ruined some beautiful land across the street from me and built a house that we call the Bates Hotel (because of its unseemly height) is sucking. It’s been on the market for 252 days for $355K - he reduced the price by $5K this weekend. Whoa, heart be still.
And to the other new neighbor who dabbles in RE and built an Ugly House that is way out of touch with the character of our street, well, he can KMA for dissing me when I’ve kindly told him a bit of what I have read on this blog.
And this is in San Antonio, Texas - the bubble IS bursting everywhere.
It’s been on the market for 252 days for $355K - he reduced the price by $5K this weekend. Whoa, heart be still.
I know, wow! What a reduction. An “investor” a few blocks from us put up a a banner with price reduction on it. He dropped the price from $623,000.00 to $620,000.00 what a joke!
Do you think that the $3000 might be his break point?
BWAhahahahaha! NOTHING screams out “hey everybody, I’m a testicle”! louder than a fu*king 1/2 percent price reduction! hehehehehe. The guy is screwed!
http://www.twst.com/yhoo/info1277.htm
For $175.00 you can buy this report by the “experts”. Too bad it is a year late and this “Expert Forum” is free.
That is nothing Bruce Norris a somewhat famous RE investor, hard money lender and housing bear has a new report out for $1,000 or so.
It says in a fancy binder what has been said here.
I would be interested to know if anyone sprung for his report and their thoughts.
I did & do think house prices are toast. However, I’m looking at the dilemna of the Fed and thinking maybe it can be prolonged. Reasoning as follows: Fed funds start to get cut early next year as the economy softens. Speculators back in business with ARMS and IO’s. 10 yr. note today at 4.93%, so fixed rates are still fairly attractive historically. This props up the housing market as cheap money spigots are turned on high.
I’m not certain the end is here. I do think it could be a few years away still. I’m forced to acknowledge the possibility. To ignore it would be unwise. Bill Gross (PIMCO) penned an article recently stating he thought the highs were in for yields in this move. He thinks we may test lows of a few years ago for the 10 year. We may have one more leg of this bull market in bonds before things are over. We’ve all seen first hand what cheap money will do first hand.
Thoughts?
All of the FB’s are going to go into fixed rates now when ARMs could potentially make sense right now (provided the re-set is in 3 or 4 years).
Yes, isn’t it ironic? Some homeowners seem to make each time the worst move: When fixed rates were low, choosing an ARM; when fixed rates reached a high, refinancing into fixed. Will they refinance into an ARM again, when rates fall, maybe, in two years? The people profiting from this moves are the mortgage brokers.
I agree with you that it will probably take many years to get rid of this bubble. I also agree that the bond market suggests that rates are down and that will cause a huge echo bubble unless the US quickly drops into a severe recession.
In Europe the housing bubble is already more than 15 years old in some countries. The gains in home prices are WAY above those in the US (e.g. my area of the Netherlands around + 1000%, or +500% or so if you believe the heavily distorted national average). People have been predicting the end of the EU bubble for at least five years and it is still expanding.
The ECB raised rates from 2 to 3% in four steps over the last year; despite this 50% increase, over the last months home prices made their biggest jump in five years in several EU countries (like UK and Netherlands). Government and bank officials are quick to explain to their audience that higher ECB rates do NOT mean higher mortgage rates. And even if it does, it’s all about crazy lending. If you can get a mortgage for 10x your income, why not 15x? If you can get a 100% mortage (no downpayment), why not make it 110% or 120% (we have those in the Netherlands, mostly for high income people)?
This bubble will not end without an end to the worldwide credit bubble. And for that, there is no end in sight - yet.
“This bubble will not end without an end to the worldwide credit bubble. And for that, there is no end in sight - yet. ”
It has to start somewhere, and the U.S. might yet be the poster boy.
When liquidity is rampant, a credit bubble pops when either of two things happen (or both):
1) Borrowers refuse to borrow more, and/or
2) Lenders refuse to lend more.
Here in the U.S., signs of (1) are popping up everywhere, underscored by a persistent and sustained drop in mortgage applications. Debt levels here in the U.S. are at insane historic highs, both at the individual and government levels. The cost of money has increased relentlessly, and it matters not that the current level is seen as “historically” low; it really only matters that the cost of cash is MUCH higher than it was only a short time ago.
The greatest proportion of our population is woefully ill-prepared for retirement, and millions of folks need to start saving NOW. It would appear that this sobering reality is beginning to “sink in”, and consumer spending is trending down.
We won’t see (2) until foreclosures reach a level that more or less force MBS purchasers to demand a higher yield. When that happens, that cost will be passed on to the borrower, damping enthusiasm for loans regardless of where the Fed Funds rate stands. I would expect to see this take hold sooner, as opposed to later.
The European nations are not like the U.S. We’re pigs. We can gorge no more, and the bust is happening. Your country will follow in short order.
I agree with Bill Gross. Lower rates imply deflation. Prices cannot rise when incomes do not. HELOCs cannot bail out the economy when RE prices are falling. A slowing economy will force people to start saving again. My guess is that consumption will fall and take the broader economy with it. It will not just be the housing sector that cuts into the GDP…
I put my money on this and bought a pretty big chunk of 2yr T-bills. I think that BB will start cutting in the next 3 to 6 months. This should be good for short to medium term note.
This is exactly the right message - too bad all the other FBs (and especially FSs) don’t get it. FYI, I’ve started a blog dedicated to the bubble here in Florida, with the same title as my call name. I’m here in the middle of it in Tampa, and we’ve already had a strange occurance - the school district just reported that they are short by (get this!) 25,000 kids!
http://florida-paradiselost.blogspot.com/
“Housing prices are still more than twice the level of 1991, when the current boom began”.
Totally amazing statement!
Up to now, most have put the beginning of this boom in the 2000’s somewhere. Others (myself included) put it @ 1996/7.
Now we’re hearing it at 1991! Maybe prices have a bit farther to go on the downside than even some of the more optimistic among us dared to hope!
Could that be a typo? Did he really say that?
That could be an accurate statement. What you’d want to factor in is normal price inflation during the intervening years. Reversion to the mean, I believe, addresses reversion to a price line that was adjusted for normal inflation. So if prices revert to actual 1997-1999 levels, those would be the prices that followed the line from 1991. Getstucco or Robert or others could put it more eloquently and probably more accurately than I .
Well in my neighborhood, prices were lower in 1999 than in 1995 so…
in Netherlands the housing bubble started early in the nineties; in many other EU countries the housing bubble started around 10 years ago, and in the EU periphery around 2000.
According to official Dutch CPI numbers, total inflation over the last 15 years is around 50%. Total home price appreciation - for individual homes - is around 1000% in some areas (or more than 10x the 1990 price level). So 50% down would be nothing more than a first start over here …
Jackie , I do disagree and think the end is here. But like you said , I can’t ignore the possibility that I am the one who is wrong - to do so , as you said , would be unwise. And so , we all try to hedge our bets and investments either expecting the worse , but ackowledging the opposite , or vice versa. I’m still holding some stocks, holding commodities. I’ve no bonds now as I can close to match them with CD’s paying over 5% now and avoid the price risk. I’ve no real estate investments , but would nibble on something after I feel we’ve corrected enough , and i don’t think we’re close - if I’m wrong on that call , I’ll lose nothing though except the opportunity , and I’m okay with that.
As for Bill Gross -”Bill Gross (PIMCO) penned an article recently stating he thought the highs were in for yields in this move.” I dunno , but somehow I doubt the biggest bondholder on earth would say otherwise. I know they have all sorts of hedges and rate neutral strategies I guess, but Gross has enormous influence and I can’t imagine that him telling people that rates are going to continue to increase and thus put pressure on bond prices, would be too well met by his investors and business associates. Simplistic thinking maybe but jmo. It’s like asking the world’s most famous and powerful barber if he thinks people should start letting their hair grow long.
You think he was talking his book? “That would be an outrage and a perpetration” to quote Jackie. I certainly think that’s a possibility, but I also see first hand the dielmna the Fed has. They may be cutting rates early next year. Who knows? How would bonds react? Would the long end tank or soar?
I’m leaning more towards the Fed easing and keeping the party going for a bit longer. Interesting times to say the least.
(As for Bill Gross -”Bill Gross (PIMCO) penned an article recently stating he thought the highs were in for yields in this move.)
This assumes that there are lots of savers out there willing to take an even LOWER rate of return on their savings, relative to inflation. Who are they?
without a doubt there ARE lots of them, because the charts of the Treasury market (which is even bigger than the stock market) are saying the same. Don’t argue with the market …
Now it could be that those ’savers’ who buy the US Treasuries are just virtual buyers hiding somewhere with the FED…
People who have the mentality that home equity = savings. IMO, once prices start to decline and their is no equity to HELOC out, people will start saving for a rainy day.
First Tennessee economist Chris Low talks about how homebuilders will start cutting prices to unload inventory because there is still a lot of profit margin left. Also talks about potential FB’s who won’t be able to refinance out of ARM’s because they bought homes with little money down and won’t have any equity to qualify. He also predicts not only the Fed is done raising rates, but possibly rates will be cut in December.
http://www.ftnfinancial.com/pdf/?daDoc=rsrch_wkCm_2006-08-04