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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Will the fed lower interest rates to bail out FBs and lenders?
(Will the fed lower rates?)
It won’t help. Home prices are falling already
and I believe that incomes must catch up.
And I believe that incomes cannot catch up. Too much outsourcing is happening to places where the pay is 1/2 the American wage. The only way to get home price / income ratio back to normal is for home prices to fall (50%+ in my neck’o'the’woods).
why do we need those stinkin’ wages if we can get more income from forever appreciating assets (with some help from the FED)?
Or hyperinflation to bring wages to affordability and thus reduce debt. :>)
They will say for as long as economically possible that inflation is a risk. They’ll do this to keep foreigners funding our debt with the possibility of higher rates. When it becomes apparent to everyone that the debt in housing can’t be serviced at these low rates, then they’ll cut them. However, they’ll come up with something about how they are cutting them, but they may need to raise again in the future depending on data.
It is no different than what I felt a long time ago. Deflation (happening now) followed by inflation. It is what has gone on for generally the last 35 years. The difference now is the differences in time lapse between the two (almost occuring together if that is possible…or at least deflation happening with the FED TRYING to encourage inflation). The FED cutting rates and people taking out more debt to purchase homes is a different story. However, it will make speculators in other areas (equities) more apt to start the inflation of other assets more probable.
This quote bears repeating.
I believe that banking institutions are more dangerous to our liberties than standing armies . . . If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] . . . will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered . . . The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Letter to the Secretary of the Treasury Albert Gallatin (1802) ; later published in The Debate Over The Recharter Of The Bank Bill (1809)
That quote is Thomas Jefferson off of Wikipedia
Hasn’t Bernanke gone on record saying there will be no bailout? Thought I saw a quote to that extent some time ago…..
“Hasn’t Bernanke gone on record saying there will be no bailout?”
Read his lips…
“banking institutions are more dangerous to our liberties than standing armies”
People need to wake up. Turn off American Idol and prepare for changes coming. Is a North American Union a good idea?
Lou Dobbs (2006):
http://www.youtube.com/watch?v=ensmPJm5B5A
http://www.spp.gov
“1984″ , “Brave New World” ? “The Report from Iron Mountain”? Fabian Socialists and the CFR realize the dream of worldwide Collectivism/High-tech Feudalsim , under the guidance of the United Nations? Keynes’ worldwide monetary unit”, the Bancor , brought to you by the WorldBank and IMF? “From each according to his abilities , to each according to each according to his needs”?
From ‘The Creature from Jekyll Island”:
“Another 20 years have slipped by and we now find ourselves in the ‘New World order’. No one around us is sure exactly when it began. In fact , there was no official starting date , no announcement in the media , no ceremony with blaring of trumpets.Sometime during the past 10 or 15 years , it became obvious that it jus was- and everyone accepted it as the natural evolution of political trends and necessities.”
Yep, this is about as scary as it gets, no doubt about it. What I cannot get past, however, is how many people continue to structure their entire lives (education, career choice, home, family) around the defunct Fordist paradaigm of thirty plus years ago. The only real explanation I can come up with for this housing bubble, for example, is that legions of people remain absolutely certain that their futures are as certain as those of someone starting out in 1955. The trouble is, those that started out in the fifties had memories (or parents) familiar with the hardships of world war and depression. Today, those starting out are entirely oblivious to any episode of American history prior to Fonzie and the Cunninghams. In other words - 1955 was the time for people to spend like they do today (had they known they could) - in 2006 it is just too darn late to think the game will go on forever.
Yes, and most people here are simply interested in buying an affordable house, without any understanding of how we got here and where we’re heading. I had dinner with a nice young couple this weekend, and they have their plans, happily working on the house, building their retirement egg, and so on, but no clue that a bullet train is coming straight at them. I didn’t ruin their calm utopia with any of my gloom and doom stuff, and had the foresight to leave my aluminum foil deflector beany at home. It wasn’t easy though… sigh.
I think that the next big thing in affordable housing will be Cheap prefab moblehomes stuck in various empty lots all over Scal which would provide cheap last chance sheltor for all those soon to be evicted FB’s. The IE has plenty of space and is the booming epicenter for prefabs: i can imagine a vast sea of trailer/moblie home parks with cheap affordable single/dblewides strewn all over the IE/high and low desert boonie regions. Hemet already has a head start, though their mobiles already filled with retirees.
Thee will be a great neeed for cheap affordable housing for the soon to be legions of ex-homeowning FB’s. Another tin-foil concept.
Do interest rates really matter? The bubble zones are/were being driven by below market teaser rate loans (Option ARMS). Short term interst rates don’t seem to be having much affect on the prevalence of these types of loans.
the bubble zones are driven by easy money; rates do not matter, whether shortterm, longterm or teaser rates. As long as none of the lenders cares about risk, the mortgage market simply adapts to the current market prices (e.g. with liar loans, higher leverage, more subsidies etc.). And it wouldn’t surprise me if Bernanke is going to drive longterm rates so low with his Black Helicopters that all FB’s can refinance out of their teaser ARM into a 30-year fixed loan at 1-2% or so. Japan had those rates so why not the US?
nhz,
I worry about this as well (refi FBs into artifically low 30-yr FRMs).
(Listening to the senate hearing linked above and am about to vomit. How can these idiots not get the fact that these “affordability products” are what has cause the lack of affordability in the first place?
Also remember that things like the Mortgage Interest Deduction haven’t made homes more affordable–they’ve simply caused home prices to rise while making the tax system even more unfair!
I’d guess that nearly every time our guv’ment tries to give an incentive to make something more affordable, all it does is make the price go up. Here’s an example:
I wanted solar electric panels on my house. At the time, there was a rebate in the state of California for solar equipment.
I wanted to do it myself, and I was picky about components. I found that it was cheaper–even factoring in the rebate–to order the parts from states with NO REBATE than to order the components from delears in California who expected consumers to have a rebate! And I’m not talking about sales tax savings here…I’m talking comparing prices of the panels and inverters.
All CA’s rebate program did was to raise the cost of the product when sold from dealers to consumers. If there was no rebate, the end price would have been the same.
At the very least, the government shouldn’t be feeding the housing bubble by artificially holding interest rates low and giving tax breaks.
uh - if this happens, we should all have the oppty to re-fi at 1% fixed
uh-oh - great opportunity; why not go to 0% refinancing right away? That would effectively make all savings magically disappear and reward the must stupid of the FB’s. Maybe it’s easier to declare private property and savings illegal for the masses from now on?
if you think 0% refinancing is not possible just watch Ben B: he has already written about the virtues of negative rates on savings accounts, for this idiot and his friends nothing is impossible.
Sounds like the Roman concept of throwing bread and circus’s to the masses(artificially stimulating bubble prices thru cheap money policies,suicide loans, Mortgage funny money finding it’s way into the hands of the largely ignorant masses, ect.)
Today I can get a 30 year fixed with no points and fixed closing costs of $1350 at 5.750%. That is 4% less than when I bought a house in 1981 and 0.750% higher than in June of 2003.
Some news from France.
Home price down -1.1% in August compared to July.
French Minister for Housing and Social Cohesion, Jean-Louis Borloo said on Tuesday that
the residential housing market is going for a ’significant drop’ within 2 to 3 years.
he’ll keep his job
how many housing agencies w soviet sounding names do we have
hud
oheoc
fha
fnm
fre
…………………………..
He’s a rightwing Minister though, from President Chirac’s party.
Not possible, Chirac’s from the Socialist party.
He’s probably right.
I also have a house in France which has trebled in theoretical value over the last 7 years. Now, whilst I don’t care (it’s a holiday home purchased with my family, and we all wrote off the cost immediately we bought it), I can see alot of second home owners getting burnt. Interestingly for nhz, there are alot of Dutch down there…!
yes, and I think the Dutch are the major cause of the RE price increases in France; in a few areas the British buyers are number one though. Last time I checked there were about 700.000 Dutchies in France (that’s close to 5% of the total Dutch population); most of them purchased long ago already so it will take some time before they get burned.
Topic suggestion: The accompanying debt bubble and the implications for the larger economy.
In some peoples’ minds, the root problem is a debt bubble and the housing bubble is merely a manifestation of that. Housing prices wouldn’t have gone up the way they had if credit weren’t so easy, and not just in terms of rates, but easier terms–no money down, pay option mortgages, etc.
The housing bust could easily cause a recession, the possible financial bust could cause something much worse.
The big question right now is, who is holding the risk on all these exotic, negative equity mortgages?
We are merely pawns in this mad credit creation game between the moneyed class and the frb.
What “moneyed class”? Only the super-rich who can hide assets sham companies (read the book “Perfectly Legal” by David Cay Johnston) and offshore accounts have the upper hand.
A French national newspaper starts reporting the slowdown.
Looks like the US housing bubble end(early stage) revisited.
Soft landing, pause, bla bla bla…
http://www.latribune.fr/Tribune/Online.nsf/Articles/Apres-le-boom–la-pause-~-20060922U6TURKV?OpenDocument&RSS=1
I’d like to hear more about how high home prices are “bad” for business. Does anyone have information or examples of businesses and the effect home prices are having on them.
1. Are their workers feeling pinched? I’ve read that workers who are having financial difficulties at home tend to be poor performers in the office due to stress.
2. Are they having trouble getting good people to come work for them if they are in bubble cities? Can’t sell a home or Can’t buy one.
3. Others…?
When people talk about the housing slowdown effecting the economy, IMO it goes much further.
The business community in metro Boston blamed high housing prices for the loss of young people and the decline of the economy. With retirees occupying existing units, even if every unemployed person in the metro area got a job, there would still be fewer jobs than in 2000.
With pressure to relax zoning and urban regeneration, there has been a bit of a building boom there. And since prices started falling, jobs gains have picked up.
On the local economy side, rising prices allowed people to spend by going deeper into debt, but left new buyers with high mortgage payments that prevented spending on other things. Falling prices shut off the ATM, but reduce house poverty among new buyers. So I guess it depends on which effect is stronger.
Salary indexes for my bubble area are at the point that I’ve quit hiring for the moment. Can’t get my head around how to grow the business (= more jobs) without moving to a cheaper area. But cheaper areas have a lower quantity of technical talent to choose from.
Rock, hard place.
We lost several potential hires (NoVA) last year due to the high cost of living here.
When you own a 4br 2500 sqft home in the midwest, it’s hard to justify moving to NoVa, where the same home would cost 3x as much.
Use realtor.com and see what $200K to $250K will buy in places like Raleigh, NC or Greenville, SC or Athens, GA. Can $250K buy anything but a 1BR condo box in NoVA?
We shudder every time we drive to the D.C. area to visit family. The traffic is unbelieveable. Living in the Carolina foothills, I can now readily detect the unpleasant smell of industry and vehicle exhaust when we approach the southern end of the megalopolis at Richmond. I never used to notice the air at all when we lived in the D.C. area.
In Silicon Valley the topic of high home prices is not welcomed by CEOs. They know they are going to lose out to other regions unless prices come down. CA is screwed on so many levels, but we have no one to blame but ourselves. Like you have all said, it’s difficult if not impossible to attract talent when other regions offer a much higher quality of life for one-half the price. Here’s to a big housing burst! It is amazing that 99% of the population see sky high prices as a positive. Short sightedness will always come back to haunt you.
I would like to see some considered opinions on “What happens if we’re right?” By that I mean that most of the readers here have very well thought-out and supported reasons why they expect the housing market to collapse. Some have addressed the ripple effect through construction, Home Depot and Lowe’s, remodelers, suppliers, etc. What about illegal construction workers? What will they do? What about Joe Sixpack who sunk his retirement into a second home? Will all of these be wiped out, unemployed, and looking for trouble? What about the rabid packs of realtors roaming the deserted subdivision streets? Seriosuly, however, the macro implications seem staggering to me, but I’d like to see others’ opinions.
I’d like a poll of homeowners (not the ones on this blog - but your neighbors, co-workers, families, etc.). I’d like to know how many of those who own homes (particularly those who didn’t buy during the bubble years) really, honestly, truly believe their homes are suddenly worth 2, 3, 4, 5, etc. times what it was worth in 2000 or so. My findings are that all homeowners are thrilled about it, but not one can really and truly justify it.
I can justify why my house worth 50%-75% more than in 1999. In 1999, it was a 2-2, 8 room, 2000sf 1935 English Tudor brick with a 1980s remodel. In 2000, it was redone to a 4-3-2 half bath, 12 room, 3200 sf with a 2000 restoration to 1935 style.
I should say and modernized where appropriate…
Yes, they can justify it! “It’s the market, stupid! And housing is the only one that only goes up!”
At least in my hood, I don’t think they care how much it is worth…Why ? They are not sellers….Its only important when you want or need to sell….
Or brag, show off, and one-up loser renters like myself. Yes, I’ve been exposed to this.
I’d like to see some of our small town resident-commenters post observations about their markets…these are places totally under the radar, that get little to no press. I’m talking populations 200,000 and under. Here in AZ, these communities have taken a hit from the larger urban areas (Phx, Tucson) from which people have bailed looking for “better lifestyle”.
Several of those in New Mexico too. They’re so tempting but if you buy there, you better like it because they’re hard to resell.
I’ve looked all over western NM…and those rancher/brokers/deli-gas station owners are playing the “city folk” like chumps.
You mean reservation land? I was talking about places like Chimayo, Espanola, Abuiqui, etc., more in Northern NM.
Well, I was looking at small towns by the Gila Wilderness…Reserve, Silver City, Glenwood, etc. I love the Gila, one of the last great wilderness areas…I do love northern NM, especially Chama area, but it’s got a way to fall.
Catherine,
Be watching Sunday or Monday. I’m coming out with an extensive market video report for Billings, MT (pop. 100,000). Downtown “urban loft” condos, $400k/acre vacant land, an established “upscale” subdivision with 1 in 6 homes for sale, all kinds of good stuff.
I’ll be looking forward to that! Also, to what you think the recent fires did to the Sweet Grass Valley area…there are some very pricey ranches there for sale.
Here is a link to a study done by the federal reserve at the peak of the housing bubble, September 2005, regarding global house prices, recessions, and monetary policy:
http://www.federalreserve.gov/pubs/ifdp/2005/841/ifdp841.pdf
The report says, “On average, real house prices rise around 28 percent over the five years preceding a peak and fall about 22 percent in the five years after a peak.”
It adds, “For many of these countries, the dating of business cycles indicates that a recession typically occurred soon after the peak in real house prices.
It warns, “…that the current peak stands out in the sense that a historically high number of countries in our sample recently experienced abnormally rapid rises in house prices. If these prices follow the same patterns as before, house prices in a large number of these countries are likely to decline in real terms at some point in the not-too-distant future.
As most of us already know, the report adds, “Price-to-rent ratios are at highs in the United Kingdom, Australia, and the United States” and “…”past experience tells us that, when these indicators deviate significantly from trend, they tend to move back toward historical norms.”
Again, the report warns, “…unreasonable expectations of future capital gains are driving house prices. If overly optimistic expectations are a significant driver of house price changes, one
might expect a surge in purchases of housing as a pure investment vehicle. If these expectations prove wrong, investment properties are more likely to return to the market than are owner-occupied houses, increasing the supply of housing and perhaps accelerating a decline in prices.”
This is unbelievable; the report asserts, “Based on our findings, we cannot rule out the possibility that monetary policy may have contributed to house price booms and busts.”
It adds we may soon experience a recession, “Real GDP…growth begins to drop markedly in the quarter preceding the peak and bottoms out at a small negative rate about five quarters after the crest in house prices.”
This sounds all too familiar for HB related stocks, “Investment plunges in the quarters immediately following the peak and continues to contract up to quarter 12.” Moreover, “the evidence suggests that the boom and bust are more pronounced in residential investment than in other types of investment spending.”
The report concludes, “…if history is any guide, real house prices are quite likely to fall or at least stagnate in a number of industrial countries in the future. Furthermore, the pro-cyclicality of real house prices also suggests that their downward correction will be associated with some slowing of consumption and residential investment, which could contribute to an economic downturn…”
Did the fed knowingly contribute to an asset price bubble? Or, as the report’s publication date suggest, did they belatedly recognize the bubble at its peak?
Good link.
Did the fed knowingly contribute to an asset price bubble? Or, as the report’s publication date suggest, did they belatedly recognize the bubble at its peak?
The Fed had (has) an explicit policy of ignoring growing asset bubbles, This is contrary to other central banks. The Fed contradicts itself, however, by easing rates when an asset bubble bursts.
With both the stock bubble and the housing/credit bubble, the Fed sat on its hands. In 1999, they could have raised margin requirements, but didn’t. Greenspan never explained why. This time the failure was twofold. First, they shouldn’t have left the rates at 1% so long. And second, and probably more importantly, they and other regulators still haven’t clamped down on all the silly lending–the explosion in subprime, pay option, interest-only and no money down mortgages.
NOT contrary to other central banks; the ECB works exactly the same (e.g. they flooded the market with credit in 2001 when the stock market bubble burst and the EU RE bubble was in danger of collapsing). Only difference is that in true EU style the ECB is slower in responding to market changes.
What is contrary is that they recognize the need to target asset prices as well as consumer prices. No one blames the Fed for easing rates when the stock bubble burst. But they should have been targeting the bubble(s) on the way up as well. The Bank of England increased rates specifically targeting home prices.
Bob_in_ma,
Excellent cause and effect summation, deals with the primary and root cause of the expansion of easy money.
The witches brew only needed a dash of greed to get the sweet taste in everyone’s mouth. Of course, now they’re tasting the bitter side of the “sweet”.
Make no mistake, Sir Greenspent has left the scene of the crime, into the mist…residing with the other “untouchables”. The fingers will soon start pointing, the needle in the damage done. Ben Bernanke’s head will soon start looking like the Mayor in the” Nightmare before Christmas”. One face for the citizen’s of the USA and one face for the rest of the world’s investors.
Timothy
Thanks for the link.
Plan to print out and read over the weekend. It will be interesting to see if there are any material differences in issues or timing between the Fed’s assessment and the IMF’s.
Did any of you HBB old timers get a copy of this report at an earlier date?
Yes and the link has been posted before. I posted the 1994 meeting of the Fed (/940322Meeting.pd) which set the expansionist monetary policy and the discussion of the impact this policy might have on creating a bubble economy. (from their report)
“We recently held a meeting of the Bank’s Academic Advisory Council which, as you all know, includes two or three Nobel Prize winners and people from Harvard, MIT, Yale, and so forth. The discussion focused on issues related to productivity growth, labor market tightness, and ASSET MARKET BUBBLES. The group was lively, to say the least. But some consensus was reached on the need for action that might take the wind out of asset markets, even in the ABSENCE of tighter monetary policy, perhaps through increased margin requirements or increased supervisory oversight on credit extended, particularly in the day trading operations.”
And you wonder how we got into this position - the Federal reserve KNEW what it was doing and continued to do it - to all our detriment. Federal Resrve FOMC Transscripts
http://tinyurl.com/ptw3d
Thanks Hoz. Downloaded.
One thing I don’t see talked about much, that to me is a huge indicator of the status of things, is the stat of sale price as a percentage of asking price. The MRIS has stats for this for the mid-atlantic region going back to 1997, when things were more normal. 97-00 the values generally were around 96-97%, 00-03 they went up to generally around 98%, then in 04-05 peak at around 99-100%, with some months being slightly above 100%. However the last year has seen an amazing rapid decline - 98% in Sep ‘05, 96% in Jan ‘06, up to 97% in the spring, but than an absolute free fall the last few months - 97% in April, 95.7% in June, 94.4% in July, and 92.3% in August! This to me is a true measurable indicator of how desparate sellers are, and IMO can be used as a good leading indicator as to when the market will eventually “bottom out”.
http://richmondamericanhomes.com/specials/saltlake/SL090603_10Days9_21.html
http://www.richmondamericanhomes.com/Marketing+Region+Special+Detail/market-region.asp?mr=Salt%20Lake%20City
I would like to see discussion about the Salt Lake City market. My brother is a Real Estate broker and is finally coming around to my point of view that SLC will be affected as well. Inventory is rising and houses are sitting on the market. The above links are to a new home builder that is offering incentives for quick sale. They have 35 single family units available for incentives. Seems strange to offer incentives in a “hot” market and have so many units availble.
I agree with you, however the local MLS cartels are very effective in manipulating those figures, so it’s still hard (at least for me) to get accurate numbers. There used to be strict rules supposedly governing the way these figures are posted, but I think this realtor panic has got them doing stuff that usually results in a fine or cancellation of their membership, cause, gee…what do they have to lose??
Can we have a topic on this guy? He is the poster boy for irresponsible lending and borrowing.
http://iamfacingforeclosure.com/
check out the “bits and buckets” link…there’s lots there…txchick is on the case!
This guy is so stupid and unethical that Ben should give him a whole blog posting.
It’s worse than that. He’s admitting on the open ‘net that he committed mortgage fraud, which is a federal offense. I wonder if they’ll let him update his blog from a PMITA federal penitentiary?
I love how he calls himself a “real estate investor” when he hasn’t made any money (and, in foreclosure, he isn’t even really holding any real estate!)
He might as well call himself a rocket scientist, doctor, laywer, and Indian Chief, too!
Also, he’s still just a huckster looking for a quick flip!
How are his “i am facing forclosure” clever flyers any different from the carpet stores that are always running the “Lost Our Lease” or “Going Out of Business” sales?
It’s a MARKETING GIMMICK! Don’t fall for it.
That guy is unbelievable. Admitting to mortgage fraud on the internet, buying properties all around the country with little to zero due diligence, paying contractors before they began work and then seeing them never complete the job, etc. How naive, stupid really, can one be? I think the fact that he got all his properties with 100% financing and owner occupied proves how bad the eventual bust will be. In other words, there has been zero underwriting done by the lenders. The term investor has lost all meaning in the past decade, what with the dot-bomb and now housing debacles.
I suggest that we do not give this guy any more attention. As I understand Crispy or Txchick has forwarded the necessary details to the authorities.
My reasoning is that your attention is giving this guy exposure and potentially turning him into some sort of celebrity. Seems like he has taken a page from the red paperclip guy and is trying to work it. If you guys keep it up he will be on TV then will have a book ghost written which will be followed by the movie deal long before any of us see a 50% decline in home prices.
At that stage even if he is arrested or charged the judge will let him off with a fine or probation citing his reform as evidence by his openness in admitting his crime, blah, blah.
Leave him alone or he will be the one laughing all the way to the bank.
With all the super-easy-credit flying out there over the last 4 years, does the mortgage lending industry need tighter regulations or is it too late?
Why? The mortgage lending industry did what the Federal reserve asked them to do. The rules and regulations are present. The banks, mortgage cos and others are not directly responsible for the Federal Governments policies and should not take the blame for the ineptitude or lieing (haven’t decided which yet) of the Federal Reserve.
Is it just my perception bias, or do the markets always go up on FOMC announcement days? And these days, there seems to be a post-announcement rebound effect as well (generally represented by a plethora of red numbers on the marketwatch.com market overview page…)
http://www.marketwatch.com/tools/marketsummary/default.asp
BTW, are the hedgies suddenly piling into Treasury bonds or something? Maybe they are all suddenly focused on recession risk (which tends to make the yield curve take on a rather inverted shape…)?
http://www.bloomberg.com/markets/rates/index.html
(Scroll down to see the broke-back yield curve getting ever-more broken.)
I’d suggest a deeper look in to this quote from this Bloomberg article :
“Americans aren’t generally worried about home values, according to the poll. More than half expect house prices in their neighborhoods to remain about the same six months from now. Among the rest of the respondents, more expect a rise in prices than a decline.”
I’m Ok with people not being worries, as the majority of homeowners are not FB’s, but more expect a rise than a decline! Even as the ubershill Lereah states all over the place that even he expects prices to fall? People can blame the media all they want for “popping the bubble”, but we bloggers get reports from all over the country and in most places, sellers are still hanging onto unrealistic expectations regardless of what they read in the papers. This poll just confirms that people are notw cemented in the mindset that RE always goes up, even as they’re not!
Relates to the topic suggestion I posted above re: polling neighbors/friends/family to see if they can give justification for these now-outrageous values (meaning just those in general - who have lived there and done nothing more than the usual upkeep - not meaning those who did a complete remodel as Army No. Va. commented - and, btw, I’m sure his/her property - remodeled or not - is still overvalued). While people are tap dancing on air over these current believed values, not one person I spoke to can really justify them and MOST say they are “totally shocked” (though also totally psyched). Well, duh.
This does not jibe with a survey I read last month that said one out of three borrowers were afraid of losing their house because of taxes and insurance. Cannot remember source sorry
“…RE always goes up, even as it’s not.”
Now that everyone knows that a nosedive in the NAHB sentiment index portends a crash in the broad stock market 1 year later, will the market rationally price this in this fall?
http://www.schwabinsights.com/2006_09/mktoutlook.html
On the marketwatch home page:
“September 22, 2006 11:31 A.M.ET
BULLETIN
Slowdown fears taking hold
Stocks beset by pressure as data suggest U.S. manufacturing may join the housing sector in contracting. Economic-data front is quiet.
• Al Goldman says the market is due for a pullback”
When Al Goldman says the market is due for a pullback, a pullback is already underway. Good luck, PPT!
Who buys the homebuilders’ stocks when all indicators point down? It must be somebody using other people’s money which they don’t mind pouring down a rat hole, as I am pretty sure there are not enough GFs left on the planet who don’t know where things are headed and are trying to catch a falling knife.
must be the old reflex
rates down must be good news for homebuilder.
wall street…. to be honest the german market is really easy to understand in comparison to wall street.
but i have to admit that in the past month the influence from the us kind of thinking is taking over the germans.
“rates down must be good news for homebuilder.”
If the reason the rates are low is that the economy is coming in for a soft landing, then party on. But if rates are low because bonds are rallying in a pre-recession flight to quality, then watch out below.
BTW, share buybacks at the individual corporate level do not very well explain the minute-by-minute correlation in price movements across the homebuilding sector. Rather, the demand pressure of some outside entity with massive buying power is evident (not sure whether this might be some big hedge fund or group of hedge funds, govt intervention, public-private partnerships, Fannie Mae, etc.).
What is the logical proof for what we are seeing?
I don’t remember much from philosophy class but I will give it a shot:
If housing industry goes down then recession
If recession then market goes down
If market goes down then housing industry goes up
They’re under accumulation, Stucco. I’m not messing with them again but that’s what’s happening.
and why not, with the current trajectory in rates we will arrive at 0% nominal rates within a few years. That should be enough to prop up the homebuilders for at least the next generation.
I am still betting their balance sheets, which are weighted down with unsold new homes, land, and land options, will sink them. But I have no hard numbers to back this conjecture — just my guess that this time is not really much different than the previous ones, and that their share prices will revert to pre-bubble levels, just like in every other cycle in history.
“under accumulation”
Who / how / why?
Thanks for your investing insights, TxChick!
GS, The hypothesis I am proposing - not provable fact, yet - but certainly worth considering:
1) I as a fund manager believe the market is 50% over valued and that I would like to be short everything.
2) I have been wrong in the past by being to early.
3) I must protect my asset base in case I am wrong at this time.
4) If I short or sell my long stocks that have held up the most since Mays collapse, especially those stocks with suspect earnings. How can I hedge?
5) If I buy stocks that have been hit with future earnings loss built in (home builders stocks), what Happens?
6) If the stock market tanks, then I make 50% on my shorts and lose 20 % on my long homebuilders stocks.
7) If the market rises (aka Soft Landing, Goldilocks economy) then the homebuilders stocks should go up twice as fast as the ones I am short.
IMHO this is what is happening, a very nice spread, I have not tried to work out the volatilities or the ratios or even the suspect stocks that would be shorted (or sold long to reduce exposure). But I guarantee somebody has.
How about a follow up on some of the buyers featured in HGTV’s “House Hunters”. I would be interested to know how some of the young owners are faring. Often, after buying a house (frequently in Southern California), the update shows extensive remodeling. Two or three years later, were do they stand.
Out of curiosity I checked the house I grew up in–it’s a nice 7 room cape–pretty but not a mansion–zillow.com currently estimates a price around $1million plus. This is definitely out of the realm of reality!
It seems a lot of the posters here have a background in finance, and I do enjoy and follow along with great interest.
What I would like to see is more total Numbers, not percents of a lot of the things talked about here on this blog. For example, I would like to know just how many total loans were taken out in 04-05 and 06? HOW, many total of these are Toxic or ARM’s? Throwing around percents to me does not give the scope of how bad things will get.
I would guess knowing there are one, two, or five million toxic loans out, some simple math could be done to see what these banks loss’s will be.
How about the topic : What would happen if the Feds reduced the rates to 1%or 2 % next year ?
Yes, I’m curious as well.
How about a topic where we as a group assemble a communique to the Senate Banking Committee (or whatever gov group is starting to look into this debacle) and make heard our concerns in concise, logical, factual points.
Along the lines of other topic suggestions and how far this thing will reach. How much much bad debt is out there. We read these amusing articles about people of average or below average incomes with unpayable debts in the $2-$3 MILLION dollar range. This has to be absorbed somehow, they are not going to be able to pay it!
It is not just about guessing how many people are in this boat(a lot), it is how much they owe. For instance one person with unpayable $3,000,000.00 in debt is like $20,000.00 debt for 150 people. $20,000 debt for one person does not seem like a lot of money, but it is enough to send the majority to bankruptcy. How so? Debt that is acquired when you get nothing in return for it is like 2 fold to pay off. Example; A $20,000 debt for a car is not that big of a deal, because you get a car to drive and the time(money) saving benefits of the car. When you get a $20,000 debt for nothing then you still have to buy a car, place to live and food. You now have to get a loan for the car and pay interest. You get the idea, I hope.
Anyway we have read articles in this blog of at least 1000 people who have easily have $1,000,000 in non payable debt. Like cockroaches, for each one you see there are 100 more just like him. So multiply that out and it comes out to $100,000,000,000.00!!!!
Anyone who does not now see how far and deep this thing is going to go has their head in the sand. When we read this blog in hindsight we will find just as comical the posts from people contemplating “jumping in”, when housing prices go down 20%.
When we all get handed the bill for this massive debt $20,000 cash will buy a decent house to live in.
You are better at expressing the idea I was trying to make than I. It seems to me there is an amount that will have to be absorb by someone [ banks, owners etc.] that is not like a stock crash, were it was all on paper. This is real money lent, and real money is going to disappear.
My pet peeve with using “percents” and not real numbers is up and down they seem to get lost. unless my math is off, a 100% increase in $1 is $2?, But to get back down to the base now of $1 would take a 50% drop?