A Look At Housing Bubble Predictions
Readers suggested a holiday topic on predictions. “I’d like to see a weekend topic generally doing a critical analysis of predictions of when [insert any generic real estate market prediction here] is going to happen. The real estate people love to predict there will be a big turn around in the 4th quarter of this year, provide no justification and people here rightly call them on it.”
“But people here make predictions too. I can see that 5 months from now as a prediction of a turn around is ridiculous on its face, but why is 2011 better? or 2016?”
“People sometimes analogize to the Japanese real estate bubble. Why is that a good comparison? People say the bubble will take as long to deflate as it did to inflate. Why?”
“I’m not looking for any guarantees. Just an explanation of your reasoning. Or an explanation/critique of the real estate cheerleaders’ reasoning (assuming they have any or have ever stated what it is). That is what is on my mind this holiday weekend.”
One replied, “I have no idea what is going to happen. I only know what happened last time, sellers held out for years, 2/3 of the loss in value was inflation. The question is whether the exploding mortgages will speed things along.”
Another posted, “Predicting the pace and severity of the decline is almost impossible. There are so many other economic factors (recession, employment, value of the dollar…) that predictions are guesswork at best.”
“But there are macro economic principles that are in play. When you look at what occurred with pretty much every bubble for the last 500 years, you can predict where this bubble is headed, if not the exact timing. When you look at Prof. Shiller’s chart of home values over the last 150 years, and see that prices at 4x median income is the overwhelming average and mean, then you can predict that todays 9x - 10x median income prices are way out of whack.”
“A return to the mean is inevitable. Will this be in quick declining prices or stagnant prices for years with values eaten by inflation is hard to judge.”
“My guess is that with the bloated inventory, mortgage crises, and a slowdown of the economy, plus the vast amount of speculative buyers who can’t just sit tight. We will see price declines over a few years (2-4) as a return to the mean. The mean is probably 1997 prices plus inflation, around 30% -50% below current prices.”
“My guess is based on recent downturns in the early 80s and 90s here and in Japan. In the case of Japan the bottom lasted 15 years, but most of the price decline happened early on. I believe the same thing will happen here. I think some buyers in the last few years will never see their house worth what they paid again in their lifetime.”
One agreed, “The key point (imo), is the speed of decline driven because of tenuous mortgages. The subprime and Alt-A resets as well as the level of speculation (buyers not living in the purchase) will drive the speed of decline. These were not ingredients of prior RE bubbles to the level that they currently exist.”
One reader looked at loans, “The resets are made up of two waves. The first started this May as monthly resets jumped from 25-45 billion dollars. They will hold at the 35-50 billion dollar level for around 15 months. They then fall back to 10-15 billion until late 2008.”
“The second wave jumps back up to 35-40 billion in resets from late 2009-2010. Foreclosures run 3-6 months behind the resets.”
“A look at a long term US chart since the origination of the FED (1913) shows market lows during the Congressional Election year. Expect a cycle low in 2010. I would not look to buy until late 2010-2111. Four years.”
The Union Tribune. “Economists from Wall Street to the Federal Reserve are scratching their heads trying to parse the future of housing in light of worsening default and foreclosure rates.”
“But they might have saved themselves some trouble if they had consulted Robert Gertz, a senior at the University of California San Diego.”
“He examined the trends in San Diego County, considered by many to be the bellwether of the nation’s housing markets, and predicted doom. ‘San Diego will likely face the worst foreclosure rates in its history in the coming three years,’ said Gertz.”
“Gertz, who based his predictions on mathematical models that he verified using historic data, said the peak number of 7,605 foreclosures he projects for 2009 represents a ‘best case scenario’ because of the possibility that such failures could tip the local economy into recession and result in more distressed sales.”
“‘Home price deterioration reinforces foreclosures, which reinforces home price deterioration,’ he said. ‘This basic phenomenon is what causes the cyclical nature of the housing market as a whole.’”
“Alan Nevin, chief economist with the California Building Industry Association…said things may not turn out as badly as he thinks. ‘It’s my belief that there will be a spike in foreclosures, but it will be short and then recede,’ Nevin said, with most activity happening by the end of this year. ‘As long as interest rates stay in their current range (of about 6.2 percent for 30-year, fixed-rate loans) that should not be a problem.’”
not much-
off 7% in 07 real
4 % same 08 real
same 09 real
same 2010
I happen to think we will see more of a decline, why? Let me tell:
I think people are continuing to believe that our economy will stay semi-strong, at least that is what I read all the time. I beg to differ, I feel that the economy is now in, or very close to a recession in terms of growth, but government #’s are basically lies, if anyone reads ShadowStatistics, or Barry Ritholtz of the Big Picture blog, they know what I am talking about.
When, not if, the #’s become impossible to hide any longer more and more will realize that all of this time the economy was floated by robbing from Peter to pay Paul through the magic of easy credit and incredible amounts of borrowed leverage, that is the elephant in the room.
It is like building a castle, but instead of building it on solid bedrock, you built it on shifting sands, that is how this economy has grown. When the economy went south after the stock market collapse we NEVER had the usual purging of debt and people NEVER got back to getting their financial house in order. The financial alchemists in our society engineered the most massive borrowing binge in history, then, foreign central banks did the same. This NEVER ends well.
Having said all that, I feel that the unwinding of the events described above will only add feul to the fire for FB’s and many others. The time is soon coming when it will once again be seen that people who are prudent and people who are savers will be admired and be the survivors (financially speaking) of this mess.
How low can we go? I don’t know exactly, but unwinding bubbles can go farther than most think.
“This NEVER ends well” - This NEVER ends! …apparnently
“It is like building a castle, but instead of building it on solid bedrock, you built it on shifting sands, that is how this economy has grown.”
Sorry to go Biblical on you, but I just could not resist the temptation…
Matthew 7:24-27 (New International Version)
New International Version (NIV)
Copyright © 1973, 1978, 1984 by International Bible Society
[NIV at IBS] [International Bible Society] [NIV at Zondervan] [Zondervan]
The Wise and Foolish Builders
24 “Therefore everyone who hears these words of mine and puts them into practice is like a wise man who built his house on the rock.
25 The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock.
26 But everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand.
27 The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash.”
http://www.biblegateway.com/passage/?search=Matthew+7:24-27
Who is this idiot Nevin? Another shill in the Lay-Lereah mode.Follow the money. He’s spouting the company line. ‘09 will slip into ‘10 or ‘11 IMHO.
Economy doing a slow unwind with offshoring and huge debt.
Wages stagnating.
Negative savings rate and record debt now with a good economy.
Boomers retiring to smaller homes/condos and spending less.
Energy prices keep going up. Mcmansions will go out of style.
Government in a perpetual printing mode means your stagnating
wages and savings deteriorating.
Forclosures are bad now with a good economy. They will continue
to get worse.
Housing will continue to lose value for a while. Maybe a few years.
Happy memorial day!
“But people here make predictions too. I can see that 5 months from now as a prediction of a turn around is ridiculous on its face, but why is 2011 better? or 2016?”
Unless one truly believes ‘it is different this time,’ history can be a useful guide. That is why I often recommend an extensive long-term study across countries released by the IMF in 2003. It has some good summary statistics, and simple take-home messages:
1) Real estate busts tend to be worse than bear markets for stocks, in terms of their duration and macroeconomic impacts.
2) The median price decline in a real estate bust is 27.3 percent (we are not there yet!) and the median duration is 4 years (16 quarters), which would take the current episode out to 2009.
3) Personal conjecture: Since the duration of the current bubble and magnitude of its price increases were the largest in U.S. history, the unraveling period is likely to be longer and the magnitude of price decline likely to be larger than historical norms, which would imply a larger than 27.3 percent nationwide median price decline and recovery after 2009. Of course, these are merely my own personal opinions; I realize that other better qualified commentators with more access to high-level information and first-rate expertise have repeatedly insisted the housing situation is contained and the market will recover by year-end 2007.
The study I refer to is the second chapter in the International Monetary Fund’s World Economic Outlook for 2003, accessible here (scroll down to find the .pdf link to Ch. II: When Bubbles Burst). The release date of this study could not have been more auspicious, nestled midway between the burstings of the tech stock bubble (2000) and the housing bubble (2005):
https://www.internationalmonetaryfund.org/external/pubs/ft/weo/2003/01/index.htm
Thanks for this post, GS. Great link.
I agree with your post. This has been a historically huge bubble. Prices going up double in about 5 years in many places, such as the beach cities of LA (South Bay) where I recently lived for 3 years, also here in Phoenix. I’m surrounded by houses in the $360,000 to $1,500,000 range. There are 340 houses listed for sale on Yahoo Realtor in the 85044 zip code. The prices on those houses have appreciated too high, too fast.
I don’t think the issue will be about boomers retiring. Many of the ones who intended to finance their retirement with their second or third homes will find they have to continue working for maybe 10 to 15 years, perhaps until they drop. Some of those who were going to merely downsize their careers will delay that and continue their careers another 5 years or 10 years.
If outsourcing won’t pressure the wages to stay low, the boomers remaining in the workforce will cause wages to stay low while young people continue to join the work force. This will keep wage increases in the 2% to 3% range.
if that does not pressure house prices to fall, it could take ten years or more before people will be able to get a traditional fixed mortgage, based on 2 and a half times their incomes to afford a starter home in a large metro area where the jobs are.
Something’s going to give. It has to be Real Estate prices dropping gradually or quickly, not wages increasing substantially.
Bill,
You bring up a good point about the boomers. One of the most intersting things to me is that boomers deluded themselves into believing that RE would fund their retirements. Boomers rushing the entrance to RE through ever increasing home sizes, investment properties,etc. certainly pushed helped to push up prices over the last ten years, but when they begin dumping at approximately the same time it will negate all the fantasy wealth they collectively created. Only a select few who time it just right will do well. The vast majority will be be SOL. Funny thing is how could a group so supposedly smart could do something so dumb en masse? It is simple supply and demand. If you are part the largest and most materialistic demographic bulge in history, how can there be a big demand for RE when your cohort starts downsizing and/or buying the farm? I suspect homes will be quite affordable in ten years or so and stay that way for a while.
One of the most intersting things to me is that boomers deluded themselves into believing that RE would fund their retirements..
It was easy to think that way on the surface, I used to sit in my backyard (2005) and hold up my hand, then I would use fingers to count from my mortgage, 150k, and holdup a finger for each 100k that my house “worth at the time” over the mortgage, once I had to holdup my other hand I new it was time to bail. I had not heard of subprime, bubble, etc., I just thought how many people were left who could(or would) buy my house.
Maybe the GOVERNMENT is using a bubble/bust in RE as a way to help the Social Security mess by making folks work longer?
“…how can there be a big demand for RE when your cohort starts downsizing and/or buying the farm?”
To add to your point, the McMansion craze brought us many, many homes priced over $500K and targeted for large families (4br+, large sqftage). With the aging of the boomers, demand will increase for smaller housing, and many of these recently built McMansions will turn into white elephants.
It must have been the case of the most massive simultaneous brain flatulence in recent history when boomers decided that they could do much better by financing retirement with owning two or more homes instead of by saving the way financial advisors (read “Money/Kiplinger’s/Smart Money/Fortune Magazine?”) have been telling them all along - STOCKS! The millions of geniouses did not consider that all their kind will be doing the same thing and ask “who will buy all these houses when I cash in the chips? Who will rent them?” They did not listen to the people who were experienced in investing. They lost a battle they could never win.
“I suspect homes will be quite affordable in ten years or so and stay that way for a while.”
I agree with Bill on this. I think it will take about 10 years before prices are affordable again and it will stay that way for at least a little while until this boom/bust is forgotten and people start to think it’s a new economy again. From studying RE booms and busts of the past in this country and others, the timetable shows a pattern. This boom - 1997 to 2005 is 8 years. Multiply 8 times 1.618 and you get roughly 13 years. 2005 plus 13 is 2018 (will hit bottom). I think there will probably be a steep drop from now to 2012-13 and then it will flatten out, still dropping. If this bust follows the same pattern as history shows us, this is what will happen. I guess time will tell though …
Thanks, great post.
Man uses pigs to trash own house after foreclosure
http://www.kgw.com/news-local/stories/kgw_052607_news_pig_house.12e66bfa.html
and be sure to watch video
http://www.kgw.com/perl/common/slideshow/sspop.pl?recid=3783&nextimage=6
Wow, good find.
The ratio of home prices to income is less important, IMHO, than the ratio of home prices to rents. Rent prices crystallize the actual value being traded.
It’s entirely possible for housing costs to account for a larger fraction of people’s income because people want more space or people prefer to live on more expensive land downtown. It is not normal, however, for the value of a housing unit to increase drastically and rent for the same amount.
How can real estate investors who rent out property make money at today’s prices? If property is worth something near the current asking prices, investors would be better off selling their rental property and investing in conservative stocks and bonds.
The housing bubble will be over when housing prices are at parity with rents. I suspect it will take a few years, but I really don’t know. When it “turns around” is moot because turning around means real estate prices staying the same when adjusted for inflation. It does not mean another crazy bubble.
what is the formual to establish “parity” between rents and the value of a home?
agentjmf,
This is where it gets interesting. The rental maket is so skewed right now my dad and i have not touched any new properties in Cape Coral for over three years. We sold three duplexes ranging from 270-318k during the run up. Paid off the other rentals we own. To service these debts at these prices the rents will need to be 1100-1300 per unit. It is not gonna happen. Our current rents on our other properties are 625-700 per month. We may end up reducing the prices a little more to keep our occupancy at 100%.
If you figure 100-110 times monthly rent this puts the value of a duplex at 130-150k. In all actuality our insurance and taxes have went up so freakin much i would not pay much over 90k to make the numbers work at todays rental prices.
Investors who bought in the last three to four years with less than 20 percent down will not be able to service the debt at current rents and expenses imho. Also vacancy rates are starting to effect the incomes also…
Like i keep a preaching,its going to get VERY ugly here in Florida in the next 1 to 2 years.
Chris
P.S. As a rule we have never owned a SFR as a rental. Just to much hassle for a very risky ROI.
The 100-110 month rule is a good rule of thumb, but more formally, an investor should always work out the capitatlization rate
http://en.wikipedia.org/wiki/Cap_rate
This gives you a better idea of what your cash flow will look like. Also, its reciprocal, the years to payoff, is really handy because it gives you an idea of the time horizon you are working with. For instance, here in Alaska I would not trust the economy not to undergo a bust in the next 15 years, so I would like to see at most fifteen years to payoff, which would mean a cap rate of better than 7%. (We actually have a rather strange RE market in Alaska, with lots of population turnover and a boom and bust economy- I would guess that before 2004 the cap rates were closer to 10%).
ron - you are correct….we had a RE investing class in our mba program and it was the hardest $^%$&^ class i ever took. to assess properties well, it is very, VERY time comsuming and very math intensive….
What textbook did you use? I’m interested in reading up on this a bit more. I learned about it first when studying Operations Management, which covers real estate only incidentally.
Sirmans (author was also our instructor)
Dr. C.F. Sirmans. Professor and Director, Real Estate Center Finance Department … Professor Sirmans specializes in the analysis of real estate…….
without trying to find the book
- i think it was simply called Real Estate Investing (or investment)….
“Dr. C.F. Sirmans. Professor and Director, Real Estate Center Finance Department … Professor Sirmans specializes in the analysis of real estate”
That is really funny! I wrote a paper with him.
you ever live in CT?
No, we were just collaborating from a distance.
what is the formual to establish “parity” between rents and the value of a home?
You don’t even need a formula. If the total monthly cost (mortgage+taxes+ins+maint) with 20% down, 30 year term exceeds the market rent for the same house, it’s too expensive.
Or to put it in other words, if you can’t make money renting it out, it’s too expensive.
That’s really all there is to it.
I predict that Bernanke’s pants will spontaneously combust at the next FOMC meeting.
Does that mean we’ll start calling him “Pants on fire” Ben instead of “Helicopter” Ben?
When you look at home prices over the decades, it’s not exactly an apples-to-apples comparison. Houses built in the seventies and eighties used cheaper materials than you’ll find even in a “starter” home now. Back then, the standard was Kenmore appliances, tile counters, vinyl floors, and wall-to-wall carpet. Now, it’s KitchenAid, granite, travertine, and distressed pecan. Say what you want about conspicuous consumption, but the materials are decidedly finer now, and the genie is out of the bottle: nobody is going back to the old stuff.
So, what should new construction cost on a square-foot basis when you factor in the improvements in quality? My wife and I are looking at North County San Diego (Carmel Valley and nearby areas) and I’m OK with $250/sq. ft. for high-quality new construction, which I’m seeing in some neighborhoods even now.
Here’s my question: Does anybody really think it will go much cheaper than that without going back to tile and vinyl?
I’m no expert but I’d wager those granite and “distressed pecan” materials came from China. I’m no more impressed with such pseudo-finery than I am with a Michael Graves table lamp from Tarjay. We have gotten better at making nicer things for the same price as less-nice things since the days of tile and vinyl, but mostly we’ve gotten better at making them look nicer…to the average American consumer…which doesn’t say much. Maybe if and when China cuts us off these materials may start costing more and then maybe there will be more value in homes with these modern veneers. But I wouldn’t count on it, if this ever happens the builders will just convince American consumers that whatever materials they can get for cheap at that time are the new rage, and that granite and “distressed pecan” are for those that can’t afford new.
granite and trendy wood are fads. In the past, consumers were lead to believe that other fads meant gracious living, and the lack thereof made consumers sub-standard, and the striving for them made life wonderful.
This is what consumerism is all about.
Consequently, in 10 years name-your-trendy-wood, floor surface substance, countertop surface mechanism, will seem dated, you will seem inferior, and fashion will have moved on to some other ‘finer’ substances to which you must switch or risk demotion against the Joneses.
Why are today’s houses falling apart after a few years while houses from the 70’s and 80’s still standing strong?
Here’s some new houses getting blow down by the wind.
http://cbs13.com/consumer/local_story_033001529.html
Do a google search on shoddy construction and You will see it is prevalent.
You point out another reason not to buy at the moment. With all the new shoddily-constructed product coming on line at price points above $500,000, it is too early to tell how the market will eventually discount the higher depreciation rate compared to better-constructed homes of older vintage. I expect the discounts to be huge, but it is way too early to gauge the magnitude.
You know, I have noticed this too. During the years 2002 to 2003, my last two years of college, I rented a room in a house from a guy who bought in a new, KB home, housing development in Fallbrook, CA (San Diego North County Inland). In early 2002, when I moved in, he had just purchased the house and the housing development looked brand new, in fact, I think they were still building in some areas of the development. In early 2003, the wall in the right hand upper corner of my bedroom started looking kind of funny. As it turned out, it was water damage due to a leak in the roof. That was just the beginning. From there, he started finding plumbing and electrical problems, as well as some structural flaws that cost him big bucks to fix. Then I heard about other houses having similar problems. I think a group of homeowners tried to sue the company, but before it was over, I had already moved on to Northern CA where I found a job up here. But … the stories continued, the ones I heard from friends and new homeowners down south and up here in the Bay Area. GetStucco is absolutely right that this is another reason it is not a good idea to buy right now. It remains to be seen what will happen with these shoddily constructed houses built in haste during the boom. And good advice, I would say, is, when you do decide to buy, make sure to have the home inspected thoroughly by professionals that you trust, either through friends who know good people, or through businesses who have an established reputation and good business relationships with others in your area. And even then, there is no guarantee they will catch everything. In any case, proceed with care …
A few things…
1) Continual quality improvement may just be the natural state of things. Houses from the 70’s and 80’s were better than the previous decades as well. For example, the US did not have widespread electrification in the early 1900’s and yet housing prices were roughly the same, when adjusted for inflation. Are granite countertops really that much more of a quantum leap over the 70’s and 80’s than past improvements, like electrification, which apparently did not raise prices?
2) Why wouldn’t these improvements raise rents by the same proportion as well?
Any builders around?. Good topic - what is a quality home? I always thought well built was “well built under the covers”. I.e - duel/triple glazed windows, double insulated wall/ceilings (ahhhh, nice an quiet!) , good water/electrical piping, higher ceilings.
All the other stuff is easy to upgrade. What other attributes from a builder’s perspective is a quality home that poeple cannot easily upgrade themselves?
I’d be curious to hear more about this, too.
“Good topic - what is a quality home?”
One consumer’s take:
1) Absence of hidden defects
2) Built to last
3) Quality of workmanship and materials
Does recent construction during a mania stack up on these criteria?
Post-war houses in the US are generally garbage. I looked at a $2.8 million house go up (land value with a regular ranch house ca. 800k)down the street and the construction materials and practice was pathetic. They even put an entire OSB side very cockeyed and somehow cosmetically mae it look ok with the veneer. Anything put up by the big builders is guaranteed to be junk. I think that you need to go back to pre-war and then add renovation to get something decent, or a custom built home on the east coast. Also the DC area is horrendous in design with their cheap looking “colonials” and their 50s-60s “ramblers” are just shocking. Frank Lloyd Wrong.
But buying the land with a teardown for 800k is indeed painful today. Most of these teardowns here (McLean, VA) are spec by small time players who build them as cheaply as possible and put the cheap “stone” or “brick” veneer on the 4000 sq ft box. It’ shocking when the RE agent puts “solid brick house” on some crapbox OSB shack. Don’t people know better? Is the RE agent being deceptive or is she just plain stupid? I think the latter.
IMHO the best modern homes are the ‘eco-friendly’ homes (such as five star energy homes, integrated concrete form instead of frame, foam core panels, high-quality windows, etc). In general, the contracting on these houses is higher-quality and all of the components of the house are well-designed and well-built. The cost per square foot of construction of these houses is estimated to be $80-$120 (estimates by the Rocky Mountain Institute). You want lots of superficial crap, you will pay somewhat more. If you are paying $250.00 a square foot for construction, you are either getting burned big time, or are getting foo-foo additions like gold-plated bidets
i am happy with the $60/sq ft i paid - i only have beautiful oak, sorry - no pecan here - and if i ever want granite (not likely) then i’ll pay for it. i would NEVER pay $250 - ever…..
Personally, we actually LIKE the carpet/linoleum floors with simple, white appliances and Formica counter tops!
Seriously, whenever we see granite/SS & cold, hard tile on the floor, we begin to add up the “discounts” we want to see for having to rip that crap out. Smells like a flipper to me.
“Alan Nevin, chief economist with the California Building Industry Association…said things may not turn out as badly as he thinks. ‘It’s my belief that there will be a spike in foreclosures, but it will be short and then recede,’ Nevin said, with most activity happening by the end of this year. ‘As long as interest rates stay in their current range (of about 6.2 percent for 30-year, fixed-rate loans) that should not be a problem.’”
How do these guys come up with this BS? And what do 30-year fixed-rate loan interest rates have to do with the story, when almost nobody can afford to buy a home in San Diego or other bubble cities on a 30-year fixed payment plan?
I suggest Alan take a close look at the Credit Suisse chart of mortgage reset doom before offering further comment to the press:
(cf. Exhibit 42: Adjustable Rate Mortgage Reset Schedule on p. 47 of this report — CAUTION: PDF LINK)
http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf
In the 80’s, if my memory serves me correctly, Alan worked for Home Federal Bank. He said at the time everything was fine with that bank while it was going under.
Maybe he could fill Lereah’s shoes at the NAR?
I think you are looking at a 3 year turn around with economic growth. However, with out economic growth, another Internet, etc you will see if take 8-10 years to start to turn around. It is a real simple and not very hard to figure out formula…at least for me.
Inventories - Have to shrink
Buyers - Have to expand
Prices - Have to drop
Mortgages - Have to be fair
Interest - Has to stay low
I highly doubt all these things will happen in 3 years, and the reasons are fairly simple… Liars loans are gone, prices are sliding, people purchasing expensive houses 500k+ can’t unload their own house to move up. Economy is in a false sense of good health, while we pile up unreal debt and are in an unending stupid pointless waste full military action in the Middle East bleeding us of resources and money and good young people.
I think the odds are better the way the deck is stacked against us to go into a recession if not a depression - not when is the housing prices going to be outrageous again. That NAR and the MSM as well as the FED certainly have economic blood on their hands, I wonder how bad this will get considering our economic state and lack of leadership.
Don’t forget -
Buyers - Need to save down payments
That will take a long time. It’s hard to even imagine our population having a positive savings rate. Think of all the Crate&Barrels going out of business! Oh the humanity!
Not necessarily. I am wondering where are the conservative voices standing in opposition to this proposed robbery of the U.S. taxpayer?
Subprime lending alternative proposed
Bill suggests getting rid of down payment
Bloomberg News
Published May 15, 2007
WASHINGTON — Housing and Urban Development Secretary Alphonso Jackson urged bankers, lenders and counselors to lobby Congress to pass a bill aimed at offering home buyers an alternative to subprime loans.
The legislation, which passed a House committee earlier this month, would make it easier for low- and middle-income home borrowers to get mortgage insurance from the Federal Housing Administration. One provision would eliminate the requirement that buyers make a down payment on their home.
“FHA reform could be one important answer to our subprime problems,” Jackson said at an industry conference Monday. “I ask you to help us to ask Congress to expand our authority.”
http://www.chicagotribune.com/business/chi-0705140517may15,0,5042549.story?coll=chi-business-hed
“FHA reform could be one important answer to our subprime problems,” Jackson said at an industry conference Monday. “I ask you to help us to ask Congress to expand our authority.”
wtf? yet another stupid idea to throw the idiocy of the sheeple on the taxpayers
Nice post Pat.
Just did a search on San Diego ziprealty.com used SFR listings priced at $500K+:
“Your search has returned the first 200 of 8000 homes”
I predict that many of these 8000 homes will not sell at $500K+, given a growing glut of new homes entering the market at comparable prices, plus a dearth of moveup buyers now that home equity appreciation is negative, and the vanishing of subprime (which can actually affect the $500K+ price range in a move-up market with high inflation like San Diego from 1998-2005, especially when liar loans are readily available).
Interesting. If you do the same thing here in South Florida, you get:
Dade County: 12,118
Broward County: 9,161
Palm Beach County: 9,279
That’s a staggering total of 30,558 homes selling for more $500K+ in the Miami MSA. Yikes!
However, don’t worry. The Realtors(tm) keep promissing that all the rich Babyboomers are going to move to South Florida upon retirement. And, since they’re not building any more land down here, I guess they’ll start snatching them up shortly.
“…all the rich Babyboomers are going to move to South Florida upon retirement…”
This prediction portends a future crash in the high-end neighborhoods of the industrial north…
“This prediction portends a future crash in the high-end neighborhoods of the industrial north”
This proves that you don’t think like a realtor… of course they will keep their house in the industrial north AND buy a second house in Florida. Oh, and one in Arizona, too.
Getstucco-I like you am wishing to enter the Sd market again. What do you think about eventually learning how to do short sales with the banks…unless you know how to do that already?
I have no first-hand experience with short sales. I am assuming you are thinking about helping banks unload REO. Other posters here have suggested cultivating personal relationships with local banks that might be desperately seeking qualified buyers at some point in the future.
Actually I was thinking about helping homeowners in trouble and telling them that we can negotiate a short sale with the bank versus them just letting it go in foreclosure.
The time is not yet right for this for we are no where near the bottom. There are tapes on ebay that that tell you how to do this and they have pre printed offer sheets to banks in theses course packages.
I saw a 6 tape set with forms and manuals for $179. Like I said, I am not ready yet nor is the market but I will be in the near future.
Thanks for this important information.
Maybe I’m cynical, or a doomsayer, but I think that I’d be looking for a 6 tape set that tells how to help the Banks that are in trouble.
That’s how to get a house!!
Paul
the_economist said “Energy prices keep going up. Mcmansions will go out of style.”
Especially in areas of the country with seasonal extremes, which is most of the country. Here in Sacramento, the winters are mild but the summers are unbearable. I can’t imagine what people are paying to cool these homes. When I speak with people in this area who would like to buy, two factors that are preventing it repeatedly arise: the prices (of course) and the size of homes.
I think that there are so many “owners” who in fact have no equity to bargain with that only the banks will be able to drop the prices as homes go REO. Most people who truly do own their homes will stay in them. A lot of very long time homeowners are going to lose their homes, too, because they can’t afford their HELOC payments and credit card bills, and bankruptcy is no longer going to protect them. In the short term, ARMs resetting will keep things going down until 2011, but if things are much worse than we’re imagining, the whole economy is going to suffer sooner than that. In the long term, we are talking generational change for people to value smaller, energy-efficient homes and a more sustainable lifestyle. I imagine my grandchildren will have much more in common philosophically with my grandparents and parents than with me or certainly their parents. Materialism as a lifestyle really accelorated during the post-WWII years; prior to that, and people who were in debt were generally looked down on, especially if they were in debt for non-essential reasons. It will take a generation of trouble brought on by over-consumption and massive debt to bring about any long term change in the way we, as a country, have come to view credit/debt and that other “entitlement” — the one where we think we have a God-given right to 25% of the world’s resources.
Here is an article that seems interesting with regard to the bigger picture. Only hits on housing with a small mention though.
http://www.independencejournal.com/
Amen. My mother and I were having the exact same conversation last night. I have never owned a home but when I do, I want it to be a small, very well built Craftsman-style home with lots of charm, double-paned windows, energy efficient lighting, solar panels. A yard for growing my own organic food. Room for a compost pile.
Living in Southern California and not taking advantage of the sun for energy (while paying enormous bills to cool an enormous home in the summer) doesn’t make ANY sense to me at all!!! So glad to see some sane people still exist in this country. Maybe only on this blog…but at least you do exist! I am waiting for some smart developer to make a housing development like the one I described, instead of these awful giant homes that eat up every square inch of land. If you search for “environmental housing” or anything like that on the Internet, nothing comes up for Southern California.
P.S. I was responding to Cmyst…
Being an Architect, the type of home that you begin the describe is absolutely the future. It’s not the size of the home, but the quality and design of the home. There are a whole array of “passive” design approaches that if implemented would definitely cut down on wasted energy and water. I could go on and on….
The “green” sustainable approach is the future.
Will there be a future growing business to retro-fit houses with energy-efficient features?
Have you taken a look at some of the prefabs coming out now? try http://www.Dwell.com. Many of them feature green materials and passive cooling. These are my dream houses.
Waiting in LA - you and I may be competing for the same house! If not - we can always share seedlings and compost
When I first came to the Housing Blogs, I asked a newbie question (can’t remember where, now) about solar panels vs big houses in L.A….as in ‘why don’t people stop bitching about energy prices and put up solar panels?’
The answer being ‘because homeowners don’t like the way solar panels “mess up” the line of thier roofs’…
…it was then I realised how #$%cked up this place is.
Going back to the previous thread about rent vs buy - my time to buy is when I can get a small (under 1200 sq ft) place with a big yard (ie 5 x the house size), and have enough money left over from the purchase to completly ‘remodel’ it - with full insulation, double-paned windows, solar panels, grey-water septic tanks and drip feed irrigation, from said tank, for my garden.
One of my favorite homes is built to hide the panels and take advantage of passive cooling. In places like Sacramento, if you can get the right lot and line the home up to get the most of the delta breeze, this home is genius
http://livemodern.com/sunsetbreezehouse
Waiting, you describe exactly what I’d like to own at some point in my life. It IS completely ridiculous that more of SoCal doesn’t take advantage of the sunshine that they seem so willing to pay extra for! Meanwhile, I keep reading until buying (or building) makes sense again. Judging from the size of the housing bubble, I’ll have plenty of time to decide what I want over the next few years. Growing a garden, placing solar panels, and installing a geothermal heat pump will be my first considerations in anything I look at owning.
Ditto, here.
It’s interesting that over the years of reading bubble blogs, I’ve seen this recurrent theme of what many buyers seem to want (smaller homes, larger lots & GREEN building).
I’m no tofu-eating hippy (not that there’s anything wrong with that), but it makes 100% sense that we use solar & geothermal energy, excellent insulation, & double-plumbed lots (for grey water recycling). It’s like…DUH!
I’ve even thought about building a development that would use these principles (every owner could buy a lot & design his/her own “green” home) when the market is finally ripe for buying.
Maybe we HBBers could come up with something (company or development or???). Lots of talent & knowledge here.
Along those lines, I’d love to have enough room to be able to build a small cob single room structure on my property to use as a studio.
http://en.wikipedia.org/wiki/Cob_(building)
I have been looking into high-quality, energy efficient building materials (though not for my present place, which is log). Foam-core panels are one great way to go- much stronger than stick housing, energy-efficient and much quicker to assemble (for example,
http://oikos.com/esb/35/demo.html
A neighbor used foam concrete forms, which are also quite energy efficient and strong:
http://www.dulley.com/docs/f746.htm
the_economist said “Energy prices keep going up. Mcmansions will go out of style.”
Especially in areas of the country with seasonal extremes, which is most of the country. Here in Sacramento, the winters are mild but the summers are unbearable.
Our large house in Colorado uses less energy than our small house in San Diego. Amazing what quality materials and proper insulation can accomplish. Summer peak cooling runs about $100 per month and peak winter heating about $130 per month.
Bottom will be 2013….just a gut feel based on having been in the middle of the early 90’s crash in CA, studying the Japan RE bust, the magnitude of “infestors” restricting supply, the magnitude of the price runup, the magnitude of suicide loans, and the long term harm done to the country/economy by the crooks in the white house.
Is there any hope for “something better”…….no.
I’m thinking a seven year downturn dating from 2005 is about right which would put the future turning point at around 2013. The seven year downturn is in agreement with both the Bible (seven lean/seven fat years), the IMF Bubble Report, and the Great Depression:
http://www.youtube.com/watch?v=KlkOPAa4Mao&NR=1
I think the credit card debt will hasten the collapse of the housing market and push us into a severe recession by the end of 2007.
Then house prices will really start falling.
I know a woman who has $20K in credit card debt. About 18 months ago she did a refi and took out money to buy a new car and other things. She has friends who make twice her salary and she is living far beyond her means to keep up with them.
She just applied for a refi and was shocked to be told she doesn’t have enough equity to refi and pull out $20K . She was told appraisers now are setting values at 90% . She was not aware of the housing bubble mess.
She can afford her mortgage payments , but is failing behind on her minumum credit card payments.
Yesterday some one here said that this Christmas shopping season may be very bleak and I agree.
I agree. I don’t see how we can continue to spend at our current rate without the house ATM. Spending HAS to slow, which kills our economy, which kills house prices fast.
I expect a 50% drop in PHX in 2 years. Only question in my mind, is how many times I’m going to have to move in those 2 years. When I rent places, ANY security deposit is going into an escrow account which comes back to me should I be evicted through no fault of my own (such as foreclosure).
Run the names of rental house owners through the recorder at maricopa.gov. There are still some owners who bought five years or more ago and did not refinance. While they may be in major debt in other jurisdictions or have unrecorded personal debt, it is still a good sign if they are not upside down or close to it. Of course, the houses purchased since 2004 are almost certainly owned by people who are upside down.
“Spending HAS to slow, which kills our economy, which kills house prices fast.”
Don’t you think top U.S. economic policymakers understand this risk, and will do everything within their power to counter it? If you do understand this point, how do you know they will not continue to keep the credit-fueled shopping binge going indefinitely?
Yup. Our gov will do whatever they can t keep the party going. Helicopter drops, make work programs, MBS bailouts, etc. Thus the real question becomes, at what point does it become in our creditor’s interest to pull the plug on us. I suspect it will come gradually as Asian countries start to use thier trade excesses to purchase oil and other commodities rather than US debt instruments.
ugh. “can t” = “can to”
I think the downturn in RE will last for at least three to five more years and the “bottom” will occur at different times for different areas. A market runup like we’ve seen doesn’t correct itself in 1 or 2 years. Anyone that thinks we’re nearing a bottom is a fool, a liar or both.
What I’d like to know…is were there these types of ARM/IO/Neg AM products available during the Calif. boom/bust of the 90s? To me it just seems to reason that the things really are different here…they’re going to be worse than last time
Exactly, and what happens when these products are no longer available? Then who is left to buy California’s 500K houses? There is no way we will see more than a couple percent a year wage increase in most fields, and those heavily offshored will continue to stagnate or fall, so very little help there.
Worse, and I believe we are already seeing this, in bubble areas car sales, furniture, household goods, electronics and home improvement type products will all take a big hit (already have). Thus unemployment instead of being limited to the Military Industrial Complex will be wide spread. This will lead to further downturn.
Everyone keeps saying how terrible protectionist policies would be for th eeconomy, but I don’t see how it will be better without them. A middle class is not a natural occurrence, and must be cultivated. The last 25 years have chipped away at the middle class, which I believe is an endangered species.
“Exactly, and what happens when these products are no longer available? Then who is left to buy California’s 500K houses?”
Bingo. How many buyers have even 10% to put down, when that’s $50K! Plus cash reserves and no credit card debt and proof of stable income. Yeah right.
This is how prices got disconnected from income in the first place. Once foreclosures hit the tipping point, banks won’t have a choice…they will revert back to more traditional lending standards and prices will take a nosedive.
A middle class is not a natural occurrence, and must be cultivated.
Why is it that every government in the world except ours has no trouble understanding this?
Oh the US government understands it perfectly well too. What the US middle class doesn’t understand - yet - is that the government is trying to get rid of it.
It is different this time. The last two run-ups peaked at about 20-30% above fundamental support levels (price of rent/affordability/cost of construction). This one is 30-40% nationally, 100%+ in some areas.
The crash will be fast and hard, IMO.
“The crash will be fast and hard, IMO.”
I would agree with you if I believed the govt would stand back and let the free market right itself. But this would be a 180 degree departure from recent economic policy on the ground.
Hence I expect a continuation of propaganda about letting free markets operate without the interference of govt intervention, coupled with unannounced-behind-the-scenes stabilization policy, to drag out this housing bust for many years to come.
Unfortunately, I agree with you on this, GS.
Many years of failed (and expensive!) bailouts.
Why do these fools not understand that a $50K worker will NEVER be able to afford a $500K house?????
bitterLArenter,
In my opinion,no they were not available during the last runup. The reason the last runup happened was the increase of dual incomes with very good jobs in the aerospace industry. When the aerospace industry collapsed in the late 80’s/early90’s most people just walked away even after originally putting 10-20% down.
As an aside i had a good friend by a VA repo (he was a vet also) in 1994 in Anaheim Hills. Homes were selling in the 270-300k range then. He paid 108k. I just think you didn’t hear more bad news then because the msm had very little desire to be mr gloom and doom…
Chris
Not only dual incomes, but Baby Boomers were in their peak buying years in the 70s and 80s — and there was real wage inflation. Lots of fundamental reasons for those run-ups, but even then the market dropped.
This time will be much, much worse. I agree with the 2012+++ “bottom”.
I had been predicting Year over Year median price *declines* in Los Angeles county *last* October. We’re still a ways away from that.
My next prediction is widespread talk of a consumer fueled recession starting after Christmas ‘07, as US consumers with a negative savings rate pull back on spending as their ARMs readjust and the HELOC ATM is overdrawn.
I make no prediction on the ARM reset tsunami (ala Credit Suisse chart), but the effect could tighten up alt-a lending (and even prime), and possibly cause a domino effect in credit in general (which would doom the economy even further). I have no idea when such a surge would have it’s largest impact, but my best guess is the first two quarters of 2008.
I based my predictions on the faulty lending . A high % of buyers just can’t keep up with the adjusted up real interest rate . This was a investor driven market based on hype that demand would be there and real estate would continue to appreciate . I have never seen so many borrowers just buying for a short term gain objective . The amount of vacant houses/condos is appalling . Under the current set of circumstances there aren’t enough qualified buyers that are end-users that these short-term speculators can sell to and greater fools are in short supply . Real estate has to come down to affordable levels again to get the demand up to eat up the supply .We are already looking at alot of job loss in the housing sector and that will continue IMHO. People will be forced into cutting back on spending and that spells recession to me .
I think the correction down in this market will be faster because of the foreclosures along with the excess building and payment stress .
I’m seeing the actual bottom being around 2012 but I think the major corrections are going to take place in the next 2 years .The industry has no way out of this because of the type of lending they resorted to to keep the party going .Because people usually need a loan to buy real estate, the lending aspect of real estate investment is the most important variable because it gives the means to invest or buy a home .A tight money market plus excess supply will correct this market really fast IMHO.
Excellent post, Wizard. My only big question is with regard to this line:
“A tight money market plus excess supply will correct this market really fast IMHO.”
Won’t the Fed and other govt institutions with economic policy clout do anything and everything within their power to keep money loose, despite all disclaimers to the contrary?
Didn’t work in Japan, won’t work here, GS.
IMO the Feds/gov. will not have the option of decreasing interest rates enough to bail this baby out .FHA rewrites will only save a small portion of buyers . Lenders can rewrite some of these loans to stop some foreclosures but in a investor driven market like this one the borrowers only had short term goals .Look at all the empty housing .
And let’s repeat, one more time, that Japan doesn’t borrow from the rest of the world. The US cannot drop rates because that would cause foreign creditors to stop lending, or even worse dump the debt they hold now. The US$ is shaky enough as it is with the current rates.
I’m in the camp of saying the bottom won’t be reached until at least 2012. I can understand people who think it will be sooner: They wonder how can low income buyers of $500,000 homes with ARMs maintain several thousands of dollars per month interest? Can they do this for 5 years? doubtful. But they will walk away. Doesn’t mean the price of the house will come down hard and soon. They could sit vacant for a few years and slowly deflate. Prices have to come down 50% from the peak, IMO, before I am interested.
The other wild card is govt intervention. I still see significant risk that well-meaning attempts to forestall an all-out collapse of the U.S. housing market will have the unintended consequence of dragging out the bubble’s denouement over a far more protracted period of time.
Well yes, this new immigration bill will greatly increase the number of consumers of low end goods to keep consumerism going. It won’t prevent the RE bubble burst but could help stocks. Millions more consumers coming into the US could put off the inevitable stock collapse another 5 years. Lots of people will be trying to get in before the bill takes effect.
Vacant houses need lot’s of care taking or they deteriorate. are vandalized and loose all value. Lenders do not want large unsellable RE holdings.
It is hard to say how long the collapse will take. The government and other shady groups will do everything in their power to prolong the slow crash - gotta get people in debt and keep them there! On the other hand, market forces and a move away from the “real estate always goes up! Real estate is the best investment ever!” mindset may lead to many people simply tossing in the keys and walking away, regardless of interest rate diddling by the FED or other such government meddling.
I don’t see a good future for housing as an investment: in truth, this may well be the last time in our lifetimes when anyone thinks of it as an easy way to make money. The Baby Boomer will soon be retiring. Many will simply stay put, but eventually they will die off and unless illegals making $2 an hour are going to pick up the slack, we’ll have a lot of extra houses. Higher energy costs will crush exurbs - places with lots of houses but no jobs nearby. The only thing that could save them would be companies actually opening facilities in those areas to escape the extreme crowding in areas with jobs. Then, there’s the water shortages out west - the last place I’d want to be “investing” is an ex-urb in the desert southwest of the US. No jobs and no water - it can’t get any better than that!
Other macro-economic factors will come into play as well: Not only will higher energy costs crush McMansions and exurbs, but what about jobs in general? How many of us here will even have a well-paying job in 5 to 10 years if everything is outsourced or insourced with illegals? Then, we have the continued devaluation of the dollar - prices are going up, but wages are not. That will make it even harder for people to save up downpayments for houses. The only ways around that are lower prices or “funny money loans.” I think we can all agree that the days of the “funny money loan” are numbered, and those may not reappear for a generation or more.
The more I think about it, the more it seems to me that the housing crash will be stunning in magnitude, and who knows how much of the economy wil go down with it. The more stores and companies fail, the more people lose their homes, and the process feeds upon itself. The sheer concept of vast subdivisions of $500,000 houses in an area with median household income of $55,000 will be looked upon as a form of madness in 10 years, I bet.
The frustrating part is not only is it taking forever for things to return to sanity, but a lot of good, honest people who save and invest wisely may end up suffering if the fallout from this crash is as bad as it could be.
In Depressions, cash is king, and that may be where we’re headed.
“In Depressions, cash is king, and that may be where we’re headed.”
What about helicopter drops and other policies to make people want to unload their cash like a hot potato? Never mind about the negative national savings rate — many top policymakers think everything will be fine as long as U.S. consumers are enabled and encouraged to keep borrowing and spending.
There is a raging debate about whether the savings rate calculation is technically in line with what it is supposed to measure, but I believe the signal in eight straight quarters underwater is resounding, regardless of how govt statisticians futz around at the margins.
—————————————————————————–
Personal savings rate hits 1933 low
By Elaine Morgillo
May 20, 2007 6:00 AM
The Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, reported recently that in the first quarter of 2007, the nation’s personal savings rate dipped to minus 1 percent, the lowest savings rate since 1933, in the midst of the Great Depression. This news has sparked a contentious debate about whether a continuation of this trend may contribute toward an impending national economic collapse.
Before he became chairman of the Federal Reserve, Ben Bernanke put a positive spin on the statistics when he suggested that the poor savings rate in the U.S. was to some extent the product of a “global savings glut.” His premise at the time was that foreign savings were being transferred into U.S. investments, which helped to keep lending rates low, boosted the stock market, and generally stimulated the accumulation of wealth.
Our national savings rate has been negative since the second quarter of 2005. People spent everything they earned, and then dipped into savings for the extra. But an understanding of the methodology used to calculate the savings rate may help to illustrate that the situation is not quite as straightforward as it might initially appear.
http://www.seacoastonline.com/apps/pbcs.dll/article?AID=/20070520/BIZ/705200328/-1/OPINION05
“Our national savings rate has been negative since the second quarter of 2005.”
I am wondering if, in the light of hindsight, this fact will be seen as a tipping point for the bursting of the housing bubble which, perhaps not coincidently, appears to have begun almost simultaneously with the onset of a negative savings rate for the first time since 1933?
Stucco, you’ve hit (again) on one of the great mysteries of the coming collapse. I believe we’ll see the dollar strengthen domestically but decline internationally, resulting in the simultaneous asset price deflation and commodity price inflation we’ve often discussed.
Interesting wrinkle, though: Peter Schiff believes foreigners will take advantage of the dollars weakness to export anything that isn’t nailed down, driving those prices beyond the ability of Americans to buy (or even hold on to) them.
Exactly.
I think people but too much into the idea that the dollar strengthens and weakens uniformly with respect to everything. I expect to see a situation were asset prices that are strongly influenced by credit will decline, commodity prices increase, and foreign currencies appreciate once our creditors decide to pull the plug.
I think we’ll see a rebound in late 2008 because prices are dropping faster than anybody predicted. If median prices drop 30% people will start buying again, not because prices will be justified by fundamentals but because 30% off just sounds like a bargain. That will be short lived and we’ll then be looking at 10+ years of decline due to demographics and a growing wealth divide.
Real wages have been coming down for the last decade or so and home prices have seen an historical, contradictory boom. The Fed is going to have a tougher time with the next bubble, it feels like their run is over.
Unlike a lot on this blog I do believe the economy is strong outside of housing. This is really the first time we’re seeing employment and wages ignore GDP, probably because productivity gains aren’t benefiting employees as technology replaces human labor instead of complementing it.
So to the extent that housing prices are fundamentally based on rents, which are based on wages, we’re going to see a massive collapse. Will that kill the economy? Probably but productivity is tied less to human limitations now and is more subject to Moore’s Law instead. So who knows.
Deflation is inevitable IMO but I think it will be good deflation (see “A Plea for (mild) Deflation)” But our whole house of cards appears to be built on inflation due to the Fed’s fear of a deflationary spiral (opposite of hyperinflation). If there is any wisdom to Austrian economics then the Fed is just delaying the inevitable and making the transition to a naturally deflation based economy (see industrial revolution) that much rougher. Aside from a deflationary spiral the Fed is worried about policy tools becoming ineffective as interest rates head below zero because they can’t pay people to borrow money, I guess this is when they start gassing up the choppers.
You’re suggesting median prices will be down 30% by late 2008?
Inflation adjusted numbers not released by David Lereah’s former employers, yeah.
Look at this graph. When fundamentals were in line before the bubble, inflation adjusted prices were $125,000. It went to $225,000 while wages were stagnant.
If this correction works like all those preceding it then the inflation adjusted median should drop 44% to get back to normal but it usually overshoots to the low side. Of course a 50% median home price drop would be catastrophic so who’s to say 60% is crazy considering the spiral that would create?
“If median prices drop 30% people will start buying again, not because prices will be justified by fundamentals but because 30% off just sounds like a bargain.”
Who will be interested and qualified, though? Won’t lenders want a downpayment to protect them against the risk of future REO worth less than the loan amount? I submit that there will not be many able to buy with traditional downpayment requirements, credit underwriting standards and amortizing loans, even at 30% off current levels.
And if your median price drop of 30% by year-end 2008 is broadly perceived, won’t ‘everyone’ know by then what a terrible idea it is to buy real estate when prices are dropping? Even the MSM will feel forced to report on that horror story, as failing to do so would destroy any remaining shards of their credibility.
Yes, the psychological “Rubicon” will have been crossed.
“If there is any wisdom to Austrian economics then the Fed is just delaying the inevitable and making the transition to a naturally deflation based economy (see industrial revolution) that much rougher.”
They don’t seem to grasp that reflating the bubble will worsen the McMansion glut. I guess they will have to learn that lesson the hard way.
Experience keeps a dear school, but fools will learn in no other.
- Benjamin Franklin -
There may never be a recovery- we may have already seen the peak.
The reason is demographics. The aging population in the US is barely reproducing itself. In Europe that trend is far accelerated. In both cases a good part of what gives stability or apparent growth to the overall population is importing of immigrants.
The problem is a very good number of these immigrants, while perhaps contributing to the population numbers, are not seeing high wages.
Even those now enjoying decent wages are not seeing real improvements in their wages.
Currently there is not a good mechanism in the US identified to expand the financial machine. Manufacturing is out, intellectual capacities are increasingly being offshored. What is left- ’service’ industries? Financial industries (see outsourced)? Government? Health care? Education? Unless there is an expansion of the broad wage base of consumers to feed them, how can government, health care, and education continue to grow as job machines?
Finally, much of apparent consumerism is ‘financed’ by debt. Debt is socially acceptable, you are advised to guard your credit rating as though it were the essence of your soul, and you soon accept that debt=wealth.
So: There is no large volume deep pocketed customer base waiting to buy expensive houses. Those who want to buy expensive houses are lucky to have a job but probably cant’ afford to buy the house. Those who can afford it have to go even more into debt, and seeing the effects all around them are reluctant to do so.
Big houses and conspicuous consumption will be seen to be the domicile equivalent of SUVs, and will become politically incorrect. The backlash will increase.
However, I don’t think housing prices will descend forever. Sooner or later we will reach a permanently low plateau.
“The aging population in the US is barely reproducing itself.”
Nothing a little immigration reform cannot fix. For instance, suppose instead of tacitly encouraging penniless Mexicans to slip through the gaping holes in our southern border, our national immigration policy was altered to make it harder for destitute illegal immigrants to
either enter the country or to purchase homes priced above $500,000, while also making it much easier for highly educated Indian and Chinese nationals to assume top posts in U.S. industry. The twin problems of a high-end McMansion glut plus productivity slowdown would vanish almost overnight.
Of course, this will never happen if a Demo-rat wins the next election, in which case more $20K/year strawberry pickers will be purchasing a McMansion in your neighborhood some time soon.
You have essentially summed up Canada’s and Australia’s immigration policy for the last several decades, and it hasn’t prevented housing busts in affluent immigrant destinations like Sydney, Toronto, and Vancouver, nor is it going to protect them from the upcoming global bust.
You are quite right that it is going to be more beneficial to the broad economy than the non-system in the US. But nothing, repeat nothing, can keep house prices out of whack with incomes in the long run.
The housing market bottomed 15 minutes ago. Trust in the instincts and wisdom of your highly trained realtors and mortgage bankers. Remember realestate is local and we have never had so many choices. Don’t worry about prices. They will work out.
Under the enlightened leadership of Greenspan, Bernanke, Bush and the Wall Street crowd, we will flow into a new age of prosperity. When you add the leadership of the World Bank and Fannie Mae, realestate and the stock market are a can not lose proposition.
This might be an appropriate thread to revisit some previous predictions on which the jury is still out. Here is one from late 2005:
Greenspan Says Fed’s Success May Inflate Bubbles.
“In perhaps what must be the greatest irony of economic policy making, success at stabilization carries its own risks,” Mr. Greenspan said in a speech via satellite to a conference of the National Association for Business Economics in Chicago Tuesday.
“Monetary policy — in fact, all economic policy — to the extent that it is successful over a prolonged period, will reduce economic variability,” Mr. Greenspan said, which will lead investors to demand less compensation for lending to risky borrowers, or for long periods. In practice, this means yields on long-term bonds will fall, as is happening now, pulling down mortgage rates and supporting housing prices. A similarly euphoric response to higher productivity in the 1990s produced that decade’s stock bubble.
Eventually, Mr. Greenspan said, this reverses and asset prices fall, reflecting “the all-too-evident alternating and infectious bouts of human euphoria and distress and the instability they engender.”
I find it interesting that the former Fed chairman’s preferred metric of policy success was the degree of reduction in economic variability. A national economy with zero economic growth would enjoy zero variability.
http://oftwominds.com/blogs/conundrum.html
There is a chicken-and-egg side to the story which AG omitted, but I will gladly fill it in. If policymakers wanted to inflate (or reflate) a bubble, one of the surest ways to to do so would be to use
price stabilization measures to reduce the risk of loss. This is the idea behind FHA expansion into insuring 0% downpayment mortgages at higher price points, as well as plunge protection in the stock market. In both cases, riskloving behavior is encouraged by government policy to make households believe (or perhaps to help households make believe) that investing in risky assets is a sure path to wealth, which tends to result in asset price bubbles.
Unfortunately, excessive stabilization over a protracted period of time has the effect of increasing price entropy (that is, flattening out risk premiums) across assets with vastly different risk profiles — the essence of the Greenspan conundrum. For example, shortly before December 2006, MBS laced with toxic subprime debt was selling for little interest rate premium over Treasuries. At this point, stabilization policy had killed off the price signal which helps investors evaluate the risk-reward tradeoff in the investment market, and lots of good money was thrown down a rathole as a consequence (witness the collapse of 76 U.S. mortgage lenders so far this year if you are unclear on what I mean by “thrown down a rat hole” http://ml-implode.com/ ).
I can’t repeat this often enough — Housing isn’t even the biggest bubble.
We’re experiencing the latter stages of a global debt bubble, and likely the endgame for fiat currencies in general. Anyone given the least amount of thought to how “emerging markets” could ever be priced within a hundred basis points of Treasuries? How about the fact that most major countries are expanding their money supply at double digits annually?? What about that Shanghai stock market???
This has certainly been the housing bubble to end all housing bubbles. Extreme & unprecedented levels of speculation, fraud, overbuilding, misallocation, lax lending, etc. The REIC alone has driven much of the economy these past years. All by itself, the bust would have severe consequences far beyond any prior housing down cycle. IMO, prices will go back 20+ years based upon tightened credit, no savings and no equity (which was all MEWed out).
Again, though, this isn’t just about housing. Housing is now the tripwire for a global meltdown and a new Greater Depression.
Here in the US we’ve got historic levels of debt secured by highly illiquid, largely immobile and totally unremarkable assets. We’ve got no savings. We have a bankrupt government directly or indirectly supporting half our population and dependent upon soon-to-be-plummeting revenues. Outside of near minimum wage services, we have jobs that can be outsourced for pennies on the dollar. Those jobs that cannot be outsourced are being “insourced” by importing illegal immigrants. We have the boomers — the largest and wealthiest demographic the US has ever known — retiring, going from making & investing to taking & divesting.
The world? Stock markets dependent upon hedge funds that make Casey Serin’s speculations appear absolutely penny-ante. An overriding dependence upon energy forms that are on the verge of going into serious decline. Political & religious animosities threatening to go nuclear.
Here’s my take:
- Housing prices accelerate downward until 2009. Afterwards, a slow, steady grind further south through 2020.
- GDP “growth” goes negative, job losses become undeniably evident, and stock markets being tanking later this year (2007).
- Hedge funds blow left & right in late 2007 / early 2008; GM, Ford & airlines go bankrupt; massive government layoffs.
- Dollar drops like a rock, energy goes through the roof in 2008.
- Next election decided on skyrocketing energy costs, rapidly declining economy, taxes, etc. — NOT global warming.
I could go on, but I wouldn’t want to take you from merely depressed to suicidal.
p.s.: There is a bright side!
“p.s.: There is a bright side!”
Please share. I don’t disagree with your post, but I prefer to narrow my focus to the housing bubble, as your view is too depressing for me.
Unfortunately, limiting yourself to the housing bubble is like focusing entirely on the symptoms and not the disease.
Perhaps Ben could post a topic next weekend on the “bright side”, i.e., beneficial effects of all this (whenever it does end). I have lots of “good” material!
GS, I will say this…
In general terms, I expect the next decade or so will amply (and brutally) demonstrate exactly what economic philosophies / theories / models / systems are beneficial and sustainable, and those that definitely are not. The latter category is crowded, and is living on borrowed time.
I agree that it is a major debt bubble leading to deflation and major energy shortages (peak oil) leading to high prices of everything oil-based. Inflation and deflation at the same time. I said it here before that oil is not just to make gasoline, diesel, and jet fuel. All sorts of things we take for granted today are oil based. That straw sticking out of that cup of soda and that lid on that cup sitting in front of you are oil-based. Hundreds, if not thousands of products that we depend on are oil-based.
Wages will have deflationary pressure as more people join the work force - like I wrote above. The high costs of things will force people to dump a lot of material possessions as they try to scrape up dollars to use for food. The second and third homes. The second and third and fourth gas guzzlers, the boat. The older boomers will lead the way of downsizing possessions. It will be a quick turnaround from recent years where they have to live in 4,000 square foot monstrosities.
I don’t think anyone who has been saving since the year 2000 (and avoiding real estate) has to fear, as long as they anticipate both inflation and deflation. That is why I bought precious metal coins and government securities. I’m still buying them. We should all hope the day of reckoning won’t be soon so that we can save more! Harry Dent predicts a depression in late 2009. I’m buying another ten year note on June 15 and will buy 3 ounces of gold to balence it.
“I said it here before that oil is not just to make gasoline, diesel, and jet fuel.”
True. It is also to grow food crops (corn) for use as inputs to alternative fuel production (ethanol). Has anyone bothered to figure out how much fossil fuel gets wasted in the “clean/green” ethanol production and delivery process?
GS, have you read about the “law of receding horizons”?
If you have 100 houses for sale and only 25 buyers. That leaves 75 to sit on the market. Say out of the 25 buyers, 5 have bad credit, 5 have no money down, and 5 don’t have enough income to qualify. Now you have 10 buyers left. Since they don’t have bad credit, have savings, and have sufficient income maybe they are too smart to want to buy right now either. So you still have 100 houses sitting on the market. The number of houses for sale way exceeds the number of people who would be qualified buyers. There’s no where for prices to go but down, because soon everyone selling is going to be competing with foreclosure prices. Banks can’t afford to hold this kind of inventory forever.
“There’s no where for prices to go but down, because soon everyone selling is going to be competing with foreclosure prices.”
You are correct, unless bailout measures pass Congress to qualify more buyers to purchase homes they cannot afford (with an FHA guarantee courtesy of U.S. taxpayers, to boot).
As long as real house prices are twice historical norms, the builders are going to build way more houses than anyone has the need, let alone the means, to buy.
That’s why any government measures to support current prices are doomed. They would just increase the oversupply and lead to an even bigger crash in the long run.
Housing is just the start of our problems.. we as americans lost our edge. We need to find it again.. work smarter, educate and save. The market will fall, the dollar will dive.. but we will survive if we work smart, educate and save..
I agree with you “beachhunter”. The debt pyramid will be destroyed or greatly reduced. New technology is on the way furthering deflationary pressure. The painful depression will make our presently soft people lean and mean. These are all positive long term results that will drive the next great 50-70 year advance. K-Wave?
We are facing an economic forest fire. It will clean the system and those (many of you on this blog) who have cash equivalents in various currencies and some gold will prosper and lead the recovery. Hasn’t it always been this way in the depression of the 1780’s, 1840’s, 1880’s and 1930’s?
One area I do not agree with some of you. Some have argued that while realestate tanks there will be inflation. This is highly unlkely since the destruction of wealth in housing will kill consumption and the ability to get a loan to inflate. Commodity prices at some stage will tank. In fact they are presently off 15%.
We all know about the shortage of oil but remember that demand is a big part of the equation and demand is going to get creamed.
Also remember that “necessity is the mother of invention”. High present demand is driving ideas and inventions that will be seen in the next few years allowing for alternative energy and further conservation. Oil has either hit its high or will only make token highs over the next year or so before it tanks…no pun intended.
It is obvious that oil will go higher. If it is obvious it is usually wrong in markets.
History also shows that basic commodities demand hardly ever drops, just slows in it’s growth. That’s because so much demand is baked into the cake, regardless of the state of the economy. Even during the Great Depression 75% of people were still working, and obviously everyone that lived through that time still ate, drank, etc.
Oil & NG are also unlikely to ever drop significantly in price. Any temporary weakness in demand will be more than offset in declines in production and in the value of the dollar itself. There are no ready alternatives, and even if there were it would take a least a decade to build the necessary infrastructure to distribute it.
I think that prices will continue to decline, at an increasing rate, until in almost all areas the cost of renting closely approaches the cost of owning. Since wages are not going to go up much, in most areas prices will have to come down a lot. I don’t think it will take as long to unwind as Japan’s bubble did because there are too many alternative places to live and our workforce is much more mobile than it (or Japan’s) was just ten years ago.
Here in Florida, I met a fellow this week who is renting a brand new condo directly on a beautiful river, for $1,300/mo. The FB owner would want $400K+ to sell the place. The rent cannot conceivable approach $4,000/mo, or even $3,000/mo, in the next half-dozen years so I believe the FB will either turn in the keys or eat a couple hundred thousand or more to unload the pig.
The declining economy, dragged down even more by increasing housing-related unemployment than by the increasing cost of energy, will simply exacerbate the problem and the patient will die sooner.
Wish I had thought to ask this question earlier: Does anyone have a scenario in which a middle-class renter (like many of us here on the blog) would want to buy a house anytime in the foreseeable future for any reasons other than because the rent ratio returns to normal or because they have no choice (small NH town where rentals do not exist, that sort of exigency)?
Nope.
When one of us wins hundreds of millions of dollars in the Lotto. Too bad we’ve already established that the posters here don’t throw their money away on state sanctioned gambling!
So just echo CA Renter. (Unless I move out of state but not buying in San Diego until affordable.)
I was always willing to pay a little more per month to own a place verses renting . I think with the no capital gains up to 500k factor coming into play also it beefed up the premium people were willing to pay . That being said ,with real estate going down ,capital gains won’t be a issue anymore unless your looking at a very long term investment .
And judging by that graph of Shiller’s, real estate only returns 1% above inflation over the long term. You could do better with municipal bonds over that same period (long term). Bonus: with munis, you can cash out anytime and you are not stuck with bad neighbors moving in. By living in the same neighborhood more than 20 years, you have to pray your neighborhood will not turn from upscale to section 8 along the way. My parent’s neighborhood turned to low income housing over the years.
No. Shiller’s graph only refers to the price of housing. It doesn’t include the yield, which is the rental value of the house. In other words, you have to look at total return, not just price appreciation. Just like you have to include dividends when looking at stock market returns.
If housing actually returned less than bonds historically, it would never had made sense to borrow money to buy a house. Think about it. Housing has historically returned less than stocks, but more than bonds.
Of course it doesn’t make sense to buy a house now, any more than it made sense to buy dot-com stocks in 2000.
Just a few other depressing thoughts:
- What if the government decides to take everyone’s gold? They’ve done it before - who says they won’t do it again? Or, how about just “wiping the slate clean” for everyone who’s not rich and connected? You’re $500,000 in debt from your McMansion mistake, that’s okay - it’s forgiven. You’ve saved $150,000 in various investments? Too bad - it all goes to zero since the dollar is worthless, the bank went under, etc. Seems like a great way to create a permanent peasant class to me. Make everyone start from nothing, and then let the system reward the corrupt instead of the honest.
- Assuming the above does not happen and we still have some degree of economic freedom in the future, unless we get some serious industry back in this nation, housing may be “dead on arrival” for years to come. If housing does do the long, slow deflation, just imagine combining that with the new “minimum wage workforce” or a highly mobile one that has to keep moving to chase after what few well-paying jobs remain: sounds like housing would be a way to consistently lose money! I guess we’ll eventually be able to say “real estate always goes down!” then.