The Housing Bubble

For the next couple of months, holidays interfere with the normal monthly reporting cycle.

Does anyone know exactly when the October/November New and Existing Home Sales numbers will be released? I’m somewhat detached here in Australia, but seems to me there could be some market-moving statistics in these 2 months.

You know at some theoretical level shouldn’t people be happy that sales are tanking? Or rather, aren’t sales tanking because buyers are happier where they are than paying current prices and sellers would rather hand on that accept the amount of money that buyers are offering. Doesn’t this mean that both are happy with the status quo? Or at least happier than a sale would make them.

Now that the housing bust is here, there are also two views of the bust. The consensus view is that the “worst is over”. The minority view is that the bust has a ways to go.

The RE party is over and we’re waiting to see how bad the hangover will be. Will the fed leave a few beers in the fridge for the morning?

i’m a re novice, and often see “fb” posted here - can someone enlighten me as to what it means?

first-time homebuyer?

House prices likely to go down in the UK…

http://news.bbc.co.uk/1/hi/business/6172088.stm

Loafer

Got a call from my realtor yesterday. She said that, if I was at a point where I was ready to buy, she thought she’d let me know that sellers are accepting an average of 6% below asking price with most offers being around 10% lower.

Sounds good to me. But nowhere near good enough to jump in…

Took a trip to the library last night, found a good one: Lets turn the way back machine to 1984! (Sorry about the long post)
THE DAY LOS ANGELES’S BUBBLE BURST
By Benjamin Stein
New York Times Dec 8, 1984
My pal Jerry P. just bought a condominium in Century City, in Beverly Hills, for 60 percent of what it sold for in 1980. Down the street from me here in the Hollywood hills, four houses have been on the market since 1981. The asking prices now are about one-third less than they were three years ago. Up and down Sunset Boulevard in West Hollywood, apartment houses that were converted to condos lie empty, boarded up, not one unit sold, in bankruptcy, with banks holding title.

New Yorkers do not like to believe they could learn anything from California, but perhaps in this one case they might try.
The Southern California residential real estate boom began in about 1974. It was not just a boom. It was a super boom, with miserable bungalows in Santa Monica running up from $40,000 in 1974 to $400,000 by 1980. Two-story colonials in Beverly Hills went from $200,000 to $800,000 and then over a million. One-bedroom condos in Hollywood were built and sold for $100,000 - what a house in Beverly Hills had been five years before. Every day, home buyers would look at the prices and say, “It can’t go on.” But every day, for five years, it did go on. Middle-class families were priced out of the market, and the brokers said, “But the rich will always be able to buy.” Ordinary rich people were squeezed out of the market in some areas, but the brokers said, “Never mind, the music business people will buy anything.” The music business fell into a depression in 1979, and the brokers said, “
The foreigners are buying. Compared with Paris or Teheran, real estate in Holmby Hills is a bargain.”

Everyone wanted to get in to the game, get the down payment on a house, somehow struggle with the payments for a year, then sell out and get rich quick. Inflation pushed housing prices into the stratosphere. But even when inflation stopped, brokers said, “The prices have nothing to do with inflation. Everyone on earth wants to live in L.A. The price will go up forever here, no matter what else happens in the rest of the country.”

Then the music stopped, some afternoon in 1980. As if a spell had fallen over the city, suddenly things began to stay on the market for three months, six months, a year, two years. Buyers disappeared. Asking prices stayed high, but nothing sold.

The great Southern California real estate boom was over. Prices had gotten so high that they could no longer be justified by inflationary expectations, or the influx of foreigners, or the climate, or for any other reason.

Now, four years later, those brokers who are still in the game tell sellers to expect that their houses will be on the market for two years. Other brokers have sold their BMW’s and are now working as “financial planners” or public-relations people, dreaming of the days when they worked for 6 percent of infinity.
THOSE WHO IGNORE HISTORY ARE DOOMED TO REPEAT IT

Think that the problems in the real estate market are gonna get fixed?
Think again!
http://realtytimes.com/rtcpages/20061120_thinkingbig.htm

That piece on NAR is just scary….those left out of the 70% ownership rate? a good one third of the ‘owners’ are only FBs, permanent debtors, or pending foreclosures.

Seems like NAR would like to make home ownership a constitutional right, with them skimming the 6% cream off the top forever.

And who is NAR to support affordable housing? They played the carnies in this last bubble seperating the fools from their money.

I am dealing at 30% below TODAY’s discount!

Trying to hawk Queen Creek crackerbox in Dallas. This really amuses me.

http://dallas.craigslist.org/rfs/238121811.html

Here is a housing article that I found interesting. I know there are a lot of folks here that are agnostic on the role of gold (the article is from a pro-gold site). Please skip those few references because the article really spells out the trouble this economy is in when housing tanks and is a good read.

Salvation Road
The title of this article is from a Ray Davies (of the Kinks) record back in 1973. The song, part of 2 records Davies wrote and performed titled Preservation Act 1 and 2, describes a desolate life after the neo-cons, corrupt politicians and pseudo-religious zealots commandeered government from the people. Ray Davies was remarkably prescient thirty-three years ago. Too bad his records received only passing interest from mainly his loyal followers. In the beginning, according to Davies, the scammers and crooked politicians conspire to gain wealth through housing corruption:

I see a little thatched cottage looking so neat

With compulsory purchase we can buy them up cheap.

Then we’ll pull up the floorboards, knock down the walls,

Rock the foundations, like a pack of cards,

Crashing to the ground.

Then we’ll build a row of identical boxes

And sell them all off at treble the profit

It is hard to not see the nameless, faceless rows of brand new suburbia as you travel around the United States. Big homebuilders such as Ryland, Centex, Beazer, Pulte, and Toll Bros. have homogenized homebuilding to ever greater scales of efficiency. Whether you are in Dallas, Atlanta, or Indianapolis, they are mostly big boxes of mud-colored variations. They are usually built in big drab subdivisions with grandiose names like Royal Highlands, Bay Colony, or Summer Brooke (I refer to that one as “some-are-broke”). What is astounding is how many of these behemoths have been slapped up in the last 10 years. While the housing bubble is now well documented, few truly understand not only how it occurred, but why it occurred. The millions and millions of new homes could never have been built without a great facilitator. That facilitator came in the form of Fannie Mae and Freddie Mac, with tremendous assistance from a duplicitous Federal Reserve. As long as long-bond rates and gold remained artificially low and credit quality could become a non-issue, the sky was the limit for homebuilding. It is no coincidence that the beginning of the gold suppression was also the real beginning of the housing bubble.

The 1990’s stock market bubble (which largely still exists thanks to the Working Groups) produced a blizzard of paper wealth. It was only logical it would spill into housing. In fact contrary to the belief the housing bubble inflated after the 2001 stock market decline the housing bubble had already begun years before. It was just less recognized when all eyes remained on Wall Street. The challenge was in overcoming credit standards required at the time by builders and lenders. Conventional loans still required a percentage down, credit quality mattered, and ratios of debt to income were strictly enforced. It was a sane approach to lending: if you had fiduciary accountability to your shareholders or, in the case of the homebuilder, it was your own money on the line you needed security. The only way you would loan sub-prime money as a lender or builder is if it was other people’s money. As is nearly always the case the best people in the business at making poor decisions with other people’s money are those in our government.

In a subtle yet profound way two little noticed government agencies were reinvigorated. Fannie Mae and Freddie Mac became full-fledged “government sponsored entities”, or GSE’s. In a still murkily defined proposition GSE’s are quasi-government backed securities capable of changing definition in chameleon-like fashion. They exude government confidence on one hand; while reminding us occasionally that technically they are not government backed. Wall Street preferred the rosier definition of “practically government backed” and pushed newer and more exotic bundling of home lending debt along with Fannie and Freddie stock. REIT’s flourished with mutual funds and investment firms pushing more and more offerings. It seemed too good to be true: millions of heretofore sub-prime borrowers building McMansions with (mostly) government backing. It indeed was too good to be true; in fact it was a Ponzi of epic proportions.

If buyers dried up at one credit point you merely lowered the credit criteria another notch. If interest rates were still too high at say 5 ½% then no interest was offered for a period of time. If that didn’t work there were interest-only mortgages, 40 year mortgages, or even 50 year mortgages. Appraisers all too eager to please the lenders gave appraisals in much the same fashion dot.com analysts once gave stock forecasts. The insanity reached a peak in 2005 when over two-thirds of all homes built were either speculative or second homes. A vice-president of a regional homebuilder remarked to me 95% of the borrowers who walked through his door “wouldn’t get a plug nickel if it was his money, but they come back with Fannie paperwork and build a home.” A slovenly looking girl in her early 20’s recently commented she was “looking for a property in the area to buy and flip.” A lawn mower by profession making roughly $15 an hour bought a new 2,800 square foot home and promptly began raising hound dogs in the dining room. Surely these were signs of the housing apocalypse.

Nothing’s permanent and nothing lasts,

We’ve sold all the houses so put ‘em up fast.

We’re gonna buy up this town and pull it all down

How I love to hear the demolition sound

Of concrete crashing to the ground.

A Ponzi scheme inherently contains the seeds of its own destruction. The Fannie/Freddie Ponzi had a seed, and it was a doozy. In order to facilitate the trillions of mortgage loans derivatives were used as accompaniment. Trillions of dollars of mortgages and trillions of dollars of derivatives can only behave if the price of gold likewise behaves. If the price of gold can no longer be suppressed it all unravels. If gold were to rise dramatically long bond yields look fraudulent, the dollar looks grossly overvalued, derivatives blow up, foreigners quit shoving money our way, REIT’s dry up and Fannie and housing collapses in a thud heard round the world. Fannie’s recent accounting and derivative irregularities would be just a warm-up to what’s in store with $1,000 gold. It cannot be emphasized enough that subverting gold’s role as keeper of the monetary trust has allowed catastrophic decisions to be made in housing.

Fannie’s accounting woes correspond to gold’s recent rise. However Fannie’s recent rally flies in the face of housing reality:

Housing’s importance to the general economy is largely underestimated. While ancillary businesses such as mortgage lenders and insurance companies have obviously benefited greatly from housing the rest of the economy is enormously dependent. Thousands of “box stores” like Home Depot, Lowe’s, Target, and Wal-Mart have been built with the tailwinds of housing in their sails. Thousands of new chain restaurants have sprung up around these new additions. In addition thousands of boutique malls catering to furnishing and decorating McMansions have been built. Realtors, appraisers, title work employees and even occupations such as garbage collectors and pool cleaners shared the bounty of the Ponzi. Municipalities, school systems, libraries, local governments and other taxpayer funded entities based revenues on the housing bubble going on forever. Bigger and fancier public Taj Mahals were built that now need sustaining. Without the ever-growing paper appreciation of housing it simply cannot be sustained. Home equity extraction alone has accounted for most of GDP growth the last several years. The de-leveraging of housing will de-leverage the U.S., and the entire world’s economy.

Never before has such a frightening scenario existed. Joe Six-pack was in effect given a high-limit credit card and encouraged to live it up just like the rich folks. Now the world awaits his inevitable tumble from what sadly was a mirage. While the recent downturn in housing has at least produced a few dire forecasts from homebuilders such as Toll Bros. http://www.philly.com/mld/inquirer/business/15954747.htm?source=rss&channel=inquirer_business nobody on Wall Street or the Fed proffers much beyond the soft landing jingoism. There just is no way you can produce a soft landing with trillions of dollars of derivatives, layered upon millions of exotic interest-only and ARM mortgages, built primarily on a foundation of sub-prime borrowers. Millions upon millions of homeowners simultaneously upside down on mortgages is just unimaginable. Once again, every Ponzi ends badly.

Ray Davies concluded back in 1973:

Sick and tired of living on loans,

Driving around in a car that I don’t own.

Tired of seeing wealthy faces flying off to far-away places.

Good-bye freedom, hello fear

A brave new world has suddenly appeared.

There is a salvation road that differs from the gloomy future world ruled by despots over mindless automatons predicted by Davies. It requires restoring democracy to economic policy. Fiat tyranny can be abolished. Honest money can prevail. An honest currency should be a store of value, not something that perpetually swindles through debasement. As long as fiat by decree prevails there will always be violent boom-bust cycles. Until the time comes when a sane monetary policy is resurrected, gold and silver provide the best viable alternative to the coming derivatives and housing wipeout.

James McShirley

Did anyone see ‘Oprah’ yesterday (I’m serious)? My wife TiVo’d the show and I was on my feet applauding in the first 10 minutes. Oprah announced that the real estate bubble was bursting, the end is here, and everyone better rush for the exits. Just when I thought the show couldn’t get any better, they profiled a family living in REDONDO BEACH that, try as they might, just couldn’t sell their house. It wasn’t suggested (yet) that lowering the asking price might be a strategy. So, Oprah brings in an interior designer and a landscape consultant for a $10K re-do. Now this townhouse is looking habitable, the asking price is lowered about 5%, positive remarks from looky-loos at the open house, and (drum roll), are there any offers? No, sorry, no offers… LMAO! I have to tell you that this area of the country has been virtually bulletproof (so far) to seller hysteria. This is the beach area southwest of los angeles, an place where, as the saying goes, they’re not making anymore land. Neither side has blinked in the stand-off between the sellers/buyers. Most of the owners have been in their houses for a long time, have hundreds of thousands in equity, and are in no hurry to leave. Unless, of course, they see their retirement nest-egg begin to shrink, or their heloc balance start to expand in proportion with their real or imagined net worth. With the size of her audience, could this be a pivotable point for the national housing market?

I have asked this before and been scoffed at, but here goes: Should I move my 401K entirely into a fixed income fund in order to ride out what seems like a coming financial market apocolypse? I could always at a later date shift it back into equities when I feel better about the market.

It just seems to me the fraud is going to come home to roost in a big way. The Dow the last couple of weeks has been been slowing like a rollercoaster as it approaches the first drop.

http://content.hamptonroads.com/story.cfm?story=114800&ran=158476

Lawyers, lenders predict bankruptcies will climb in 2007

Check this out:

The ad agency behind NAR’s $40M buy now blitz says prices are going down.

“No real estate market in the history of the world has ever continued to do nothing but go up. It’s going to go down.”

“Q: How can it be both a good time to buy and to sell?

A: It depends on where you live, what part of the country or what part of California you live in.

You’ll find at some point, wherever that balancing point is, that, yes, the prices will have come down, but you’ll also be paying less for those homes if you’re selling.”

Do you think he will get anymore work from NAR?

http://www.ocregister.com/ocregister/money/abox/article_1361262.php

This may explain the persistent bid in the homebuilder stocks.

1. Deal-Hungry Private Equity Group Bids for Self in Dramatic Leveraged Buyout

Let’s make a deal. More than 40% of the $1.28 trillion of announced U.S. mergers this year has come from private equity firms or foreign buyers, up from less than 24% last year, according to Thomson, the Wall Street Journal reported. The frenzy is unlikely to stop anytime soon.

Amid a spate of recent high-profile takeover deals, the value of leveraged buyouts — deals by private equity firms financed by debt backed by the target’s assets and repaid with its cash flow — has nearly tripled, according to the Wall Street Journal.
Even some companies once considered too big to become private equity firms are now targets, the Journal says.
The newspaper cites Sprint (S), Hilton (HLT) and Avis Budget Group (CAR) as potential acquisition targets.
Also mentioned in the article are home builders such as Lennar (LEN), Ryland (RYL)and D.R. Horton (DHI).
Data cited by the WSJ shows the average premium over the market price being paid in this year’s deals are 17.2%, compared to 25.7% in 2000.
But a look inside some of the deals suggests the insidious nature of what is really taking place.
An article in the International Herald Tribune (”Cheap Debt Takes the Fear Out of Making a Deal”) takes a closer look at the Freeport McMoRan (FCX) deal for Phelps Dodge (PD) that was announced Monday.
“The combined companies will go from having no net debt to having a staggering $15 billion in net debt,” Carol Levenson, an analyst with Gimme Credit, wrote in a research note, the IHT reported.
While that shift in debt would be enough to consider the debt of almost any company speculative quality in normal times, Moody’s Investors Service announced that it would probably upgrade Freeport’s credit rating.
Put another way, FCX was suddenly deemed more stable and creditworthy for borrowing $15 billion and buying PD.
Meanwhile, the wave of purchases by private equity groups has pushed issuance of high-risk debt to record levels.
However, the IHT notes, instead of worrying that defaults will increase, debt prices show that bondholders believe the companies will have few problems paying off new loans.

In almost every article I come across in MSM, in CA home values are 10x median income. None of the articles really address an overriding issue of this bubble - homes way overpriced for income levels.

As of today default notices in zip 93552 as tracked using foreclosure.com are at a 3 three year peak on monthly, quarterly, and annual rolling avg. 22, 18,11.5 resp.

I like this. “2nd time on market in 50 yrs.”
When was the other time? June 2005.
http://tinyurl.com/y26peo

Price Increased: 09/01/06 — $1,195,000 to $1,199,000

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The stock market can’t be stopped, kids.

And you’ve got to love DELL! Did any of you pigeons short DELL in the last few days?

Slower economy growth forecast
By Stephen Dinan
THE WASHINGTON TIMES
November 22, 2006

The Bush administration yesterday predicted slower but steady economic growth over the next year, revising estimates downward because of a sluggish housing market.

Administration officials also said inflation should remain at a manageable pace, while unemployment has now dropped to 4.4 percent and will remain at 4.6 percent as an annual rate for 2006 and 2007. The forecast was one of the periodic updates released by the administration, and will be the basis for President Bush’s 2008 budget he will send to Congress early next year.

In reviewing the numbers, Rob Portman, director of the Office of Management and Budget, said they showed a “strong, growing economy, steady growth, good numbers on inflation in the sense that they’re lower again.”

The gross domestic product is now expected to grow by 3.1 percent in 2006, down from the 3.6 percent growth predicted in June.

“That’s primarily a reflection of the housing market, which as most of you know, has been a bit slower than expected,” said Edward P. Lazear, chairman of the Council of Economic Advisers.

http://washingtontimes.com/national/20061121-105646-8606r.htm

SunsetBeachGuy,
The ad agency behind NAR’s $40M buy now blitz says prices are going down.
—————————————————————————-
In the same OC Register, there’s a prominent interview of Chris Thornberg who basically refutes everything this dingaling ad guy was claiming.

The one piece of advice given by Thornberg that stuck out was “Don’t rely on anyone’s opinion who has an interest in making money in the RE transaction”.