The Housing Bubble

Here’s three shorts for ya (Cramer pumps). He has no position in any of them.

My three faves right now are Qwest (Q - commentary - Cramer’s Take), Level 3 (LVLT - commentary - Cramer’s Take) and Arena Pharmaceuticals (ARNA - commentary - Cramer’s Take). Let me explain why these can work and work big here.

GDP 1.6%. Roubini was right.

Recession now inevitable?

OT, from the WSJ:

“Housing Decline Sparks Slowdown In Construction; Store, Mall Demand Drops As Fewer Homes Are Built; Weighing Economic Risks”

“The unexpectedly rapid decline of the nation’s housing market will mean an overall drop in construction spending next year, with spillover effects in areas such as job growth and real-estate development.

“In a closely watched report expected to be released today, McGraw- Hill Construction will forecast the first decline in overall construction spending since 1991. The company says the value of new construction will decline 1% in 2007 to $668 billion, compared with an expected rise of 1% for 2006 and a 12% increase in 2005. McGraw-Hill said the anticipated decline was due mostly to a 5% fall in construction of single-family homes. But the overall drop also reflects a 3% slide in construction of stores and shopping centers, a component closely tied to population growth and home-building trends. [...]

“The construction industry accounts for almost a tenth of economic activity, and its contraction could have a ripple effect through the economy as it is a major buyer of finished products and generator of jobs. Local governments’ ability to raise revenue through development fees and taxes, especially in fast-growing parts of the country, could suffer as well. [...]

“Some of the negative effects from the housing slump are likely to linger well into 2007 and perhaps much longer. Some economists think housing prices will continue to drift downward through much of next year. That may damp consumer confidence, and it will diminish consumers’ ability to borrow against their homes to finance spending. And foreclosures are expected to rise at least modestly; that could prolong weakness in housing as lenders dump properties on the market. [...]

“But the decline won’t be limited to housing. Also expected to see a falloff is the construction of retail centers, whose development has been consistently strong in recent years as consumer spending and housing formation grew. [...]

“The continued rapid construction of a wide range of other commercial projects — hospitals, schools, offices, hotels and factories — will keep bulldozers and backhoes somewhat busy and the massive construction industry active. That, of course, could be reassuring news for the economy. Spending on commercial construction, including multifamily dwellings, will increase 2.5%. Among the fastest-growing segments are hotels and manufacturing buildings, as well as schools and health-care facilities.

“Construction activity has a major impact on the overall economy. Census Bureau estimates of construction spending, which rely on McGraw-Hill’s numbers while adding other spending categories, showed $1.2 trillion of spending on construction in the year ended August. [...]

“Some developers could benefit from the housing downturn as demand for materials such as gypsum, copper electrical wire and lumber drop. Already this year, prices for those products have fallen. Falling house prices would also bring welcome relief to buyers who have been buffeted by steadily rising price tags.

“Certain sectors of the commercial construction industry could continue to grow. Hotel construction spending, for instance, was up 64.4% to $21 billion in August on a seasonally adjusted annual basis, according to the Commerce Department. [...]

“Manufacturing and industrial construction will grow thanks partly to the mushrooming of ethanol plants in the wake of federal legislation mandating increased supplies of the fuel additive. [...]

“The office-building sector is also expected to grow as it reacts to recent job growth and business expansion. [...] And bond issues passed in several states to accommodate growing school-age populations has meant a classroom building boom. Fast-growing states such as Arizona and Nevada are adding dozens of schools a year.”

business week has once more a great artice

Boom! Bust! Boom? / history of housing busts business week

here (especially fot tx) the kink to the full story
http://tinyurl.com/ylnuab

summary/highlights plus some other stuff
http://immobilienblasen.blogspot.com/

have a nice weekend

test

Don’t know if anyone posted this before, from USA Today:

Sellers sing the blues as price drop sets record

“Then: San Diego’s housing market was so hot that the town house next to Jeff Cruce’s was flipped from buyer to seller three times in three years. The owners, who never moved in, didn’t even need to put up a “For Sale” sign.

“Now: Since August, Cruce and seven of his neighbors have put their town houses on the market (that’s nearly 20% of the units in the complex). All have cut their prices, including Cruce, who chopped his price last month by $30,000 to $559,000. Not one has received an offer yet. Each time one owner would lower the asking price, it put pressure on the others to follow, says Cruce, 38, a salesman who’s moving to Atlanta.

“That domino effect, rippling through neighborhoods across the country, pushed down the nation’s median home price in September by the largest amount on record, the National Association of Realtors (NAR) said Wednesday.”

Boom! Bust! Boom?
Check the history of housing busts. Some areas bounce back more strongly than others

Housing has gone from a sure thing to a complete muddle. Median prices fell nationwide for a second straight month in September, the first time that has happened since 1990, according to a report on Oct. 25. Homeowners don’t know whether to sit tight or bail. They have no idea whether they’re experiencing the beginnings of a deep bust that will leave a permanent hole in their wealth, or a small hiccup.

There’s a lot to learn from history. While national downturns in home prices are rare, we have plenty of experience with busts in local markets. Remember, many regions that have been strong in recent years, such as New York, Boston, and Los Angeles, were mired in slumps in the early or mid-1990s. People who bailed out of them at the bottom are still kicking themselves or blaming their ill-informed spouses.

How common is this boom-bust-boom pattern? Over the past three decades about 40% of housing busts in big metro areas have eventually been followed by strong recoveries. That’s according to a BusinessWeek analysis of inflation-adjusted housing prices. In an additional 15% of markets, prices adjusted for inflation barely got back to their previous peaks after 15 years. In the remaining 45% or so of markets, prices adjusted for inflation were still down a decade and a half after their pre-bust peaks.

The disparity between winners and losers was striking: Among the winning markets, the average inflation-adjusted gain after 15 years was 43%, while among the losers the average inflation-adjusted loss was 19%.

How do you know if your own local market is the kind that will snap back or the kind that will languish indefinitely? One key factor is the ease or difficulty of building new homes. Places where new home construction is a long and expensive process, such as Boston and San Francisco, tend to experience big price movements, both up and down. “Restricted supply leads to more volatility in prices,” says Edward L. Glaeser, a Harvard University economist who has studied big-city housing markets.

Glaeser isn’t ready to predict where prices are headed market by market, but the cities with tight housing do usually boom again after a bust. In places such as Atlanta and Houston, by contrast, price cycles are usually mild, because the supply of housing is flexible. Traditionally, flexible markets have gone through booms and busts only when there was a wrenching change in demand, such as during the oil-patch roller-coaster of the 1980s.

If the supply-side analysis is correct, it has scary implications for markets like Miami, Phoenix, and Las Vegas, where prices have zoomed in the past several years. Because it’s easy to keep up with rising demand by building housing in those areas, they never experienced soaring prices — until the past few years, that is, when prices seemed to rise out of line with fundamentals. Speculation appears to be the culprit. Regarding Las Vegas, Harvard’s Glaeser says: “I cannot believe that this stuff is remotely sustainable.”

Looking at the supply side’s effect on boom-and-bust behavior isn’t the usual way of assessing housing prices. The more common approach is to determine, by measures such as price-to-income ratios, which markets seem to be overvalued and which undervalued, and then assume they will converge toward fair value. Moody’s Economy.com Inc. (MCO ) has a projection of house prices out to 2015 that shows most of the biggest 10-year gains in apparently cheap markets such as Pittsburgh, Nashville, Houston, St. Louis, and Austin. The forecaster projects small gains for expensive markets including San Diego, Los Angeles, Las Vegas, New York, and Washington.

Economy.com’s approach is consistent with textbook economics. But it would have done a bad job of predicting what happened in the past 10 years, wherein the pricey got pricier and the cheap cheaper. For example, even though Houston has had a long stretch of healthy growth, it’s so easy to build homes there that inflation-adjusted prices are still 19% below their 1983 peak.

With apologies to the mainstream, the truth is that supply considerations can cause markets to diverge from what seem to be the fundamentals for a long time, perhaps permanently. One explanation for this is the “superstar cities” concept developed by economists Joseph E. Gyourko and Todd M. Sinai of the University of Pennsylvania’s Wharton School and Christopher J. Mayer of Columbia Business School. They argue that certain cities — Boston and San Francisco, say — benefit from a winner-take-all phenomenon that separates them from also-rans. People all over the world want to own homes in Boston and San Francisco, and the supply is limited. As worldwide wealth rises, there is a bidding war for homes there. No such luck for, say, St. Louis. In fact, according to the authors, the gap between prices in San Francisco and the national average doubled between 1970 and 2000.

In an era of globalization, cities with international reputations can get an edge over blander neighbors if they’re perceived as scarce commodities. For example, Nashville, as the capital of country music, has at least the potential to convert its fame into wealth, says Gleb L. Nechayev, an economist at Boston-based Torto Wheaton Research, a unit of CB Richard Ellis. Miami developers have parlayed the city’s international fame into booming sales of condos to Latin Americans and Europeans. But while the uniqueness phenomenon may help growth in those cities, it won’t necessarily keep prices up, because it’s easy to build: Witness the current glut of Miami condos.

What makes the housing supply inflexible in markets like Boston isn’t necessarily a lack of land. Far more often, the cause is regulatory constraints like minimum lot sizes. “There’s a pretty strong correlation between volatility [of housing prices] and regulatory constraint,” says Stephen Malpezzi, a housing economist at the University of Wisconsin School of Business. Glaeser says that because of zoning regulations, the density of housing in many metro Boston communities is actually lower than in growing areas of the supposedly wide-open Southwest. “In Wellesley [Mass.], they should be building apartment buildings around the train stations, but it’s all single-family housing,” says Richard K. Green, a finance professor at George Washington University.

At this stage in the slump, restricting the supply of housing may sound like a good thing. It’s not. Sure, it can make current owners richer by increasing the scarcity value of their homes. But it’s murder on first-time buyers. And in the long run, it’s bad for the local economy. As Glaeser notes, companies tend to migrate away from areas with costly housing to avoid paying the higher salaries needed to compensate employees for their home costs. He notes that between 2003 and 2005, high-cost Massachusetts lost 0.3% of its population, more than any other state. “The economy cannot grow unless the population grows, and the population cannot grow without new housing,” he wrote in a May paper.

Thinking long term is hard when you see for-sale signs springing up everywhere. But there are plenty of places where sitting tight may be the best thing to do.

unfortunatly i´m not able to post links anymore. make sure you see also the graphs either on business week or on my blog.

have a nice weekend

1.6% any here “shocked” ?
subtract MIC and other BS trnasfer payments /inlfation and we’re already negative
?? if I build a tank and drop it in Iraq- does that boost GDP NDP ?

Black & Decker profit down on softer demand

A few exerpts:

ATLANTA, Oct 26 (Reuters) - Black & Decker Corp. (BDK.N: Quote, Profile, Research) on Thursday reported lower third-quarter earnings as faucet sales fell and sales growth slowed in power tools, reflecting weaker demand as the U.S. housing market cools.

The tool maker cut its full-year profit forecast for a second time this year, but said it would buy back more shares to bolster results.

The Towson, Maryland, maker of DeWalt drills, Kwikset locks and Price Pfister faucets reported net earnings of $125.1 million, or $1.74 a share, down 9 percent from $137.8 million, or $1.70 a share, a year earlier. Per-share earnings rose because of a 12 percent decline in shares outstanding.

“With what’s been going on in the broader economy, housing — it has been a more difficult environment so our rates of growth have slowed,” Black & Decker finance chief Michael Mangan said during a conference call. “Our customers across channels are being more cautious.”

Stay Calm, All is Well?

http://www.xanga.com/home.aspx?user=russwinter&nextdate=10%2f27%2f2006+23%3a59%3a59.999

(One explanation for this is the “superstar cities” concept…a winner-take-all phenomenon that separates them from also-rans. People all over the world want to own homes in Boston and San Francisco, and the supply is limited. As worldwide wealth rises, there is a bidding war for homes there. No such luck for, say, St. Louis.)

Speaking as a superstar resident, it seems to me that in the long run (contra Cote), if people want cities like this, the market will create them. It is already trying to, though it will take time. Meanwhile, even superstars can be overpriced. The attributes attributed to them make the prices volatile in both directions.

http://www.orlandosentinel.com/business/orl-asececon27102706oct27,0,5832687.story?coll=orl-home-headlines

This morning listening to NPR, they used words “housing crash” & “recession” in their report. MSM is waking up.

First time poster, long time reader. I keep my eye on this neighborhood because I want to move there to be near family. This house was purchased in May 2006 for $570,000. Broward county taxes are 2.2% so that’s 12540. Even if they put down 20% they are losing $2000 a month. Is this a good example of a FB? (P.S. Last week he wanted $2300,now it’s $2000.)

http://fortlauderdale.craigslist.org/apa/225750994.html

For those who like to see what the rental markets are doing:

Craiglist house rentals.
3BR
Date Phoenix Orlando Raleigh
25/03 2571 610 724
02/04 2494 637 711
01/05 2572 766 908
09/06 3014 961 903
01/07 3296 1055 979
07/08 4166 1374 1186
14/08 4452 1511 1190
21/08 4846 1619 1249
28/08 5119 1749 1245
05/09 5261 1821 1220
11/09 5445 1875 1133
18/09 5746 1972 1134
25/09 5924 2021 1075
29/09 6208 2169 1058
05/10 6490 2295 1061
12/10 6432 2364 1103
27/10 6585 2595 1137

Looks like the Raleigh market is pretty stable but Phoenix and Orlando just keep on going up.

I agree with what many on this blog have been saying, the media coverage of housing is frustrating as all hell. On one page, the Denver Post will talk about foreclosure rates and exotic loans (), a few pages later you’ll see a full-page ad about overpriced luxury condos somewhere.

I have been suffering serious house envy over the past few months. I make a nice income. It would sure be good to be able to afford to buy something other than a condo or an exurban tract house.

Here’s a little blurb from Fleck

“Let’s look in the housing arena/dark-matter department. It was brought to my attention that the shares of London-based Queen’s Walk declined 10% on Wednesday. What is that, you ask? A closed-end LLC that invests primarily in a diversified portfolio of subordinated tranches of ABS (asset-backed securities). Apparently, a majority of the fund’s positions are either below investment-grade or unrated, with many representing the equity, or first-loss position, of a securitization transaction. So, there’s another data point on the declining health of the dark-matter universe.

Another sign comes by way of an email that I received yesterday from my favorite source on the subprime industry. He said that first-time payment defaults were really picking up, and it would not surprise him to see a “disconnect” in that market before the end of the year.

From today’s San Francisco Chronicle: “Bay Area foreclosures on rise — adjustable loans a growing threat”

Are banks really so cheery about working with distressed, defaulted homeowners, as depicted in the article? It all seems so friendly and easy — just call your bank if you have trouble paying your mortgage and they’ll be happy to help you out — and I just doubt that it is.

Also, for Bay Area people, check out the crazy number of toxic mortgages cited in the article: two-thirds of all loans in the Bay Area! Oh no you didn’t!

“About two-thirds of Bay Area homeowners have mortgages with payments that start at a low level and rise over time, according to LoanPerformance, a service that analyzes mortgage risk for institutions such as Fannie Mae, Freddie Mac and BofA.”

“Some loans, called payment-option ARMS, let borrowers pay so little each month that they can quickly end up owing more than they borrowed. Most lenders offer homeowners low teaser rates or allow them to make interest-only payments.”

http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2006/10/27/MNGE8M168T1.DTL

Marketwatch: “Has housing bottomed? Most economists say no”

Be sure to read the second page, where the economists cited get considerably more bearish — and there’s an interesting discussion on “real” mortgage rates killing sales/prices in the future (even if nominal rates go down).

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B223FC7B5%2D2037%2D48C5%2D95C5%2D27B269C44855%7D&dist=rss&siteid=mktw

Anyone daytrading in home builder stock options? If so, quick — buy your calls now before the 1pm PPT intervention glides these sagging prices back up to the opening price…

http://tinyurl.com/fzeuw

Hey everyone I need your help.

The local newspaper here in Springfield, MO finally posted a story about the housing bubble…but of course the story says that even though the bubble is bursting everywhere else IT’S DIFFERENT HERE…BECAUSE THIS PLACE IS SPECIAL! I wrote a response to the article, and now some local yokel has challenged me with his post, saying that I’m wrong, there is no bubble here. All is well, be happy. I would appreciate it if some of you who eloquent bubble masters could go in and post some of your own insights.

You do have to register to post sorry about the inconvenience but it only takes a minute.

Here is the article; the two posts are below the article.

Local housing bubble hasn’t burst

Nationally, home prices are dropping, but in Springfield they are still rising.
“The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.
The Commerce Department reported that the median price for a new home sold”

“The Springfield housing market, however, continue to boast steady growth.

“The local median home price increased by 2.6 percent to $123,950 in September, compared with $120,775 in September 2005, the Greater Springfield Board of Realtors said.”

“The Springfield market is still very good,” said Stacey Clem, president of the local Board of Realtors. “… The prices have stayed steady and gone up a little bit.”

“Unlike the national housing market, Springfield did not have “the big bubble to bust,” Clem said, “and our properties have not seen the big appreciations.”

(note: according to others on this blog, in 2000 the median price was about $80K in Springfield…I don’t have any factual info on this unfortunately)

Tony Crescenzi Blog
Yield Curve Inverting Further
By Tony Crescenzi
RealMoney.com Contributor
10/27/2006 12:28 PM EDT
URL: http://www.thestreet.com/p/rmoney/tcrescenziblog/10318209.html

The yield curve continues to invert. The spread between three-month bills and 10-year Treasuries is at -42 basis points (10’s yielding less than bills) compared to -39 yesterday, and -29 a week ago.

The spread is the most inverted since December 2000. The bulk of this week’s economic news was weak, including today’s GDP report, of course. Short rates are being held up by the 5.25% funds rate.

Longer-dated issues are priced for scenarios beyond the very short term and hence are building in the likelihood of cuts down the road (long-term rates are bets on future levels of short-term rates, the theory goes). Recession odds are about 35% with the current spread. It would take a -80 basis spread between bills and 10s to bring to odds to 50%.

What do you think of this signal? Do we ignore it like some say to?

Is this Casagrad in drag?:
http://realtytimes.com/rtmcrcond/California~San_Diego_County~dawnlewis
“Many home owners are selling their homes for lower than they want because they are in a position where they have to sell. The lower priced homes get sold first while more persistent home owners won’t reduce the price of their home until desperation sets in. At the point the market has come down even more.”
No I guess one by one the agents are starting to put “real” in realty….

A woman whose blog I read from time to time is facing the realities of the bubble in MI, without much knowledge of market realities. I find it interesting (and sad) and expect to read many more such stories of families faced with similar unhappy choices. Here’s her URL: Suburban Bliss.

Even more realism:
http://realtytimes.com/rtcpages/20061027_timetodecide.htm
“It’s only a good time for you to buy a home, typically, when owning is cheaper than renting and a home purchase is a natural fit for your financial needs, goals, obligations and lifestyle.”
When owning is cheaper than renting! This is getting scary!

Here is a link about people’s plans to vacate Florida. Housing prices too high. Of course, they say it is the taxes and insurance.

I sent the link to Ben, but he did not post it.

http://www.sptimes.com/2006/10/27/State/Poll__Affordable_stat.shtml

Ah… this is better:
http://realtytimes.com/rtcpages/20061027_rates.htm

“Median House Prices Slip as Mortgage Rates Edge Up
…30-year fixed-rate mortgage (FRM) averaged 6.40 percent with an average 0.4 point for the week ending October 26, 2006, up from last week when it averaged 6.36 percent.”

So obviously the drop in prices is caused by the 0.04% increase in the mortgage rate.

“And some areas of the country may experience a few bumps up and down as the housing industry corrects itself in the coming months.”
“On a positive note, new home sales in September came in at a higher-than-expected pace, while the number of homes for sale on the market dropped. This should help support housing prices going forward.”

WTF does “help support housing prices going forward” mean?

Look at these graphs:
http://www.financialsense.com/Market/wrapup.htm

The National Association of Homebuilders (NAHB) released its Housing Market Index (HMI) which was up 1 point to 31 after falling for eight consecutive months. Hooray, we’ve reached the bottom! Buy HB stock with both hands!
Wait a sec, look at Figure 4. NAR median sales price. That’s the steepest drop in history.

Check this out:
http://condoflip.com/
There are 3 panic buttons, when you REALLY need to sell. If you press the red, level 3 button, you’ll get a haircut with a lawnmover!

did anyone see the big arson story in Palm Spring, CA? apparently, it’s an arson’s job. Wonder if this guys is one of the FB’s? it would be a very interesting headline if it is. “FB’s could not meet monthly mortgage payment, decided to burn it down”

“Most of the negatives in housing are probably behind us,” Greenspan said.”

isn’t that what hoover said just months into the great depression?

Kerch (at Marketwatch.com) gets it — mostly. But I think he should check out what the interest rates were like in Japan during the 1990s before he gets too sanguine about low rates cushioning the landing
very much. He is right that rates will not go to 10% (unless perhaps
if Paul Volcker somehow were reappointed to the Fed chairmanship).
—————————————————————————–
THIS WEEK’S REAL ESTATE STORIES

A barrel of economic news concerning housing hit this week, and none of
it points to market decline coming to an end soon. True, new-home sales
were up, but that gain came at the expense of prices, which took their
biggest tumble in 36 years. Existing-home sales fell for a sixth straight month, and existing-home prices posted back-to-back monthly
declines for the first time in 16 years.

But the bad economic news does have a bright side. There is now such
worry about housing and what it might mean for overall economic growth that the Federal Reserve was inclined to leave interest rates unchanged for a third consecutive meeting. And that thinking has had a positive effect on long-term mortgage rates, which have remained low by historical standards even as housing declined.

We were supposed to be approaching a 7% 30-year fixed rate by the end
of 2006. We’re not going to get there. Not this year, not next year and
probably not in 2008 either, if the latest economic forecast from the
Mortgage Bankers Association proves out. That trade group says the
30-year should nudge ahead only to 6.7% by the end of 2007 and 6.8% a
year later; the loan stands at about 6.4% today.

Those numbers may make you shrug when you remember 5% mortgages three summers ago. But you don’t have to go too much farther back, to 2000 in fact, to find the benchmark 30-year mortgage at 8.5%. From that perspective 6.8% is a great number.

The problem in the housing market isn’t interest rates, as is so often
the case when the industry goes into a slump. The problem this time is
prices, which leaped too far too fast in many locales, increases that in
a lot of cases were driven by speculative investment. It looks like
we’re in the midst of a price correction now and the only question is to
what extent it will go.

If interest rates behave themselves, however, that puts a pretty solid
floor under the housing market. With most of the speculators already
having run for the hills, the remaining underlying demand for homes will
keep getting a boost from mortgages under 7%. And after a year or two of decelerating prices, the market will likely be back in a relatively
healthy balance.

Is there some pain still ahead? No doubt. But it’s not going to be as
excruciating as it would be were mortgages at 10% or more.

Steve Kerch, real estate editor

“Total entitlement spending makes up 84% of the federal budget including interest on the federal debt and defense.”

Say WHHAAATT??
Even better, how `bout: “total federal spending on Spotted Owl Preservation programs take up 84% of the federal budget including interest on the federal debt, entitlements and defense. Good LORD! We’ve GOT to CUT the Spotted Owl Program! Damn liberals!”

I’ve spent 56.3% of my money on alcohol and gambling–the rest I just wasted. [within a 40.2% margin-of-error].

For TxChick,

Here’s your buddy at it again:

http://www.myebid.com/cgi-bin/auction/view?cmd=view&listingID=2435

sorry if it’s already been posted