Bits Bucket And Craigslist Finds For November 21, 2006
Please post off-topic ideas, links and Craigslist finds here.
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
About Me
Name:Ben Jones
Location:Northern Arizona, United States
To donate by mail, or to otherwise contact this blogger, please send emails to: thehousingbubble@gmail.com
PayPal is a secure online payment method which accepts ALL major credit cards.
Links
-
May 2024 M T W T F S S « Sep 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Photo Submission: hbbphotos@gmail.com
View the HBB Photo Gallery *updated 4/13/2008
Front page of this morning’s Honolulu Advertiser’s business section:
Mortgage Loan Risks Must Be Revealed
“State officials have instructed mortgage brokers and other non-depository lenders to follow new guidelines for informing consumers about risks of nontraditional loans.”
“The state guidelines, issued by the Department of Commerce and Consumer Affairs Division of Financial Institutions, mirror the federal ones and apply to state-licensed mortgage brokers and nondepository lenders that make most home loans.
Among the new standards are evaluating a borrower’s ability to repay a loan based on a rate after a low introductory rate expires, and doing more to verify income, assets and debts for higher-risk loans.”
http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=/20061121/BUSINESS04/611210322/1071
This is so vague. Just the word “guideline” means go ahead and ignore it. But at least the word keeps getting out.
CYA time comes first. LTeeth in lending restrictions don’t come until much later, as part of the mop-up operation after bankruptcies have skyrocketed.
and all these gov worker parasite will get raises by providing the oldest of news
The lack of enforcement suggests that more government workers are needed rather than fewer. The demographics of goverment workers suggests that we should be concerned about the large percentage who are expected to retire in the next five to ten years. Currently there is a trend toward letting workers retire, then hiring them back as contractors at greatly increased rates of pay. This practice suggests that attempts to hide government worker payrolls may not be cost effective.
You have a point that optimizing payrolls underwritten by taxes is critically important, but all the simplistic ways of looking at or attempting to deal with the problem end up as market distortions that make everything that much worse.
“The lack of enforcement suggests that more government workers are needed rather than fewer.”
You’ll have a radical loonie outside your door if you say that too loudly.
“The lack of enforcement suggests that more government workers are needed rather than fewer.”
Yeah, so that problems can be solved, efficiencies can be realized and the system can be streamlined by the best and brightest minds that our government can offer? Like the IRS?
“Yeah, so that problems can be solved, efficiencies can be realized and the system can be streamlined by the best and brightest minds that our government can offer? Like the IRS?”
Yes.
Uhhmmm… You ever looked at the debacle that we call a tax code? Have you ever seen the government perform ANY task in a timely and efficient manner? Last one I am aware of were the development of ‘Little Boy’ and ‘Fat Man’. Please enlighten me as to the source of your confidence, enthusiasm and desire for increased governmental control.
Sorry Capt’n- looks like I missed your sarcasm in a previous post. Belay my last…
No sarcasm. Just the truth. You just happen to be part of a vociferous minority who hates govt.
The IRS is largely not responsible for our byzantine tax code. For that, you have to blame our elected representatives and those who have paid to have paragraphs added to it. Given the 1000s of pages that they are tasked with enforcing the IRS does a surprising efficient job IMHO.
“This is so vague. Just the word “guideline” means go ahead and ignore it.”
Thanks for posting this article — I’ve been interested to see when the new state lending guidelines would start rolling out. I just wanted to say that I wouldn’t be so sure that “guidelines” are toothless, since from what I understand (I’m not in the banking/lending industries, though I’ve done some research into this) lenders can lose their license if they don’t follow them. The article is pretty misleading, since the only thing they mention is that consumers will now have to be duly “educated” about their prospective mortgages: Big whoop. But if these guidelines do in fact mirror the federal ones — as the article states — then borrowers using state-licensed brokers in Hawaii will now have to qualify for the highest fully amortized loan amount, whether the loan is IO, Option, ARM, or whatever. How quickly these guidelines are enforced is a whole other issue…
Actually, it would be a great thing if consumers were “educated” about their prospective mortages.
I know people who switched out of low 30 yr. fixed a few years back and into an ARM because the payment was, initially, lower. A year later, their payment was HIGHER than the original 30 yr. fixed and they felt compelled to sell the house just to get out from under the loan. Plus disgust with the whole affair.
These people are not morons - they’re average intelligence and just didn’t have enough street smarts and were naive enough to trust that the broker would not be purposely screwing them into a loan that he knew *could* go ballistic on them.
A simple chart with 2 columns on top, one for interest and one for comparable payments with a few samples of the increases one might encounter would have done the trick.
Then add a line of caution/disclaimer stating that interest rates are unpredictable and can go up or down at any time (and that NO broker or realtor has ANY knowledge whatsoever about where interest rates are going).
Really that last shouldn’t need to be there but I am increasingly amazed by the number of people out there who actually believe that brokers and realtors have some special knowledge about where interest rates are headed, then plan accordingly based on that “advice and wisdom from the expert”.
If it weren’t so sad it’d be funny.
Don’t you think many government workers, including politicians, have Interest Only loans on houses they can’t afford, and when their mortgage doubles, they are going to be pissed as average Joe Sixpack. But they have the power to do something. Nothing hits this government types over the head until it happens to them.
I love that notion David Cee. Hadn’t thought about that but there probably are at least one or two gov. people who are going to get socked by this.
And you’re right, they don’t seem to get it unless it’s happening to them. Fun times ahead if some of these guys get hit with payment jumps.
Downsizing dreams delayed
Housing slowdown making it hard for suburban empty-nesters to fly the coop
By Kimberly Blanton, Globe Staff | November 21, 2006
Denise Acampa, 54 and divorced, knows precisely what to do when she buys her Boston condominium. She will try a different North End restaurant every week, meet her girlfriends for cosmopolitans, and frequent the theater…
…One thing stands in the way of her empty nester’s dream: a three-bedroom house in Saugus on the market since August…
…”I can’t tell you how many times I’ve heard this story,” said Paul Turcotte, owner of Re/Max Destiny in Cambridge and Boston. “All these people in the suburbs want to move into the city, but they’re hung up because houses are staying on the market so long.”
…Determined not to let the slowdown stop her, Acampa is eager to negotiate with a serious buyer for her house, winner of a 1960 design award.
Link: http://www.boston.com/business/articles/2006/11/21/downsizing_dreams_delayed/
Oh the humanity. Dreams of playing Sex and the City on hold! I guess a “serious” buyer is one who shares Ms. Acampa’s distorted market view? How about skip this “waiting to negotiate” nonsense, and just lower the price?
I’d hate to be 54 and divorced. I know I’m going to get flamed for this but there it is.
What would be your ideal divorce age?
24
Marriages should be like waffles - the first one doesn’t count.
Better than being 54 and stuck with a loser husband.
True.
Or be stuck with a 54 year old wife.
Trade for a pair of 27s??
Or a loser Wife…..
…in a community property state.
I’m 56 and divorced…so I would prefer to be 54 and divorced
Actually I would prefer to be 30 and never married. No wait, I would really rather be 25, never married, and the latest recipient of the Nobel Peace Prize awarded for my brilliance in discovering and implementing a mechanism that ends all forms of violence. No, no, that’s really not enough. I would rather be god.
LOL
Good one Ozark!
I would rather be a renter than a owner of property right now .
A good divorce beats a bad marriage.
A good marriage beats all, though.
(Celebrating my 10th wedding anniversary soon….)
Unlike some, I still say downsizing to a condo in a viable, walkable urban location (or at least a small home) makes sense for empty nesters. Ah, but you have to sell your existing home at a price the next generation can actually afford. Which means that you need to buy that condo at a significantly lower price than that for the whole thing to deliver the savings it should.
The bubble has not been good, in the end, for the “back to the cities” trend. It’s unwinding could be, once it is over.
Not to mention the national glut of condos… If someone wants to do this, it won’t be difficult.
Does Boston have a glut of condos or just a fleeing population?
Neil
The evidence suggests that what the population is fleeing is the high cost of housing relative to wages. A price decline might not allow existing residents to make as much of a mint on their way to Florida, but would otherwise be good for the state.
I lived in Massachusetts in the ’80s and as I recall they had a pretty well developed condo boom and bust that time around. I remember reading about stubborn people living in empty buildings without utilities because the association went bust. Yes, the value of a real estate investment really can go to zero.
I live in Phoenix now. People here have no idea how bad the downside of a condo bust can be.
Add to that “will be”
Boston has a glut of *luxury* condos. A lot of condo developers counted on retirees being able to sell their houses for the same price as a luxury condo. They are learning otherwise. There are several large new complexes near Chinatown that are nearly empty. Lovely condos (just out of curiosity, I went to an open house in one building when I was working at Tufts-NEMC a block away), but Chinatown is a sketchy area in spite of gentrification, and most people won’t pay $800K plus for that.
The thing that’s missing in the housing market is small one-story homes. I would bet that many retirees would be very happy with a one-story 2 or 3 BR home on a smallish lot.
My father is very lucky in that his two-story house in San Diego can be lived in as a one-story because there is a 3/4 bath along with two bedrooms downstairs. He has peripheral neuropathy and cannot feel where his feet are, so stairs are very dangerous for him. I don’t think that he and my mother were really thinking about old age when they bought the house the year they turned 50; they were just lucky. They did look at condos about ten years ago, but couldn’t find anything that they really liked that would also take their two cats (and allow them to get “replacement cats.”)
The thing that’s missing in the housing market is small one-story homes. I would bet that many retirees would be very happy with a one-story 2 or 3 BR home on a smallish lot.
That’s exactly the kind of development my folks live in. Those kind of houses work well for young couples and DINKs, too. So you get a nice mix of households instead of everyone being the same demographic.
Unfortunately, too many builders want to build “luxury” this and “exclusive” that. I think once this bubble is finished playing out in 2010 or whenever, builders will get back to more basic stuff.
There is a condo glut in the middle-class suburb my parents live in. The problem is that these 2 bedroom condos cost more than the median-priced 3 bedroom sfr in this suburb. My parents would love to down-size from their house on a big lot to a condo, but they would have to pay more to do so. So they stay in their house.
both
I think boomers becoming empty nesters and downsizing is largly a myth. Old people become comfortable where they are and are not likely to make such a significant change unless there is an external motivating force like $ issues or they become unable to drive. I know from my parents and their friends (in their early 60s) who are all empty nesters that none have downsized and a few have actually bought larger houses in the last few years. There are a number of reasons boomers will stay in their suburban SFH:
1) Status of the McMansion
2) Their friends / relatives are close by
3) They have become accustomed to a suburban lifstyle where you can drive to the grocery store or to a friend’s house and be guaranteed parking at the other end
4) Yard for Pets, no noisy neighbors, and room to entertain or host relatives on Thanksgiving / Christmas
I think the majority of boomers will transition from their houses right into their children’s au pair suite or an assisted living center. Hopefully this won’t be for another 15-20 years though!
My mother and father are still living it up in the empty nest they raised me in. And, given all of my parents’ badmouthing of retirement communities, which they find boring, I think they’re going to stay in that house until the end.
More power to them.
I have mentioned this before but given the discussion I will mention again…
I live in a very large Court…14 houses…ALL are retiree’s except me…I am 54 and the rest are in their late 60’s and 70’s…They are almost all original owners (45 Years+)…my next door neighbor just added a full bath downstairs and converted the downstairs office to their bedroom….Why ?? He had serious back surgery and she had knee replacement…Upstairs is just to difficult…So, just sell the place, buy a single story home, take your $500K tax free, transfer your tax base to the new residence and your home free ?? No Friggen Way !!! They will never sell !!! They are going out of the house ONLY one way and that is “Feet First”….
but are you 54 and DIVORCED? That’s the real issue. (If you don’t get this see earlier post by txchk57)
Saratoga;…but are you 54 and DIVORCED? That’s the real issue. (If you don’t get this see earlier post by txchk57)
Two are widowed and two are widower’s….SO, does my thesis still apply ???…..
You may not be wrong as to remaining where they are, but I think many may downsize. I know my parents want to. But I seriously doubt they will do so into a condo - they have the opportunity, but for them, downsizing means a smaller house. They still want room to entertain, have any future grandchildren stay with them, etc. Condos just don’t provide that. They are great if you are still independent at a more advanced age, but when you’re 60, it’s not really the thing. I don’t know who will buy all these condos.
My parents are downsizing into a 55+ community. But they aren’t going into the condos - they’re getting a “bungalow” (which is a twin, rancher).
IMO condos only make sense in an urban area. Why they throw them up in suburbia is beyond me.
Maybe there is a point when its “Too Late”…Like I stated above, most of my neighbors are in their 70’s….In my opinion, “Nothing” is more important to them than living out their remaining days right where they are…Not Money, or convienence, or house size…..One of my neighbors (Widower) is in late stages of MS….His mind is still there but the body is not…Single duaghter came back to live with him until the end….If she was not available, the son was going to hire in house care for him even if ultimatly it means doing a reverse mortgage on his house…POINT….HE AIN’T LEAVING ALIVE….
The Globe story gives the lie to the Lehman analyst who said (in today’s WSJ and yesterday’s blog posts) that there is no reason for prices to decline in non-bubble areas. Whether Saugus had a bubble or not, there are plenty of places that did not, and where sellers do want (a) to downsize or (b) to retire to one of the places where builders are giving incentives and all that. As we have discussed, the credit bubble and the HELOC’s were national, but in a society of transients, steep declines in a few areas can bring about substantial declines in all areas.
make that last “but” an “and” sorry
I’ve been called out on this blog for stating that the new demographic of the flight from suburbia to cities is reality and this article is more evidence of it. Although we’re early in the game when considering this trend, it shouldn’t be ignored when assessing prices.
It COULD happen if they build the right housing in the cities, but no, they’re getting so greedy that every condo project has to be lableled ‘luxury’ and ’sumptous’ like everyone moving into the city are millionaires.
Take downtown Long Beach, CA for example. They’re building countless condos there and they’re definitely not cheap. But walk around that area any night and you don’t see a lot of white faces at all, and at the risk of being racist, I doubt a lot of the Hispanics that frequent the area can afford the $400k starter condos. This is the type of development that will derail any flight back to the cities. until there are some big pricing adjustments.
There are neighborhoods south of Downtown Tucson that used to be predominantly Hispanic. Then the gentrifiers came in.
A few years ago, a couple of friends and I went on a home tour in one of these neighborhoods. A couple of things stood out:
1. How nicely the gentrifiers had fixed up their places.
2. The angry glares of the longtime Hispanic residents, who watched us walk down the streets as we toured the houses. I felt quite uncomfortable. So much so that I ruled that part of town out when I went hunting for my own house.
That’s where I live.
On #2, I know which people you are talking about. I tend to avoid that block - that’s Meyer just north of 17th - there are always a couple of people hanging out outside doing nothing but waiting for the next support check. Two blocks away though and you’re looking at paying $300/sq ft for a house, or maybe that’s down to $200 by now
This neighborhood is overrated, it’s not as special as they’d like you to believe.
In 85701 there are currently 54 listings, with 0 under contract.
You mean SSI? Amazing how SSI families breed…
And, what is worse, they all seem to act as if though it is THEIR money (like a paycheck).
Chicote, you nailed the neighborhood right on its oh-so-trendy head! I owe you a burrito for that .
And what happens when all of those hispanics dont have jobs, with a slowing economy and construction screeching to a halt. Either they go back to Mexico and live of their bounty from the past few years, or if they are recent transplants, then they start stealing your stuff. Crime goes up, then you really won’t want to be walking at night, and probably during the day for that matter. You might live in a secure high rise, but you still have to go shopping and drive to work.
In North County and San Diego they have un-gentrification where a nice neighborhood has multiple families move into a SFR. 10-15 cars in on the street for one house. Everyone is just thrilled when 5 families move into a single place.
Boston is quite liveable (I lived there for 14 years until May), and the trend is still toward gentrification and wealthier people crowding out the traditional demographics. So while the population may be stagnant, it’s different people with lots more money. This trend has been going on for 20 years or more and has nothing to do with the current housing bubble.
There is some evidence of overbuilding in the city itself, but space is tight. Below $400k, condos are selling if fairly priced (I know because I just sold mine in 8 days), and above $2 million the market may still be okay — the “Manny Ramirez” end of the market. In between, there’s trouble, but it depends on the neighborhood.
Outside the city is a different story. Condos and large new apartments are sprouting like fungus.
So in Boston there are two different condo markets. There’s the one in the city, where smart rich people want to live close to restaurants, Symphony Hall, Fenway Park, the Esplanade, the airport and museums. And then there are the slum tenements of the future that are going up in the suburbs near Applebees, Wal-Mart, and Blockbuster Video stores. While both are currently overpriced, one has a future and the other doesn’t.
Good point. I also see some of the same happening in CA. The suburban sprawl is going ghetto, and fast.
After 15 years I left Boston because it was too expensive then! (Little did I know haw much worse it would get!) Your comment about the ‘burbs may also apply to all those Triple-Decker condo conversions in “hot” neighborhoods. Family and I now live on 1 income in gorgeous 2400SF Craftsman (150K in 2000) in walkable Lakewood, OH. Better quality of life at a fraction of the price…..check out Cleveland, folks!
Dreams of playing Sex and the City on hold!
Funny !! I got the same take from the article……..
A boob job and a convertible with a 20-something hunk in the passenger seat, and this mid-life crisis will be complete.
[Crystal ball turned on] After the first few weeks of trying the restaurants and doing the entertainment scene her group of fabulous and interesting friends never materializes.
I see her sitting on the couch in her flannel nighty eating a “Lean Cuisine” eggplant parm with a bottle of Pino Grigio and watching “Dancing With The Stars”. She later stumbles over to her laptop and trolls for single men. After striking out there, she calls her girlfriend/sister/mom while weeping about her miserable life. She lays in bed flipping through the latest Cosmo and finally passes out.
The next day, her “notice of assessment increase” arrives in the mail and her car has been broken into. A winter snowstorm has just dropped two feet of snow and the power is out. Living the dream . . . .
David Lereah’s Power Point Presentataion @ The Realtors Convention:
http://tinyurl.com/tkt9h
He ought to read it himself some day and ponder what that data is really telling him…
Why quote Greenspan? The guys not even holding office any longer. Oh yea that’s right Greenspan is trying to spin that there is no bubble to prove his own theories were right.
GrinSpin
So that in 1-2 years when people are calling for his head he can say “Well Greenie TOLD me everything would be all right - what can I do about it???”
Anyone notice that strange amount of money - $184,4000 in homeowner wealth? Where can I get $184,4000?
What a moron.
Yeah, at what prices did he calculate that wealth level? In a year or two that might be a negative number.
Wow… he has no shame. There is no way he believes his own spin…
11/21/06 WSJ p. A2
Why the Housing Forecast is Mixed
Many Economists Predict Worst of Decline Is Over; Lower Prices Expected in ‘07
By Phil Izzo
By nearly 2 to 1, economists surveyed by WSJ.com said the worst of the housing bust is over. But they still predicted that the average selling price of a house will fall next year.
After several years of double-digit percentage increases, housing prices stopped soaring this year. The 49 economists responding to the monthly WSJ.com forecasting survey expect home prices, measured by the government’s Office of Federal Housing Enterprise Oversight index, to rise 2.8% this year and to fall by 0.5% next year, on average. That contrasts with a 13.4% increase in 2005.
Blah, blah, blah…
———————————————————————————————
– Are two out of three economists predicting that demand will pick up now that prices are predicted to drop, instead of rising at a high inflation rate of 13.4% or year like they did in 2005, or like they were supposed to again in 2006? Because I don’t know why a buyer would want to buy an overpriced asset now when they can supposedly shave 0.5% off by waiting until next year? Especially when economists have generally been overestimating everything lately, only to appear shocked and awed when the numbers come in worse-than-expected?
– Prices are already anecdotally down by 10% in areas formerly known as frothy, and we just saw the big surprise from the NAR that the Q306 national median is already down by 1.2% this year. I guess momentum has no effect on the way down, after seven unprecedented years of double-digit real price inflation to all-time low levels of affordability?
– As I mentioned in yesterday’s bits buckets, residential construction as a % of GDP peaked in 2005 at an all time high of 6.3%, and appears to already be in a recession, based on the big drops in levels of new home orders and order cancellations we have read about on this blog (30 to 40 percent are the usual YOY figures we have seen). In past RE downturns, construction has bottomed out somewhere in the neighborhood of 3.4% of GDP on average, and so far, it is only about 0.5% off its recent high. There has never been a sharp drop in residential construction as a share of GDP from a level above 5% which did not herald a much more substantial correction over the next few years.
– We have also seen recent evidence on this blog that the number of new homes for sale in the US is at an all-time record high — an inventory correction that does not point to either a near-term resumption of high rates of home price appreciation or return to high rates of construction activity.
————————————————————————————————
DO TWO OUT OF THREE ECONOMISTS POLLED BY THE WSJ FEEL CONFIDENT ENOUGH IN THEIR OWN JUDGMENTS TO INGORE ALL DATA WHEN MAKING THEIR FORECASTS?
“down by 1.2% this year”
Clarification: the national median is down 1.2% YOY (Q305-Q306)
bingo- if you just go 1/06 to 1/07 it will be closer to 10%
trust me, RE contruction etc is in depression already
10 quarters to go to make it official
>>>ATOMIC BLASTER ON >> ATOMIC BLASTER OFF
This belongs in the “What do you see” thread but I’m heading out the door.
Talked with a project manager friend. Recently only 1 out of the 3 projects he had lined up actually started construction. yesterday he told me the 1 that did start is real slow with the money and he was going to have to give them an “pay to play” type ultimatum.
All of us in here are pretty aware of the local news housing headlines. I’ve posted the headlines that I’ve seen in the Modesto, CA and Merced, CA area in the last few days. There is a noticable increase of housing news in the last few weeks. Although Merced Sun-Start is still silent, even after a report yesterday listed Merced as the least affordable in the U.S., the larger Modesto Bee and regional papers have reported. I’m interested in amount of housing news in other areas. Is it increasing?
I have a complete listing of these news stories here:
Mercec Housing Bubble Blog
Merced Going Quickly,
Thanks for the posts. I’ve noticed the same thing out of the Visalia Times-Delta. On the way up, they had a feel-good RE story just about every week. They have been silent on the way down.
The Valley Voice news, a twice-per-month publication serving the southern San Joaquin Valley, has been far more vocal on dropping prices.
The Fresno Bee has had some stories on the declining market, but they too have been much more occasional than the “warm & fuzzy” stories of RE from years past.
Many Economists Predict Worst of Decline Is Over; Lower Prices Expected in ‘07
Economists correctly predicted 5 of the last 4 recessions.
Sellers rejoice!!! The worst is over!!! You’re still getting less for your house next year, but don’t you feel better now that the Economists have said the worst is over??
But the psychological impact of the housing downturn is just as strong on consumer thinking, if not greater, others believe.
“We expect the housing market to remain weak well into next year,” cautioned Philip Neuhart, economics analyst at Wachovia.
“US economy fears mount as housing market cools”
http://tinyurl.com/yxyxdp
From The PeninsulaQatar
Nov 18
a nice outsiders look at the U. S. bubble
As expected, McGraw-Hill’s Engineering News-Record is reporting a steep decline in the cost of lumber. The 20-city average price for the most commonly used species fell another 1.5% in November, capping a year-long decline of 11.1% below a year ago. Average mill prices in October tracked by Random Lengths are down 24% from a year ago, while its panel price increase shows a 46% decline.
its panel price increase shows a 46% decline.
And thats the most important item “Plywood”….
article in the orlando slantinel:
http://tinyurl.com/yxtsxe
I just got back from Sweden. My family wanted to pay for my airline ticket and gave my $1,000 in the Swedish currency of
“crowns.” BTW, Sweden has not changed their currency although they are memembers of the EU (European Union). Anyhow, I asked my nephew to change the money to dollars for me. He went to the bank but they didn’t have any so he had to go the bank at the airport. I was surprised and asked him how in the world the bank didn’t have US$’s. He told me that no one buys
US$’s anymore, that most people buy Euro’s. I felt disappointed by this. Also, gas prices around $6.00 per gallon.
Most people drove really small cars.
sounds like hilery land- lots of free health care
=sad
Nobody in Europe actually needs US$ any more, unless you want to visit the US. And that has become much less popular because of the Bush administration, sadly.
The Swedish government says that Sweden is not ready yet to join the Euros zone, but they have to join the Euros zone when they are. Denmark and the UK can keep their own currencies as long as they like.
Gas taxes in Europe are significantly higher than in the US, and Scandinavian countries even have high luxury taxes (60%) on cars. Europe is part of the Kyoto treaty, after all.
Back to the housing bubble. I have followed this great blog for months now. Fortunately, Germany, where I live, is one of the few countries without a housing bubble, but the recession in the US that is unfolding will hit Europe nevertheless.
We have had a decent G.D.P growth in the Euro zone this year, so interest rates are likely to go up. In contrast to the FED, The European Central Bank monitors asset prices and still uses M3 in addition to inflation targets.
So, when interest rates are rising in Europe and Asia, how can the FED keep rates down to fight the recession and up to attract foreign capital at the same time?
Siggi,
Why is it that Germany hasn’t participated in the housing bubble?
Germany did have a bubble, in the early 1990s. Housing prices AND rents went through the roof.
I was there earlier this month and stuff looks a lot more affordable, and in the countryside downright cheap. Germany’s population has pretty much topped out and will start shrinking in a few years.
Why didn’t they participate in this go round, the 1st global housing bubble? (the last as well?)
The West-German central bank, the Bundesbank, has never believed the theory that inflation could fight unemployment. So, compared to other countries, there never was a lot of inflation after WWII.
In the early 90ies, however, there was an inflationary boom, called reunification boom. The boom was largely caused by the German monetary union with the former GDR. GDR citizens had nothing to spend their money on. For political reasons, most of the GDR money was changed into DM 1:1. So, the money supply grew too much. The Bundesbank realized that, but could not do much about it. A couple of years later, the bank killed the boom by contracting the money supply. In the end, that led to the demise of the Kohl government in 1998.
Germany also had the technology bubble (dot com). About when that ended, the single European currency was introduced. The European Central Bank had to show that it was pursueing a strict monetary policy and kept interest rates high. In addition to that, structural problems in the East and stiff labour regulations led to high unemployment. It also seems that the industry leaders did not trust red-green government and did not invest in Germany, but in Eastern Europe and China. So, when the US had the housing boom, Germany’s economy was stagnant. The German industry restructured and became very competetive, though, and the trade surplus has been growing every year.
After some structural reforms from the red-green government and the new “grand coalition” government, industry and consumers have become more confident, this year, G.D.P is expected to grow at 3% and at 2% next year. For Germany, that is quite high.
Did Germans have access to the sort of bad loan possibilities, (i.o.’s, a.r.m.’s, etc) that the rest of the industrialized world gorged themselves on?
“Did Germans have access to the sort of bad loan possibilities, (i.o.’s, a.r.m.’s, etc) that the rest of the industrialized world gorged themselves on?”
Partly, but not really. The banks here are conservative, so they don’t hand out loans easily. The idea to sell morgages to hedge funds has not yet settled in here, or it is not allowed by the law. On the other hand, mortgages usually run for 5 or 10 years at a fixed rate and are adjusted then. This, however, has never been a problem. Germany never had to attract a lot of foreign capital, so the interest rates have been very low all the time anyway. In addition to that, law and regulations on banks are relatively strict. Banks have to check if a client can afford a loan, and document that properly. Germans are conservative in financial matters as well. So, families ususally don’t overestimate their payment abilities.
However, when people become unemployed, they often can no longer afford their house. If the foreclosure does not repay the debt and the person becomes bankrupt, it takes seven years to get cleared from the debt.
Youngsters nowadays are much careless. They accumulate debts with their mobile phones and stuff like that. Credit cards in Germany are not really credit cards. You cannot accumulate debts with them. The amount you pay with the credit card is taken from your bank account every months. We do have consumer credits, though, but they are usually linked to a certain product, such as furniture or a car.
All in all, in Germany, only the state accumulates debts, the people save money. The saving rate is at about 10%.
Siggi,
Thanks for cluing me in~
A 10% savings rate is phenominal.
Do people in Germany worry that they’ll get caught up in the ramifications of the the worldwide housing bubble, despite not having participated in it?
Most people in Germany have no clue about the worldwide housing bubble, the MSM don’t mention it. Quality newspapers and magazines do, though. American investors such as Blackstone and Cerberus apparently think that German real estate is undervalued and try to acquire social purpose buildings. I am not sure that these investments will be profitable. The buildings are usually in not very fashionable districts.
The burst will of course hit Germany, too. Because of the slowdown of GDP growth worldwide in the next year, Germany’s GDP growth will slow down as well. Exports will suffer a bit. OTOH, corporations have accumulated huge amounts of cash that will become very useful.
The saving rate makes sure that there will not be a lack of capital. Attractive investment oppurtunities will present themselves.
A complete meltdown of the international financial systems would cause havoc here as well. But, the USA are far too important for this world, so the other nations will help to prevent a devestating crisis. When the hedge fund LTCM crashed a couple of years ago, European banks helped to prevent a catastophe. Next time, this will be far more difficult, but I am still optimistic.
Sweden is not part of the EMU yet, but they have to join when they are “ready” according to the convergence criteria. Cars in Sweden are small because there is a luxury tax (60%) on cars in Scandinavia.
Gas is taxed higher all over Europe, Europe is part of Kyoto.
The good news is there is no housing bubble in Germany. We have had a decent G.D.P growth in the Euro zone this year, so interest rates are likely to go up. In contrast to the FED, The European Central Bank monitors asset prices and still uses M3 in addition to inflation targets. So, when interest rates are rising in Europe and Asia, how can the FED keep rates down to fight the recession and up to attract foreign capital at the same time? Why would Europeans use US$?
“Why would Europeans use US$?”
Out of the kindness of your cruel hearts. LOL. Unfortunately Europe is stuck with 350 Billion dollars that are depreciating and that the US Federal reserve considers an interest free loan. The key to what happens in Europe is France - If they dump their US Treasury notes and bonds in their diversification from the dollar, then every Euro country will follow suit. Last one out turn off the lights.
Interesting thought. After all, in 1973, France wanted to change their US$ into gold - that was the end of the Bretton Woods system.
Siggi,
BTW, Bought my first BMW last month. A great piece of German engineering. It was repossessed from some realtor!!
There is no way the Euro will last another 10 or 20 years. I know Jim Rogers feels this way and I read a good article about this yesterday. I’ll try to find it.
In deflation, the USD will reign supreme, until it collapses, but the Euro will go first. The European tribes won’t stick together when times are hard.
Mark,
Interesting point. Obviously the USD is backed by more debt than any currency. But, you brought up an interesting point…when the conflict between Israel and Lebanon got going, what happened to the USD and gold? The USD strengthened and gold fell more! The opposite reaction that many on this blog (including me) were expecting. People around the world still go to the USD in times of crisis, wrongly or rightly.
“backed” by debt, eh?
About the Euro:
Germans have been very sceptical about the Euro, but people get used to it. There are some problems, though. Inflation is considerably higher in some Euro countries then in others, but on the other hand, the European markets are now very integrated. Only worker mobility is still limited because of language barriers. I have no idea, though, what will happen when there is a huge financial crisis. As long as smart guys such as Otmar Issing work at the ECB, I am not worried. But after that?
If people go to USD in a crisis depends on the crisis. They do that only so long as the USD is not the reason for the crisis…
I have read a report that Euro central banks such as Finland and China are slowly replacing some of their USD with UK pounds.
Next year, Angela Merkel, the German chancellor, will be both President of the G8 and the European Union. How good is she in a crisis?
I posted a link in bits bucket yesterday. The link was for a report commissioned by the U.S. Congress concerning the security of the US with regard to China. In the report (~pg 54 - 70) the commission discusses the conversion from dollars to the Euro. The commissions belief is that this is happening and that in the long run it is good for the American economy to have the dollar drop 10% to 40%.
http://tinyurl.com/ygr9ro
US-China Economic and Security Review Commission
2006 annual report
Nov 16, 2006
Caution pdf file ~300 pgs - But well worth the weekend read
Hoz, thanks for the link.
I’d agree that in the long run the dollar should devaluate. That will help to reduce the account deficit. OTOH, there are risks involved. Will the oil exporters tolerate such a devaluation? In any case, the devaluation has to be coordinated with the holders of the US Treasury bonds, else there is a risk of a crash.
Hmmm. I did a little research project this weekend. Went to the library and checked out all of the newspaper articles from the 80’s housing bust. I lifted the headlines and Realtor quotes, then matched them up with a house price graph. It never ceases to amaze me how much Realtors will deny on the way down!
What did Realtors say during the last bust?
Unfortunately, the local paper printed a Realtor puff piece yesterday with the front page headline “No ‘bubble’ in Billings.” I hope they print my letter to the editor.
(Oh, yeah. This is Montana. Flyover land, so Cote and friends can skip it if you’re not interested..)
Also, it’s hilarious to see the newspaper headline “BUYER’S MARKET” right before the big crash. Then at the bottom, the best possible time to buy, the headline was “Is the Buyer’s Market Over?”
We really need to define that term “buyer’s market”
That was fun. Thanks.
That was great. Thanks for putting in the effort. I also enjoyed your video.
It would increase the acceptance of your presentation and make it bullet proof from REIC criticism if you could link each of the comment bubbles to a pdf of the applicable article from where you pulled the comment. Then send it to your local paper for publication and watch the poo poo fly!
a 100 year graph should = 100, and will again someday
Thank you for the post. Good reading!
I would like to propose a topic for a future thread, maybe Ben can put his prodigious research talents to work on it.
During the S&L crisis I had a good friend who owned an apartment building with about $300K of commercial loan against it. When his bank got in trouble with too many bad loans, they called HIS loan. Now he was a good payer and was quite solvent so he asked the bank why they were calling the loan. The answer was they needed the money and they new he could/would pay off the loan.
Now this was a commercial callable loan and residential mortgages are not usually callable, but I wonder if anyone knows how the terms of these HELOCs are written. Are there circumstances where the banks can in effect ‘call’ the loan. For instance if the house value drops below a certain point so that LTV hits say 120%?
I doubt it.
Neg Ams are recast to the market, but I do not believe they are callable. Helocs are nominally secured loans, in practice they are unsecured.
No…
I thought this was amusing
5. Minyanville Guide to Retirement
Planning for retirement is one of those goals that we never seem to find the time to but it is critical to develop a solid, well-formulated gameplan for reaching your retirement goals.
Below are some useful retirement-planning tips designed to help you retire on your own terms:
Diversification is the key to any sound retirement plan. Make sure you gamble away your retirement savings in both Las Vegas and Atlantic City.
When it comes to saving for retirement, some people say “Don’t put all your eggs in one basket.” But if all you are saving are eggs, well… then good luck with that.
Have you considered a Rothschild IRA? The 2000 Chateau Laffite Rothschild Pauillac is a safe bet with a maturity range of 2021 to 2050, rated 99 points by Wine Spectator.
A good rule of thumb is to allocate your retirement investments between stocks and bonds according to your age. Another good rule of thumb is to somehow get a whole lot of money just before you retire.
Estate planning can be tricky and involve many unexpected expenses. To save your heirs from unexpectedly high burial costs when you die, start building a giant pyramid now in which to store your jewel-encrusted sarcophagus. Fill the pyramid’s chambers with gold and treasures.
Did you know that a single Styrofoam cup of coffee a day would in 40 years turn into the equivalent of $381,437 in the stock market? Clearly, this shows that the best retirement plan is to horde Styrofoam cups.
Some people are concerned that social security will run out by the time they retire. In order to increase the odds that you will receive social security payments, assume various identities with unique social security numbers.
Don’t be like a lot of people and forget to write down where you buried the tin can that contains your retirement savings. Also, make sure your name is clearly written on the can in permanent ink in case another investor accidentally digs it up.
Nice chart. The part that distresses me more than Realtor inability to predict the market is the inability of economists to do any better. Realtors need to eat. For them it means selling homes. Economists need to eat. For them it means making good predictions for their clients. I think it just points out the difficulties in predicting the future of human behavior.
Oops. should have been a reply to Tango in Uniform re. Billings.
Ignoring the fact that David Levin in Palm Beach is a realtor and was probably telling would be buyers a short time ago that “Prices will only keep going up,” his latest observation that there are now at least 27,000 empty properties in Palm Beach for sale because, “No one can afford to live here (in Palm Beach),” is why the brilliant economists who are saying we are at the bottom and 2007 will see a reversal are full of sh*t.
Mr. Levin’s quote, “No one can afford to live here,” can be applied to dozens of areas in the US. Depending on which economist you read, in California, only between 11% and 18% can afford to buy a home at current prices. Of course, they can still get toxic loans in some places but that window is closing real fast. As it should.
For those who say the “bottom is in”, I would like to know who is going to step in and buy the massive inventory in places like Florida and Las Vegas and dozens of other locations? Waiters, hotel maids and other service workers? I doubt it. Also, with property financially out of reach for the thousands who are needed to service the community and who make $12 an hour (if they are lucky) with no benefits such as medical insurance, where are they going to live in these new communities?
It looks like this current, obviously unregulated, property boom and the consequences in the aftermath has been about as well thought out as the Iraq war. Except, of course, the Iraq war mess is the fault of the Boy Genius in the White House but this property mess is the fault of greedy local councils and individual states trying to grab as many tax dollars as they can by issuing building permits as if they were lotto tickets.
One point about condo’s. Condo’s ALWAYS take the biggest financial hit in a downturn. I’m not sure why that is but it’s a fact and when I say big hit I mean big hit. In West Hollywood in the boom to bust cycle of the 1980’s/90’s, I know of one West Hollywood condo that sold for $320,000 at the peak. The owner walked away 2 years later when prices dropped and it eventually sold at auction for $190,000. This time, not only is it NOT DIFFERENT….it’s worse.
The answer to the current problem lies in past history (as usual). That is, that many of the older generation who now own their homes free and clear after 30 or 40 years, COULD NOT AFFORD TO BUY THAT HOUSE if they were starting off again. So economists…. what part of “CANNOT AFFORD” do you not understand?
Yeppers, you are totally correct!!!
Minyan Mailbag: The Refi That Won’t Refi
Fil Zucchi
Nov 21, 2006 11:00 am
But, as we know, these are less than normal times.
Minyan Brent lobbed the following question to Toddo and I thought I’d chime in as well:
“I know you have been quick to point out the structural problems and the massive mortgage resets about to take place. My assumption is that this party does not have to end, because of creative financing (this week alone I have gotten three requests for re-financing and one will give me a fixed rate of 2.5% for 5 years). As a side note, I bought my house in 2001 and still have the original 30 year fixed loan on it. My question is, and maybe you can shed some light on the subject, what happens if, when you go to refinance your house, it is appraised at less then your loan amount? By my estimates houses are selling at January 2005 levels and if you bought or took cash out after January 2005 your house has a good chance of being underwater.
Thanks for all your help.
Minyan Brent”
Dear Minyan Brent - In my humble opinion, how this question is “answered” by the markets/government may well dictate where and/or how hard our economy lands. It is beyond dispute that there are hundreds of thousands of people who have fooled themselves into believing they are “homeowners,” and who will soon come to the realization that what they really own is what they paid for: a “monthly payment,” a “pile of debt,” and aboslutely no piece of the real estate they live in. That rude awakening will be brought about by precisely what you describe, upside-down mortgages. Under “normal” circumstances, the outcome of this scenario would be relatively straight-forward: either the borrower ponies up fresh equity to bring the loan-to-value ratio back in line or there is no refi and the house gets foreclosed on.
But, as we know, these are less than normal times.
I doubt that the same “forces” that facilitated the debt binge (i.e. Elmer and the Feds) will work to worsen the symptoms of the inevitable hangover. Some evidence of that is already emerging in the “subprime mortgage area” where, anecdotally at least, the new OCC guidelines aimed at tightening lending standards appear to be treated like red traffic lights in Naples, Italy, i.e. as an invitation to be deliberately ignored. With the benefit of plausible deniability by the lenders in cohoots with the enforcers, we will likely find out what is really going on with these “new” underwriting standards about the same time that we will see a credible set of financials by Aunt Fannie (FNM).
More insidiously, I can attest first hand that some large private residential developers/lenders are already agitating their lobbyists to stave off a sequel to the 1990 horror movie which starred various bank regulators and the RTC. If you believe these characters, the 1990 debacle was not the result of 150% LTV loans for office buildings in the desert, but rather a consequence of out-of-touch power-hungry regulators who dared demand that S&L’s maintain a degree of solvency above some barf-test level. Hence, the solution this time is to ensure that the regulators stay out of the way, and they allow the lenders to decide how to reserve for bad loans and collect on them. I describe this scenario as far more insidious because, if left to perpertuate iteself, it would likely be the beginning of a long torturing journey along the path followed by Japan, which for more than 10 years opted to turn all eyes away from failed lenders and bad loans at the cost of a near depression for the rest of the economy.
Of course the draconian, free-market solution to “the refi that can’t refi” would not exactly smell like roses either. People who should never have been allowed to borrow beyond their means would face foreclosure, banks would fail, and on a more macro level, we just may find out how much of its $40 trillions in underwritten derivatives JP Morgan (JPM) is really good for.
Realistically, and perhaps stemming from the apathetic despair I feel for the current level of complacency in the financial system, my sense is that the answer to your question (it took me a while, but I have one) will likely be a random, nonsensical mixed bag of all of the above, with the uniting goal of maintaining our current permanent plateau of debt-induced “prosperity.” Two or three years ago I would have convincingly argued that the “refis that can’t refi” would have been the trigger for financial armageddon. But sticking to that posture today requires ignoring that equal, if not bigger, imabalances have been buried, at least temporarily, under the ever-growing wordlwide piles of freshly minted fiat- money.
Ultimately, an unforseen and uncontrollable financial accident will ripple through our financial system and wash ashore all the sins of our uber-leveraged asset economy. “However, no one knows the day or hour when these things will happen, not even the angels in heaven or the Son himself.* Only the Father knows.” (Matthew 25:36).
See, I knew 15 years of Jesuit education would come in handy at some point.
No positions in stocks mentioned.
TCHICK;….So you got that Jesuit Education eah ?? I am close to Santa Clara U….My duaghter went to Loyola then SCU…..
A very bearish article on house prices in today’s San Francisco Chronicle (the 180-degree turnaround that paper has done on housing makes my head spin!). I know the decreases predicted by Ken Rosen and other economists may not sound massive, but notice how such numbers keep getting larger and larger with each passing week:
Housing prices expected to drop more
Berkeley economist says recovery will take 3 or 4 years
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/11/21/BUG5UMGNVT1.DTL
The median price of an existing home in California will fall 4.8 percent next year and 2.9 percent the year after, Ken Rosen, chairman of the Fisher Center for Real and Urban Economics at UC Berkeley, said Monday during a presentation at the center’s annual real estate and economics symposium
I’m pretty much with him on the time scale (I think the bottom will be late 2008/early 2009, then mostly flat of a year or two after), but the precentage changes have GOT to be bigger than that in CA.
I generally like what Ken Rosen has had to say over the years.
But right now, he’s full of crap.
The kind that says if houses really fall in price by the numbers he mentions, there is no way “incomes catch up in three years”.
At those rates of house price declines, incomes catch up in 6 years - maybe - not 3.
And this quote is no different from what the “bitter renters” have been saying for years - he finally states the obvious:
“… homes have simply gotten too expensive for most buyers.”
No kidding.
********
“It may take the California housing market three years to recover from its downturn because homes have simply gotten too expensive for most buyers, whose salaries haven’t risen nearly as fast as housing prices, an economist said.”
Leslie’s back…
LA Times today:
http://tinyurl.com/y4fpxr
“Relative strength in California housing”
“Thanks partly to its healthy economy and lack of overbuilding, California’s home prices are holding up slightly better than other recently red-hot locales, according to data released Monday.”
…
“Also, the California economy is healthy and most people “are keeping up with their mortgage payments,” said Leslie Appleton-Young, chief economist for the California Assn. of Realtors, which supplied data for the national Realtors’ report.”
“The data on the economy is fairly good and we’re seeing job growth,” which helps bolster demand for housing, she said.”
…
“Overall, Appleton-Young said, the national data “reflect the fact that as you get into fall, there is less upward pressure on prices and less activity in general.”
“But we are still seeing firmer prices here,” she added.”
most people “are keeping up with their mortgage payments,”
Gaud what an idiotic thing to state as a “Big Positive”
In the same LA Times article (http://tinyurl.com/y4fpxr), there is a poll:
“Southern California home prices are holding up better than in other parts of the country. What do you think lies ahead for the local market?”
The tally so far (500 votes):
Sharp Drop : 20.6%
A long, slow decline: 30%
Slackening Demand, but healthy prices: 25.6%
Steady growth, but slower: 23.8%
As much as I hate Leslie Appleton-Young. She is right in one respect: housing prices ARE holding up better than places like Florida or Massachusetts or Arizona. Enough people have enough equity to keep the party going longer here. Plus, people are stupid enough in California to believe that a 5-10% drop in prices represents a “good deal” while the rest of the country actually sees this as the beginning of the end. However, LAY’s comments about a “lack of overbuilding” are ridiculous. Look at the Central Valley/Sacramento!!
Everybody have a great Thanksgiving! See ya next week.
And Friday we should have a I ruined thanksgiving dinner by talking about the housing bubble thread. Or maybe my sister the FB.
The Vix closed below 10 yesterday and is presently trading at 9.90 as of 2:50 pm. No risk for this market. Rock on! Maybe its getting to be a good time to go long on the Vix?
Wall Street investors are a happy go lucky crowd…
http://tinyurl.com/uavna
A co-worker showed me the house she was trying to sell in Cinncinnati. (She relocated here for work.) I was floored when I saw the pic: an entire neighborhood of Craftsman-style bungalows, in great condition! It’s close to impossible to find a property like that in these parts…for less than 300K anyway.
(this was supposed to nest under Mark Duluk’spost…waayyy up there.)