The Housing Bubble

How long has the bubble in Spain been running?

Spain is in for an interesting ride these next few years and it’s not just because of the bubble. The spring tide of Euros coming in from the EU is going to shift from Spain to various EE countries, thereby drying up what’s been an extremely significant cash inflow to the Spanish economy this past decade.

What that will do to the economy is unknown, but governments in general are not all that good at having to make do with less.

bear run?

anyone?

crickets?

thanks, i’ll be here all week….

Is inflation is the only thing that can get us out of this? Make today’s debt worthless and start all over again?

He is a true piece of human excrement.

What he needs is a 12 step program for his gambling addiction, in addition to a job.

He’s from Uzbekistan. Thank you, Republicrats, for our open-borders, all riff-raff welcome immigration policies.

HOUSING SPECULATION HANGOVER
by Dan Amoss

According to the chief economist of the National Association of Realtors (NAR), the housing market is now transitioning from and “unsustainable boom” to a “permanently high plateau.” According to an October 25 NAR press release:

“David Lereah, NAR’s chief economist, said stabilizing sales should build confidence in the housing market. ‘Considering that existing-home sales are based on closed transactions, this is a lagging indicator and the worst is behind us as far as a market correction – this is likely the trough for sales,’ he said. ‘When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market, and sales will be at more normal levels in the wake of the unsustainable boom that we saw last year.’ He noted sales already are improving in some areas.

“Total housing inventory levels fell 2.4 percent at the end of September to 3.75 million existing homes available for sale, which represents a 7.3-month supply at the current sales pace.”

Housing inventory levels can certainly continue falling, but don’t make the mistake of concluding that this will automatically lead to the return of a “tight” market. Over the past year, inventories were given an extra kick as many existing homeowners merely tested the waters of the market; these homeowners hoped to extract big equity gains in 2006 via the analytically complex process of slapping an “ask” price closely resembling their neighbor’s sale price from last year. From there, they expected to sit back and wait for multiple “bids” above their ask price, ultimately selling to the highest bidder.

Trouble is, buyers have finally wised up to the realization that housing runs in cycles – and the top of this cycle has been the most overextended in history. Irrationally exuberant psychology extended the topping process, as buyers clearly feared being left behind by the home equity gravy train. This was very reminiscent of the tech bubble psychology that caused an already-overvalued NASDAQ to double yet again from spring 1999 to spring 2000 before crashing.

The hangover in the housing market will clearly not be as severe as it was in the case of the NASDAQ’s 78% peak to trough decline, because houses (generally) have more durable, tangible value than stock certificates. But by no means is housing about to turn around and rocket upward once again. Buyers’ lowball bids are reflecting this, and sellers can either withdraw their listing or hit lower bids if they must move out of necessity.

As I wrote in the August issue of Strategic Investment, too many pundits (who in fact must remain cheerleaders as part of their job description) are treating the housing market as if it were similar to the stock market:

“…about 9-10% of the housing market turns over every year. Compare this low turnover with volume in the stock market. The typical S&P 500 stock has about 150% turnover per year, so you can be reasonably sure that the stock sitting in your portfolio is worth within a fraction of a percent of the last tick. The low housing transaction volume makes aggregate national housing value statistics misleading. The near-term value of your house is completely dependent on what current shoppers are willing and able to pay for your house. The ‘willing’ part is psychological, and psychology has morphed from ‘my house will appreciate 15–20% per year’ to ‘my house will appreciate 8% per year.’ The ‘able’ part is dependent on global liquidity and mortgage financing aggressiveness.”

The data coming out over the past few months indicate that while homeowner psychology may have worsened to “my house will appreciate 2% per year,” the mortgage liquidity spigots remains on full blast. Those desperate to sell should be able to sell by hitting lower bids in this low-rate, high-liquidity environment, while those buying are doing so because they want to raise a family in a home – not because they are deluded into thinking they will become millionaires without lifting a finger.

But the bond market merits our attention, particularly after what we saw there last Friday.

If yields spike back above the June highs, the buying support under the housing market could quickly falter, making the “landing” far more perilous than it currently appears.

It’s a big analytical mistake to extrapolate the prices of a 9-10% turnover market onto the entire housing stock. But this mistake has convinced many millions that housing inflation equals “wealth creation.” Thus far, this mistake has not proven to be very costly, since credit availability appears to have no rational limit.

But those who have been planning under the assumption that last year’s housing market was the status quo are waking up to an ugly reality. An article in the November 3 Wall Street Journal entitled “The New Word in Home Sales: ‘Canceled,’” provides an anecdote:

“Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2% range, according to the National Association of Realtors. In September, however, nearly half of the 454 agents responding to an online NAR survey said they had recently experienced cancellation rates higher than that.

“Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., says that roughly 22% of his sales have fallen apart before closing this year because the buyers backed out, up from 10% last year. With the market cooling, buyers have decided they can buy a similar property for less. For others, adjustable-rate mortgages have gotten more expensive, making a home purchase too costly, Mr. Shallis says. To reduce the chances of cancellation, he is advising his clients to close their deals as quickly as possible after the offer is accepted, and to put fewer contingencies in the contract. ‘The longer your property is under contract, the longer the buyer has to talk and think about it and watch the market change.’

“Mr. Shallis himself is among the would-be buyers with cold feet. Late last year, he agreed to pay $595,000 for a new two-bedroom condominium in Jersey City for his in-laws. He pulled the plug on the deal this summer after his father-in-law’s illness scotched the planned move. ‘My exit strategy was if they didn’t move into it, we could sell it or rent it,’ Mr. Shallis says. But that plan made less sense after the price of similar properties dropped to as low as $529,000. At the same time, higher short-term interest rates made it unlikely that he would be able to cover his mortgage payments and other costs if he found a renter. Instead, Mr. Shallis walked away from the contract and lost his $30,000 deposit.”

The huge number of people who bought investment properties in recent years cannot all rent them out. For those who can, their after-tax, after-expense yield is practically negative. Without the fundamental support provided by yield, the “second house” market rests on the speculation that prices can continue to irrationally inflate. As the WSJ story shows, even “senior real estate strategists” are beginning to grasp this concept.

Best Regards,

Dan Amoss, CFA
for The Daily Reckoning

P.S. The hangover for real estate speculators is likely to continue worsening. Upon the first hint of “deflationary” fears, global central banks tasked with destroying paper money at a “measurable” pace will unleash their next campaign of rate cuts and liquidity injections. At that point, the “good” inflation in the stock and real estate markets can quickly morph into the “bad” inflation of rising CPI levels, gold, and commodities.

Sammy that was a great read! Tuff but so true. You know all GWBush proved was America has an Armed Force it is unworthy of. This makes it twice in my life time. Just like when LBJ quit the field when our troop were in battle, Donnie Rumpy has bugged -out, just quit his post while on duty. They would shoot a 19 year old for that…. for shame… for shame.

WT-I sent this data this week to a client whose son is bidding 1.3m+ on a coop on the West Side–and she’s senior management at Merrill.
She dismissed it out of hand–good apts in good coops in Manhattan never go down…Must be reassuring to folks who have their money invested at Merrill to know those folks are so on top of the situation.

Nauseating. But what the hell, they can steal at will so nothing is out of reach.

Just heard (second hand) from someone that is long 2 homes in Greenwich, CT that during October only 7 sales took place compared to 75 during October of 2005. I find this quite surprising considering how well Wall Street is doing this year.

Federal rules require bonuses and sales commissions to be disclosed on the HUD-1 settlement statement, but buyers don’t see that document until the closing or shortly before. At that point, it would be awkward to start negotiating with an agent about the compensation.

Oh yeah? I don’t think it would be awkward. If I were a buyer and found out this had happened without my knowledge, I’d walk away until a similar amount to whatever the “incentive” was removed from the sale price.

Actually, gridlock is back, meaning good times for the economy (if it is given a few years to take effect). If you look only post-1994 (i.e. after Republicans seized the Congress), then you’ll see the good times. The big key will be if we can resist the urge to bring back rubber-stamp hegemony. Personally, I think we’ll get a Democrat. Let me be the first to name him President Jimmy Carter II.

Which, in hindsight, was not so good
But it was exciting while it lasted!

You go get ‘em, GetStucco.

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Liberals are evil.

Crudele has been blowing the horn for some 3-5 years if I remember correctly. And he is usually spot on which is a surprise for a politically pander rag like the Post.

Crudele is the voice of one crying in the wilderness…

Wow, Don Hays used to be a reliable bear back in the bubble days but he went soft in the head and became bullish in about 2001 - 2002 (kidding, good call)

Glad to see him moving back toward the dark side.

Pernially bearish, love it: all the while, the bull markets climb the wall of worry. I think when enough people on this board become bullish, I’ll sell…to you…

Housing has nothing to do with the stock market.

ROFLMAO

Much overblown. That £16 per month is a wee fraction of what my pals there spend on beer, though it does come on the (August) heels of another rate rise.

What will be the real misery is if/when the BoE continues its rate rises in succession, one meeting after another, in their attempt to nip inflation. One or two rate rises will only affect the marginal owners, but a sequence of eight or ten or more rate rises (not out of the question in many scenarios) is when the real pain starts.

Thanks. Good read.

Good read Paul….

First time I’ve seen recommendations for such high net worth asset allocations to gold, kinda flies in the face of modern investment theory. Anyone know why PM’s are going bonkers today?

hopefully the ‘murder’ will deal with the bubble in RE and mortgage mob first.

PM John Howard is correct but he’ll probably get the boot next go round.

Bit of a problematic statement there: The privately-owned Fed…

The Fed is not privately owned at all, and there are no share owners at all in the sense of private companies. In fact, the Fed is set up as an independent agency, meaning it is under the “umbrella” of the government, but its decisions do not have to be ratified by the government (which is to help isolate it from too much political pressure).

Perhaps the writer was confused because the member banks themselves are privately owned (I believe). But not the Federal Reserve Board.

And as for operating in the public interest, that depends on the poltics of the one making the statement on a given day. Any central bank might indeed think it’s operating in the pulbic interest when it raises rates (even belatedly) to maintain currency stability; those who want it to concentrate instead on other goals, however laudable or not, might vehemently disagree.

Online Journal is leftist propaganda; I would not trust any opinion found there.

“This is not speculation; it will happen and there is nothing that the Bush administration can do to stop it”

I thought congress authorized spending, not the “Bush Administration.” So now that congress is pwnted by a different party,
it is true that the Bush Administration can do nothing about it. However, the new congress has an opportunity to do a lot about it. Will it?

all utter nonsense, don’t believe any word of what Tricky Trichet is saying or writing.

The only thing these ECB bankers are worried about is that the FED may start printing money faster than they can (for the last 5 years or so, the ECB has been ahead of the FED in growning the money supply, and over the last year they are even further ahead). Just a few weeks ago they openly stated that they will not let the euro appreciate over 1.30 to the dollar (that’s just 2% from where we are now).

I think Trichet should buy up all of EADS and have it work overtime on assembly of black helicopters; he will need them soon.

JR;….Large asset with a relatively short term lease…And, I suspect, Toll is not in the mood to extend….I do not follow any commercial markets other than California & Oregon but, over the past 6 months, I have seen a significant spike in large portfolio properties offered on the market…One that stands out was a recent offering for 15-20 (possibly more) regional shopping centers….For the ones that I saw, their value was close to 2 Bil…When I see portfolio managers dumping 2 Bil worth of real estate on the market in one geographic location it promps the question why ? AND, where are you going with the doe ?

Time to cut and run?

OB_Tom: Good point. Eventually, the YOY will be large enough to make the month to month data less distressing to report.

there are soo many clever things you can do with statistics .. I just read in the magazine of the Dutch National realtors organisation (NVM) that the ‘median home price’ that they publish every month is now defined as the average price of the median 50% of properties sold. So the cheapest and most expensive properties no longer count for the statistics; good trick to produce stable numbers for another year or so.

OB_TOM: One of our local realtors had been using the fact that YOY medians were still 8.7% to argue that “appreciation is still happening” and that “8% is a great return on your investment”. I dunno how she will spin it with the most recent data, which shows a YOY median decline.

How can she state “Prices are still going UP” and “But sales PRICES are only down 1.8%”? I know people have trouble with math, but it shouldn’t be too hard to figure out if prices are up or down.

And those 6 reasons are just idiotic:

“Here are some reasons why the “Housing Bubble” is bogus.

1) Employment is the key driver of home purchases. With an unemployment rate of only 4.8% in July - the lowest since 2000, we are at near full employment. This is because even if they were given a job, 3% of the population wouldn’t work.

2) After 17 consecutive rate increases the Fed finally stopped and mortgage rates have been moving LOWER.

3) In June 2006 UCLA’s business school of forecasting admitted that not only were prices not headed downward, but that they felt that today’s prices are at their lowest point for the next 5 years!

4) Over the next decade, there will be a 25% increase in the population who are over 50 years old. This group is spending $1.7 trillion dollars annually!

5) Last year 27.7% of all sales were for investment purchases while only 12.2% were for 2nd homes.

6) In the US incomes are growing 6 times faster than the population. There are over 1 million people living in $1M(+) homes and 1/3 of them own a 2nd home!”

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Let’s see, (1) employment is the key driver of home purchases, and employment is great - but home sales are down despite the low unemployment rate. Hmmm.

(2) Rates haven’t dropped that much, and the reality is that homes are so overpriced that a small drop in interest rates isn’t going to help. And sales are still down, despite the the drop in interest rates, so her theory doesn’t seem to really be holding up.

(3) UCLA’s Anderson School of Business admitted that it’s previous forecast of falling prices was wrong, and now says prices will essentially stay flat. So, if they were wrong before, what makes this forecast right? Is it because she wants it to be?

(4) Not sure what her point is about the increasing population of people over 50. Sure, they spend (which will help the GDP), but do they really need to buy houses (I would think most of them would already own their house). So, I see this as creating less demand, and thus lower prices.

(5) 27.7% of purchases last year were for “investment.” And how many investors are still purchasing or likely to purchase in San Diego over the next few years when prices are not climbing at double digit rates? So, there goes 27.7% of demand, thus leading to lower prices. Not to mention the 12% of people buying second homes - how many will continue to do this if prices are flat or falling?

(6) I’m not sure I understand her statement that “incomes are growing 6 times faster than population.” But the fact that she backs up that statement with the number of people living in houses purportedly worth $1+ million seems inconguous, as the value of house has nothing to do with income unless it is sold. And, how many of those houses will be worth $1+ million in a year or two? And how many of those folks “living” in those homes will be able to stave off foreclosure as their ARMs reset?

If she really wanted to argue why the Housing Bubble “is bogus,” she could have given some good economic fundamentals about price to income ratios or price to rent ratios, or some other time-proven fundamental. But, I guess that she doesn’t understand those or, if she does, she knows that they clearly show that there is a housing bubble that is bursting.

“it should go up in value each year, 6% a year….that $230k profit”

heh-heh, now that’s funny!!! :o)

Hell, why 6%….Lets use 10% and make it a real sweet deal….

“So you pay yourself around 2200/mo, and get paid 1200/mo from the renter, more if you make both sides 3br/2ba. The reason I say you pay yourself, is that if you sell it in five years, it should go up in value each year, (6% a year?, thats $230,000. profit), plus you’re getting ~36,000 A YEAR!($180,000 5YRS) from your own payments, and the renters. 180+230=$410,000.00 !!) First time buyer is ok and even better, because of first time buyer programs out there, some are ZERO DOWN PAYMENT!”

Just love the laudromat due diligence!

Whither the symbiosis? It looks like decision time is at hand:

Defend the dollar, or the continuation of the conundrum. You can’t have it both ways any more.

—————————————————————————–
Dollar, gold move on China’s diversification talk
By Wanfeng Zhou, MarketWatch
Last Update: 2:47 PM ET Nov 9, 2006

NEW YORK (MarketWatch) - The U.S. dollar tumbled and gold rallied Thursday after news that China’s looking to diversify its rapidly growing foreign-exchange reserves.

Zhou Xiaochuan, governor of the People’s Bank of China, said at a conference in Frankfurt that China has very clear plans to diversify its reserves, which now stand at more than $1 trillion. A wide range of instruments are under consideration, Zhou added.

The dollar slumped to a two-month low against the euro following the news. The Europe’s shared currency is seen as the most obvious alternative as a reserve currency. See Currencies.

Gold futures climbed to their highest level in two months after Zhou’s comments. See Metals Sector.

“The remarks are especially crucial a few days after reports showed China’s currency reserves have attained the $1 trillion mark, making such diversification plans inevitable,” said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York.
“We have long warned against the diversification wave by global central banks in light of the peak in U.S. interest rates and the need to diversify into other currencies and commodities that are boosted by steadying commodity prices,” he said.

http://tinyurl.com/yaa4wn

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CSCO is going to $30, silly. I dare you to short it.