There’s More Bust Left In The Housing Bust
Some housing bubble news from Wall Street and Washington. MarketWatch, “The 13-month-long decline in home prices in 20 major U.S. cities accelerated in August, with prices dropping a record 0.7% in the month, according to the Case-Shiller price index. Prices were down 4.4% in the past year, the fastest decline in the seven-year history of the 20-city index. In the original 10-city index, prices have fallen 5% in the past year, the biggest decline since 1991.”
“‘The fall in home prices is showing no real signs of a slowdown or turnaround,’ said economist Robert Shiller.”
“Prices could fall much further. In a separate report, analysts at Goldman Sachs figured that prices in California are about 35% to 40% overvalued, compared with past relationships between home prices and income growth. The median sales price of a home in California was $589,000 in August, Goldman said, but should be around $375,000, they said.”
“In the Case-Shiller index, fifteen of the 20 cities tracked in the index have seen prices fall in the past year, led by Tampa, Fla., with a 10.1% decline, followed by Detroit with a 9.3% loss. Indeed, eight of the 20 cities recorded their largest-ever year-over-year price declines in August.”
From Bloomberg. “The price measure from the Realtors group can be influenced by changes in the types of homes sold. Because the S&P/Case- Shiller index tracks the same home over time, economists say these more accurately reflect price trends.”
The New York Times. “UBS on Tuesday reported a net loss of 830 Swiss francs ($713 million) in the third quarter, its first quarterly loss in nearly five years, as troubles in the United States subprime mortgage market led to big writedowns and losses in its investment banking unit.”
“Switzerland-based UBS, Europe’s largest bank by assets, is just one of many large financial institutions to suffer the effects of the recent credit crunch, which sent values of many mortgage-related securities sharply lower. Marcel Rohner, who took over as UBS’s CEO earlier this year, called the results ‘unquestionably disappointing.’”
From The Age. “Rohner, who replaced Peter Wuffli four months ago after the in-house hedge fund Dillon Read Capital Management collapsed, aims to restore profit by slashing 1500 jobs and reducing risk-taking.”
“‘They didn’t have very good control over what was happening at their investment bank,’ said Mark Glazener, a fund manager at Rotterdam-based Robeco. ‘It’s still not very clear what is going on.’”
From Reuters. “UBS repeated warnings of further writedowns, but CEO Rohner declined to give any detailed forecasts. ‘The range of possible outcomes is widening,’ he said.”
“UBS’s Chief Financial Officer Marco Suter later told Reuters in an interview that any writedowns UBS may have to make on subprime-related exposures in the fourth quarter were ‘highly unlikely’ to be on the same scale as in the third quarter. ‘Nothing is inconceivable,’ Suter said when asked if fourth quarter writedowns could be as big as in the previous three months.”
“Bank of China, the country’s flagship foreign exchange lender, booked $322 million in provisions to account for its exposure to U.S. subprime mortgage-backed bonds.”
“The state-run lender reported on Aug 23 that it held $9.65 billion worth of U.S. subprime-related bonds and collateralized debt obligations, the largest exposure revealed by a Chinese bank.”
“In the first half of the year it booked subprime-related charges totaling about $153 million. To reflect the depreciation in fair value of the related subprime securities, the lender also set aside $321 million of reserves against the balance sheet.”
Dow Jones Newswires. “Investors in two highly leveraged Bear Stearns Cos. hedge funds that went belly up in the summer are taking an unusual tack in an effort to probe possible wrongdoing in the fund’s operations, said a person involved with the effort.”
“Investors who lost about $650 million in the Bear Stearns High-Grade Enhanced Leverage fund, known as Hegel, are scheduled to vote at Bear Stearns headquarters in New York on Nov. 7 and in London on Nov. 14 on whether to install a forensic accounting and restructuring firm in place of Bear as controlling party.”
“By installing an investigative firm at the center of the funds, which were heavily invested in collateralized debt obligations tied to subprime mortgages, investors hope to pressure Bear Stearns to cooperate, another person said.”
“Separately, Massachusetts securities regulators are investigating whether Bear Stearns had a conflict of interest by improperly trading with the two in-house hedge funds, saddling investors with added losses. Bear infused about $1.6 billion into one of the funds in an effort to save it prior to its collapse.”
“Treasury Secretary Henry Paulson said it’s too soon to call an end to the U.S. housing slump. ‘We haven’t hit the bottom yet in housing,’ Paulson said.”
“The fallout from the U.S. subprime market has cost the world’s biggest securities firms and banks more than $30 billion in bad loans and trading losses in the third quarter.”
“The U.S. administration is studying what went wrong, with an emphasis on the role of credit-rating companies and accounting rules related to structured investment vehicles, Paulson said.” “‘We need to shed light on it and make the policy adjustments so this doesn’t happen again,’ Paulson said.”
From Business Week. “After three decades of stability, the national rate of homeownership suddenly began rising in the mid-1990s, going from 64% in 1994 to 69% in 2004.”
“But new research published by the Federal Reserve Bank of Atlanta concludes that the bulk of the increase was caused by looser mortgage-lending practices rather than demographic factors such as more households of home-buying age.”
“In an Oct. 23 e-mail to BusinessWeek, Goldman Sachs chief U.S. economist Jan Hatzius wrote: ‘The key issue is the potential for a vicious cycle’ in which falling homeownership hurts housing prices and forces more defaults, causing ownership to decline even more. That’s because falling prices make it more difficult for holders of certain types of mortgages to refinance and hang on to their homes.”
“Added Hatzius: ‘What the Atlanta Fed paper does is illustrate how important changes in access to credit can be in this cycle.’”
“One warning sign: The rate of homeownership has already begun to drop. It was 68.2% in the second quarter of 2007, down a full percentage point from its peak. The third-quarter number was scheduled for release on Oct. 26.”
“Many analysts have pointed to easy lending as a contributor to the housing boom, but the Atlanta Fed paper may be the first to quantify its effect in a rigorous way. Using math-heavy macroeconomic analysis, the authors conclude that the availability of new mortgage options accounted for 56% to 70% of the decade-long increase in the U.S. homeownership rate, while demographic changes accounted for only 16% to 31%.”
“Although the paper cites lowered downpayment requirements as the biggest factor in raising ownership, co-author Carlos Garriga of the St. Louis Fed says a forthcoming paper will attribute more of the effect to ‘teaser’ loans with low introductory payments that appeal to young and lower-income buyers.”
“Nevertheless, the homeownership rate could fall well below the level it reached in 2004, at least temporarily, because the mortgage market is in such turmoil.”
“In a recent report, Goldman’s Hatzius wrote: ‘Given the current number of U.S. households of 110 million, the change in the homeownership rate over the past two years has already subtracted almost 500,000 from the underlying demand for new homes.’”
“Looks like there’s more bust left in the housing bust.”
From USA Today. “In hindsight, it’s not hard to see why so many home buyers got burned in the subprime mortgage meltdown. They might not have fully grasped the risks they were taking. Or perhaps they refused to believe housing prices could actually fall, or were desperate to keep up with others and achieve the goal of homeownership.”
“But what explains Stanley O’Neal? He was CEO of Merrill Lynch as it lost a staggering $8 billion on mortgage-backed investment products.”
“Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September.”
“They borrow in the bond market and lend the money to their members. Federal Home Loan Bank obligations, when combined with the $1.5 trillion debt and $4.7 trillion in bond guarantees of Washington-based Fannie Mae and Freddie Mac in McLean, Virginia, are 46 percent more than the $5.04 trillion of Treasury debt held by the public.”
The Financial Times. “Angelo Mozilo, CEO of Countrywide Financial, on Monday strongly criticised the US government’s response to the collapse of the subprime lending market, saying there had been ‘zero’ effort to tackle the crisis.”
“‘In terms of tangible effort from the federal government…there has been no programme, no federal effort, no legislative assistance – zero,’ he said.”
“‘First-time buyers cannot buy a home now. Only the wealthy and privileged can afford to buy homes,’ he said.”
“Mr Mozilo blamed the subprime crisis on ‘easy, low-cost money’ that drove up house prices and ‘exotic loans and diminished underwriting standards.’”
“‘People stretched themselves,’ he said, though he implied that the blame for the crisis should be shared. ‘It takes a village to do this. As long as [house] values keep falling, the subprime situation will get worse.’”
The Associated Press. “Alan Greenspan issued bearish comments about the U.S. housing industry Monday, saying that ‘prices of homes will continue to go down’ until housing inventory starts to shrink.”
“The former Federal Reserve Board chairman, speaking at an investment conference in Bermuda, said ‘we’re nowhere near’ the point where inventories of new homes are set to drop, noting that home builders continue to discount new homes and add other inducements in a bid to cut their inventory.”
“‘We’ve got a way to go, and I’m not sure where that leaves’ the housing industry in the next year, he said.”
“Former Federal Reserve Chairman Alan Greenspan said on Monday securitized assets backed by subprime loans were unlikely to become a problem in the future because markets have lost their enthusiasm for them.”
“‘Markets have made the decision that subprime securitization is much too risky, so problem solved,’ Greenspan told a conference.”
‘Things could get worse, said Yale economist Robert Shiller, who helped create the index. ‘There is really no positive news in today’s report,” said Shiller.’
This is another reason I’m not real impressed with Shillers analysis at times. He apparently doesn’t see an equilibrium being needed and often sounds like an apologist for the housing bubble.
‘Federal Home Loan Bank obligations, when combined with the $1.5 trillion debt and $4.7 trillion in bond guarantees of Washington-based Fannie Mae and Freddie Mac in McLean, Virginia, are 46 percent more than the $5.04 trillion of Treasury debt held by the public.’
When Chris Lydon asked me if Fannie and friends could be bailed-out on the radio in 2005, I replied it was just too big. It’s like asking a cat to drink a swimming pool. As for the screaming mimis in that article, just look at which think tank they work for.
‘Alan Greenspan issued bearish comments about the U.S. housing industry Monday, saying that ‘prices of homes will continue to go down’ until housing inventory starts to shrink.’
‘The former Federal Reserve Board chairman, speaking at an investment conference in Bermuda, said ‘we’re nowhere near’ the point where inventories of new homes are set to drop.’
IMO, this shows that the Fed and others know prices must fall in order to force the builders to stop oversupplying the market.
Nobody quoted in the MSM seems willing to put bad news in the context that it needs to be delivered in order to pierce the thick numbskulls reading it.
On a lighter note, my realtor/rental agent just called me back with the brainstorm that I should buy a small house for a couple of years until I find that perfect place. Just a phenomenal segue opportunity into the rant I gave her about affordability issues surrounding asshats listing property after 100%+ appreciation in 5 years, 5-8 X median income issue, cheap credit gone issue and the whole concept that I refuse to acknowledge the insane listing prices with even a low-ball offer. I told her that as soon as sellers lower their price down to the level that existed in 2001 then I would consider making a low-ball offer. As one of the very few potential buyers she rubs elbows with, she was not happy to hear my thoughts on the matter. Oh well, the sooner these folks get a reality check the sooner we can get back to business.
“Nobody quoted in the MSM seems willing to put bad news in the context that it needs to be delivered in order to pierce the thick numbskulls reading it.”
There is a determined effort by many to avoid shouting “fire” in a crowded theater. At least that is how they see it. I just got an email from an academic RE analysts who acknowledges there are affordability problems but doesn’t want people to panic. Instead, he is hoping for a decade of zero price growth (and decline in inflation adjusted dollars) similar to what we experienced in the 1980’s.
Personally, I’d rather have some serious nominal price drops to re-establish affordability and liquidity. And given how this bubble was funded, I don’t think the drawn-out 1980’s deflation will occur.
but there is a fire in the theatre.
I made an analogy along these lines a few weeks back:
Realtors / MSM: “If you don’t have to sell, take you home off the market and wait until things pick up again.”
Scenario: You are in an overcrowded, 3rd floor, nightclub with insufficient exits and a drugged drummer accidently sets the stage on fire with poorly designed pyrotechnics.
You should:
a) Fight, claw, and scratch your way out the nearest exit, risking personal injury on your way down the stairs;
b) break a window and jump two stories to the ground below, risking a broken leg or back or worse;
c) wait until the crowd dies down so you can calmly and safely exit the building.
The MSM would suggest option (c) to avoid the risk of injury. Of course, by taking that option you will be burned alive before the exits clear.
As long as people are looking at their houses as “investments”, then it’s impossible for prices to flatten. Either they go up (good investement), or they are dumped and traded in for another investment, which forces the price down.
“he is hoping for a decade of zero price growth.”
Great, no first time home buyers for 10 years, I suppose.
Has any one of these “inflation will fix everything” clowns answered the question regarding the lack of WAGE INFLATION? The one type of inflation the Fed actively fights? Why will wages go up if we’re stucking competing with 3rd world nations where kids work 12 hours a day, everyone lives in shacks, and the factory pollution is dumped straight into the river from which people drink? Maybe when we’re stuck living like that, we’ll see jobs return!
“the brainstorm that I should buy a small house for a couple of years until I find that perfect place”
You have *got* to be kidding.
When people have mouths to feed, they will say and do anything including torching their neighborhood. I’m going to stand by my prediction that we aren’t anywhere near the 7th inning stretch until we get a major economically driven riot.
That’s pretty much the way I see it too.
The tipping point will be when people feel that they no longer have anything to lose. As long as they do they won’t riot.
I would be interesting if we had a Bolshevik revolution in the US. The real question is how far will the billionaires allow the situation to deteriorate (for the unwashed). They prbably think that they can create a Goldilocks situation of where the situation is not quite dire enough to bring about a revolution. Of course, they sometimes screw up. Just ask the last Czar of Russia. Had he been just a bit more benevolent, perhaps his heirs today would be Constitutional Monarchs living the good life.
That is the problem with power, those who lust for it are often blinded to the misery they cause, and fail to see the error of their ways until they are facing a firing squad.
The problem with Nicholas was that (as autocrats always find out, from Louis XVI to Gorbachev) you can’t have just a little freedom. It always gets out of hand, and you’re lucky to keep your head.
If Nicholas had kept out of World War I, or at least not made such a mess of it once in, Russia might have made a slow transition to something like a constitutional monarchy. But losing a war is never good for a regime’s popularity.
“you can’t have just a little freedom.”
to paraphrase tocqueville:
“revolutions don’t occur when the lid of repression is tamped down tight; only when it is loosened do you get an explosion!”
I wish I was kidding but seriously, that was her big idea. I got off a great rant on the housing market though and felt much better than she did by the time I got off the phone.
Sorry ’bout the double post earlier. Anyway, the Bloomberg piece is very telling.
Firstly, it shows the PTB are not going to let CFC and other ‘too big to fails’ go down. They’ve chosen to partner rather than regulate these guys. Secondly, shorting these guys further is very risky. After all, they have a safety net. Thirdly, Mozilo’s claim that CFC has not recieved any Federal help is false. Fourth and finally, if it wasn’t for these loans, CFC would probably be BK already.
My entire adult life people have said Bear Stearns and Merrill Lynch were too big to fail, and they aren’t being bailed-out even as they lose billions and fire CEO’s. These loses are peanuts and CFC is chicken-feed, IMO. For instance, look at the China bank article and consider how small their loses are in comparison to the balance sheet. And I fail to see how the US, needing to borrow 3 or so billion bucks a day can find someone to finance a bail-out of Fannie and friends. Anyway that’s what AIG is for! Like Greeenspan said, problem solved.
… and lowering rates are going to help this situation how? I’m not even an economist, and I see the problem. I strongly suspect that the ‘law of supply and demand” is in a non-linear portion of the curve in housing. This means that lowering rates and prices will not help to stimulate demand much.
Roidy
I loved that: “Problem solved.” How does he get away with these inane comments? It’s true that the problem (stupid lending) may not exist in the intermediate future (until the next generation forgets what a bad idea it was), but the problem today has not been “solved.” We are working through it now with price decreases, but the problem is still there and will continue to be there until an equilibrium is reached that is sustainable in a world without stupid lending. Big difference.
Note: Sir Greenspent was between chews of Wagyu beef short ribs from the steakhouse…when he commented that: “Problem solved.”
I agree, these lenders are NOT ‘too big to fail.” In fact, I’d like to see some failures. It would be healthy.
However, as the evidence drips out regarding CFC, I get the sense the PTB will not allow highly publicized failures. They will not allow a Northern Rock scenario to unfold. The PTB will head that off before it happens. It seems like they are willing to bend rules and make temporary but extraordinary exceptions to avoid failures.
That’s what I’ve concluded as well. When a couple Wall Street firms out and out die, then we’ll be a little farther along in the ballgame. Until then, the PTB just seem to be in one big, collective CYA mode.
just when you think you know the dangers of “exclusion letters” and “TIC” and “Technically Insolvent”…
why are we here? Are we to believe the lies and be rewarded, or not? are we going to war with citizens?
whose “we”?
This whole scenario is way way too big for TPTB. The gathering downside momentum in the GLOBAL real estate markets will take absolutely NO prisoners. Let TPTB stand in front of the gathering storm waving their “authority” and “ruling” things to stop (going down). “They” will be the forefront for the intergenerational asshanding that is coming to all of us and “They” are the ones that caused, fed and sponsored this whole mania. One (unowned/unoccupied) piece of real estate is an alligator. What are millions upon millions of pieces of (unowned/unoccupied) pieces of real estate? Way way more than a herd of alligators at least…. and whatever these are, they will take much much more than a bite out of their arses……… In due time it may likely end up as an armaggedon or two…….
Do not forget it was Shiller who brought the bubble to the attention of the MSM back in April 2005 when he released Irrational Exuberance, Part II. That book is a dry read but chock full of details that everyone taking a mortgage should be tested on. Shiller has a fine line to walk - his track record is excellent and he doesn’t want to upset the markets too much. He’s on record of advocating a ten-year reversal in prices, stating the bubble started back in 1996.
The Economist magazine was way ahead of that and others like Dean Baker. And if he thinks it’s going to be 10 years, does he really want to be telling everyone how ‘bad’ things are getting for that long?
I say bring it on. Long, drawn out corrections remind me too much of Texas in the last bust.
1Q08 or shortly therafter you’re going to think the housing situation is on a fast roller coaster ride to hell. Too much money is being lost in the 4th quarter. The needed cash is in layoffs and R.E.O. inventory. Won’t stop the bleeding, but it’ll slow it down enough.
“I say bring it on. Long, drawn out corrections remind me too much of Texas in the last bust.”
I agree completely, but perhaps this is would make for a good weekend topic now that most folks agree that RE is going bust one way or another.
I think there are a LOT of folks out there that think a quick price drop would be catastrophic, but somehow a decade-long market freeze would be better. Seems to me that the former scenario would be FAR more efficient. And I’m not even sure a decade-long price freeze (and sales freeze, they go together) would correct this market.
On my coffee table is the June 27, 2005 issue of the Economist with “Housing Bubble” and a illustration of a falling weight. I’m having a party in my rented condo so I think I’ll be putting it away, lest it be destroyed.
Actually the first Economist in-depth analysis of the housing bubble was way back in 2002 or 2003. That was when I first became aware of the problem. From there I found Dean Baker, Robert Shiller, and eventually this blog.
Mr. Alan Greenspan said in 2000,
“It’s pretty clear that it’s an unsustainable underlying pattern,” Greenspan said in response to a question after a speech on energy to the Economic Club of New York. “People are reaching to be able to pay the prices to be able to move into a home.”
Bloomberg
May 20, 2000
Greenspan Calls Home-Price Speculation Unsustainable
http://tinyurl.com/2puot3
Frankly, with much of the evidence in, it is convincing that the US Federal Reserve, the Treassury Department and much of the government relied on the wealth effect created by bubbles.
Schiller, the Economist and other magazines were late to the party. The Federal Reserve knew, questioned and were silenced.
Groundhog;
That was pretty much my path also.
I like Shiller, but he was not the first to see this, though I did like both his books.
I have been flipping residential for years in Orlando and I personally began to smell a rat in 02 and 03. 2004 I bought a few and have not bought since. I left some money on the table but that is preferable to a vitale organ, which many of my local cohorts, who barrelled through 04/05/06 will have to sell to get right side up.
“…and look at this lovely 3/2 with granite, gold bathroom fixtures and a perfectly sale able kidney!”
Look at Paulson’s brilliant comment:
“We need to shed light on it and make the policy adjustments so this doesn’t happen again,’ Paulson said.”
The policy and laws are in place. They needed to be enforced.
I say again, if we, the people on this blog, saw it, how come the powers that be didn’t?
If I have a vote, I vote for a hard and fast crash. Non of this lingering s**t. Schiller lost some of his luster with that s**t. Bring it, for God’s sake!! Let it fall!! The GD Government will fiddle with it and make it worse.
And Bernake lowers rates!!!
The same thing happened in the depression. Continued gov intervention trying to improve things forced the depression in the US to be the longest and the worst in most of the world.
Moman, you can print out a copy of this Schiller Index for your party, because here in Tampa, we’re number one! Time for a victory lap with Bud Light.
I say bring it on.
I agree with you Ben. The USA cannot compete with the low wage countries such as china and india who have a much lower cost of living. The bulk of that cost of living is in housing prices. I always ask the question to the nay sayers who think housing prices will not fall: Which do you think will happen first, corporate america raising wages to keep pace with rising housing and cost of living expenses of employees or prices falling to become back in-line with incomes? If you selected corporate america raising incomes to keep pace with the rapidly appreciating housing costs, then just think about all of those jobs going to China and India! That should be a wake up call!!
RE: He’s on record of advocating a ten-year reversal in prices, stating the bubble started back in 1996.
Most accurate time table put out by anybody that I have read.
Shiller an apologist for the bubble? C’mon Ben…
Shiller may not be pure truth, but he’s not God, and having met the man, I can tell you, he’s no apologist either. To anyone. Both you and Prof. Shiller are of the same mold: you both have a nose for BS.
Shiller are of the same mold: you both have a nose for BS.
Spoken like a true realtor! Your an idiot!!
Folks–I have to share this. I sold my house in Fremont, CA last year after noticing a significant change in the new home buyers.
Several months before I sold my house, a neighbor who purchased his home in 2005, put it on the market. He accepted a job out of the area. After trying to sell (for more than he paid–to cover fees and some upgrades) he decided to rent it.
Fast forward to last week. A 24 year old was gunned down at a nearby Fremont thrift store in broad daylight.
The following day I visited a friend’s house on my old street. His house is three doors away from the “rental”. The “rental” was surrounded by police cars and TV news crews. The SWAT team had just raided it looking for a suspect… The house was trashed (once again–HBB predictions prove true).
I have to share one more item. I’m working in Dubai this week. Think Bakersfield with lots of sovereign money, cheap labor, and a housing boom that is recreating downtown Chicago every 12 months.
While speaking to a coworker today, he said that home prices have gone up 7 fold in 5 years. And get this, he says “it’s different here”.
Something happened to my first post.
I sold my house in Fremont, CA last year after watching the neighborhood deteriorate. One of my neighbors tried to sell his recently purchased home after getting an out of state job. When it failed to sell for more than he paid in 2005, he converted it to a rental. Fast forward to last week. I visited a friend on the street the day after a broad day light shooting a few blocks away. The rental was surrounded by police cars and news crews. The Fremont SWAT team had just raided the house–and of course now it’s trashed. Just another HBB prediction made real.
You bring up a good point.
It seems the stability and quality of a neighborhood can swing
in a span of months if not days, be the decline attributable to natural disasters, a manufacturing plant shutting down with attendant lay-offs, an influx of illegals or resettled 3rd world refugees, inadvertant toxic contamination, muni-government mismanagement, et. el.
Right now I’m waiting to see how this Atlanta water crisis is gonna turn out.
Great time to be a renter.
So, on the eve of an era in which the stability of a locale cannot be assured for any length of time - why would buying the largest (in historical terms) and most expensive (in terms of wages/rents) houses in our nation’s history seem like a good idea? House prices should reflect that risk - and if anything they should have been falling for the past decade in advance of this oncoming instability (read: globalisation). Once again, where is the proof that the next fifty years will be as stable as the past fifty? After all, the only way it would come close to making sense to pay so much for a house would be if that future neighborhood stability could be guaranteed - which it can’t.
People aren’t thinking like that, people are thinking the way HGTV wants them to think.
Put things in perspective - that was the 4th murder in Fremont this year — not too bad for a city of 210,000 people.
A link for the SWAT team:
http://www.mercurynews.com/breakingnews/ci_7290048
There was another article saying it wasn’t a rental, the family had grown up in the house.
BearCat,
That story is for a different event. I knew the owner of the rental.
When Chris Lydon asked me if Fannie and friends could be bailed-out on the radio in 2005, I replied it was just too big. It’s like asking a cat to drink a swimming pool. As for the screaming mimis in that article, just look at which think tank they work for.
Thanks I just sprayed my computer screen with already chewed pizza
“‘The fall in home prices is showing no real signs of a slowdown or turnaround,’ said economist Robert Shiller.”
Why do MSM-quoted experts always have to sugar coat the situation?
I’m confused Ben, the NAR keeps saying we hit bottom and everything is fine. However, when I read the Shiller report, it appears to be more credible than the NAR. Perhaps the NAR is not reading the same material.
It’s fairly clear that the Tampa area has only had a 10% reduction in prices. The prices need to fall about 40-50% more in order for home prices to align back with local incomes. Much more pain to come in the next year!
“The median sales price of a home in California was $589,000 in August, Goldman said, but should be around $375,000, they said.”
Blasphemy!!!
375 seems a little high to me still. could you put in a pool and throw in the Hummer?
Then you will own two rapidly depreciating assets and a swimming pool.
You could turn the hummer into a playhouse for the kids.
375k seems about right. After all, annual median household income in all of California, including El Centro, Bakersfield, Fontucky, et al comes out to about $100k.
The median household income for all households in California is nowhere near $100K.
Not even close.
Where did you pull the $100k number from? I believe the US census numbers for California HHI in 2006 are only $64,000. The $64k figure supports the argument that $375k median is still too high.
as if a 375K house isn’t too much for a 100k income…
California, Period ending 6-30-06
Total housing units 13,174,781
Owner-occupied housing units 7,102,197
Renter-occupied housing units 5,049,030
Vacant housing units 1,023,554
Median value (dollars) 535,700
Total population 36,457,549
In labor force (over 16+ yrs) 18,064,498
Average household size 2.93
Average family size 3.54
Median household income 56,645
Median family income 64,563
Per capita income 26,974
Gross Rents, Median (dollars) 1,029
Source: U.S. Census Bureau, 2006 American Community Survey
For those not familiar with it, the ACS is going to replace the traditional UCS estimates.
So the median Cali HH income is about the same as Ft. Collins, yet houses are 2-3X more expensive.
Chuckles Cat. I refuse to even look at a house with a pool!
Smiles,
Leigh
Heresey
“But what explains Stanley O’Neal? He was CEO of Merrill Lynch as it lost a staggering $8 billion on mortgage-backed investment products.”
Why, greed. Greed ‘explains’ Stanley O’Neal. Funny, it didn’t seem that difficult to figure out to me…
what IS greed ?
I think of greed as fear.
fear that there will not be enough.
seems people always dislike a coward.
From what I read, O’Neal will leave a terrible legacy at Merrill, having fired a huge number of very talented people — in many cases simply because he saw them as rivals. That might work if you have the talent of an Iacocca, but now Merrill is left stripped of much of the talent that might well have turned their ship around in a reasonable period.
Merrill Lynched?
HAW! Oh, that’s a nice one!
There should be a quote of the day thread. Ben? Ben?
Iacocca was a one hit wonder - he couldn’t follow up the K car success.
Iacocca was at least a 2 hit wonder. The Mustang was better bthan the K car
He’s predicted to get a $250 million golden parachute package. So Merrill Lynch’s loss is not necessarily his loss.
The incentive system has some serious issues at that level. When most people screw up at their jobs, they don’t get a layoff package equaling ten times their annual income. There’s a good reason why they don’t.
I’m thinking that you could’ve paid someone $8 / hour to act as CEO for the past year. CEO compensation is always “justified” by the need to pay competitive compensation in order to attract top talent. But I’m thinking that you don’t need top talent for losing $8 billion dollars; a third-rate CEO will do just fine.
An untrained monkey gambling at the track with all the investment proceeds probably would have lost only about 2 billion, and you only have to pay him bananas.
‘The key issue is the potential for a vicious cycle’ in which falling homeownership hurts housing prices and forces more defaults, causing ownership to decline even more. That’s because falling prices make it more difficult for holders of certain types of mortgages to refinance and hang on to their homes.”
This is not a “potential for a vicious cycle”, but rather an unavoidable vicious cycle.
Ex-nv — agree — from the Business Week quote, “…the national rate of homeownership suddenly began rising in the mid-1990s, going from 64% in 1994 to 69% in 2004.”
IMO, it quite rightly ought to regress to 64% and may well overshoot that for a number of years as vast numbers of bankrupt or down-paymentless FBs “serve their time” before buying again. Vultures will make plenty of rental housing available to them in the interim.
Gonna be one big national hangover that will take longer than usual to forget.
Chip, I think you are on to something. It very well could be the loss of 3.5MM manufacturing jobs in the last 7 years that were replaced with McJobs that cannot support home ownership. I would not be surprised to see home ownership drop to 60%. And as more and more jobs get outsourced there are fewer new jobs being created. In the dramatic outsourcing of technology manufacturing overseas we have spread our demise.
I went seaching around on the net and found of figure of appoximately 53% home ownership in 1990.
Sounds about right?
“They might not have fully grasped the risks they were taking. Or perhaps they refused to believe housing prices could actually fall, or were desperate to keep up with others and achieve the goal of homeownership.”
The answer is “D” - all of the above.
‘The range of possible outcomes is widening,’
But in only one direction. I don’t think UBS will be booking recoveries from this quarter’s write off anytime soon. Quite the reverse.
“Investors who lost about $650 million in the Bear Stearns High-Grade Enhanced Leverage fund, known as Hegel, are scheduled to vote at Bear Stearns headquarters in New York on Nov. 7 and in London on Nov. 14 on whether to install a forensic accounting and restructuring firm in place of Bear as controlling party.”
An appropriate name for the fund, Hegel. The German philosopher Hegel believed that a person who doesn’t have the general capacity for preserving his independence, must be reduced to servitude!
Ah, yes. Hegel.
Bit of a jerk. Of course, almost all German philosophers are. In my experience.
That’s why I don’t read philosophy anymore. I stick with cookbooks and stormwater regulation manuals. I feel that the breadth and depth of my spirit has vastly increased thereby.
I’ve always found stormwater regulation manuals to have more to do with the depth of my spigot than of my spirit.
Philistine.
Cookbooks ! That’s no way to talk about Fannie May accounts. Show some respect.
Oooh, another good one. You’re on a roll today, Houstonstan.
I got a neat little vintage book at a yardsale the other day. It was 25 cents. ‘Magical Desserts: A Magnificent Collection of Whip’n Chill Delights’.
There’s this new thing out, called ‘Jello’. Evidently it’s super. I’m learning all about it.
I got that one too. Try putting pineapple and marshmallows in your jello. People love it.
Immanuel Kant was a real pissant
Who was very rarely stable.
Heidegger, Heidegger was a boozy beggar
Who could think you under the table.
David Hume could out-consume
Wilhelm Friedrich Hegel,
Italics be gone!
“Angelo Mozilo, CEO of Countrywide Financial, on Monday strongly criticised the US government’s response to the collapse of the subprime lending market, saying there had been ‘zero’ effort to tackle the crisis.”
And just how much of your huge profits did you share with the federal government when you were collecting huge fees on bad loans during the boom-boom bubble years?
“‘First-time buyers cannot buy a home now. Only the wealthy and privileged can afford to buy homes,’ he said.”
I’ve got an easy solution to this problem: falling home prices. And, baring crazing lending, only the weathly could afford to buy a home for the past 5 years in places like California.
“Mr Mozilo blamed the subprime crisis on ‘easy, low-cost money’ that drove up house prices and ‘exotic loans and diminished underwriting standards.’”
Hmmmm… and who championed those exotic loans and diminished underwriting standards?
I agree wholeheartedly. Mozilo’s little speech belongs on the cover of a hypocrisy textbook.
“Angelo Mozilo, CEO of Countrywide Financial, on Monday strongly criticised the US government’s response to the collapse of the subprime lending market, saying there had been ‘zero’ effort to tackle the crisis.”
-Financial Times, 10/29/2007
http://thehousingbubbleblog.com/?p=3650
“Countrywide Financial Corp. CEO Angelo Mozilo said on Monday that proposed regulation in the subprime mortgage industry would help crooks while hurting legitimate lenders and the housing market.”
-Reuters, 5/21/2007
http://thehousingbubbleblog.com/?p=2829
Mozilo would be wise to keep his big mouth shut, and retire.
Best defense is a good offence!
Was that Spurrier’s philosophy?
I refuse to believe it’s the “wealthy and privileged” buying… I say it’s the “somewhat well-off and stupid”…
Now who is trying to start a class war? Those are my-tee peculiar words coming from the well-tanned pig man.
“First-time buyers cannot buy a home now.” So what? Let them rent until they’ve saved a proper down payment. Good for everyone.
Gonna start referring to him as Comrade Mozilo.
Chip:
Time for your math test. What is 20% of $600,000? Do you and/or does any one that you know, who is considering the purchase of a home for the first time have that much money to put down? That’s what I thought. And, for all the naysayers, 600K is the going rate in many bubble cities for what used to be considered starter homes.
I think the forgot to add the evil laugh after the part about how only the rich can buy houses. That was probably part of the goal all along.
Right. “Mooooooooooommmmmmmiiiiieee … I’m mad ’cause I broke into daddy’s candy stash, ate it all, puked all over the closet, fell asleep in the puke, then pooped all over the pillow after daddy moved me to the bed, and now daddy won’t give me any more candy.
lol
MOZILO is a complete slimeball. What nerve he has.
Right, every time I think he can’t stoop any lower, there he goes. And the MSM doesn’t question it when he whines about unaffordability, when he played as big a role in that as anyone! It takes a village? Uggh.
Who knows? Maybe believes he was fighting a battle against some dark force to preserve affordability by lending on more and more ridiculous terms as prices rose. Perhaps he didn’t understand that prices rose in part because money was lent on more and more ridiculous terms. Could that be?
It’s all part of the bizarro world of MSM and the housing bubble. High prices good, unaffordability bad. Easy money caused this problem and why the hell isn’t the government giving Countrywide easy money.
Ben…. you hold arms, one of you other knuckleheads get his legs and I’ll kick him in the balls.
STOMP, kicking is for girls.
OH fine, I’ll do it then.
I’m with you right up until the kicking him in the nuts part, let’s go with the joshua tree treatment instead.
Homemade video of him having oral s*x with Ann Coulter at a tanning salon.
Countrywide certainly didn’t share the wealth with any villagers on the way up. Now times are tough, and you want to be part of a village?
As usual: privatize the profit and socialize the risk. Count on the Moz to make this Wall Street mantra so blantantly obvious.
Bet he wants to be HUD Secretary if Hillary gets elected.
It takes a village to do this.
Translation: hang on to your wallets!
How much of his stock sales is he willing to spend ? I betting “None”
“In a separate report, analysts at Goldman Sachs figured that prices in California are about 35% to 40% overvalued, compared with past relationships between home prices and income growth.”
OK. I’m going to be a doofus for a minute, but why are they picking out this relationship as significant for determining the “proper” home price?
Other factors, such as interest rates and credit availability, as well as current movement in prices so completely overwhelm this “relationship” that it makes it meaningless. Does anyone even have information on how stable the relationship has been over time?
My feeling is that if other factors were able to distort prices upward, those same factors should be capable of distorting them downward as well. I am skeptical that there is some foundational relationship that determined the “proper” home price.
Actually, it is not a bad approach. No matter how you slice or dice it, income must support prices. And, this analysis does not tell you how much prices will overshoot on the way up or down. But, it does allow you to escape the trap of only looking at today’s price.
They do distort it downward, but if you look at a time horizon long enough to see the distortions as distortions, you should see that home prices follow pretty narrow multiples of income.
it just seems like since in most home purchases we are dealing with the time value of money rather than the current value, fluctuations in the various rates that effect the time value would have a large effect on a persons ability to pay the current value.
again, i am a doofus. do these factors tend to cancel each other out overall and boil down as you say, to just slicing and dicing?
$375K at 5% is different from $375K at 8%, but income doesn’t necessarily adjust with interest rates.
That’s why everyone wants a 3% fixed rate right now to offset the 50% over inflation on the prices .
Ill refinance at 3. cut the term in half. keep the payment.
“As long as [house] values keep falling, the subprime situation will get worse.”
It will all get worse NOT just subprime.
And that leads me to believe that the low 1% to 3% teaser rates had just as much bearing on creating the demand as the low or no down payments . They made home ownership look like a affordable product with these low teaser rates and the promise that the borrower could refinance to either a new teaser rate or sell .
“Looks like there’s more bust left in the housing bust.”
Thats a great quote.
.. nothing but a quick, sideways glance at some of the overflowing cleavage so far.
–
Mozilo’s comments are disgusting. When crooks like him get to run very large financial companies we know the future of the economy.
Jas
This is why, for the first time in my life, I am wondering if there are greener pastures outside this poor country. There is a complete and total lack of business ethics, accountability, and moral decency among these elitist maggots. May they rot in hell.
And just think, they are buying the people in the government too…
If there are greener pastures elsewhere, rest assured that wherever that is, they do not welcome immigrants unless they have suitcases full of money. Heck, just try getting an immigrant’s visa (FM2) for Mexico. It makes getting a Green Card look like a cakewalk.
“But what explains Stanley O’Neal? He was CEO of Merrill Lynch as it lost a staggering $8 billion on mortgage-backed investment products.”
Is it 8 billion or 14 billion? I thought I had heard on CNBC this morning that it was 14 billion. I guess it doesn’t matter what’s a billion here or there…
It might be the 7.9 billion this quarter with more anticipated?? I’m sure O’Neal doesn’t care at this point. He got his.
Yes, I’ve seen multiple articles with analysts expecting another 4-5 billion next quarter. Very reasonable for an analyst to predict 6 more for a total of 14.
So what does O’Neal get for being such a slimeball? A $160 million retirement package!
Is it only in America you can get paid so much for being a failure ?
From an American perspective Borat was funny. Too bad Americas are even funnier to foreigners. I’d rather be comically known for mistakenly bringing a bag of shit to a dinner table than for being known for being a stupid gluttonous American.
“Alan Greenspan issued bearish comments about the U.S. housing industry Monday, saying that ‘prices of homes will continue to go down’ until housing inventory starts to shrink.”
But aren’t the falling appraisals/prices feeding the exploding inventory? It seems to me that Greenspan is using Green-Speak again.
“And upon revealing the economic word of god, Mr. Greenspan closed his Economics 101 textbook and paused momentarily, and affected a somber, pensive, repose for maximum theatrical effect, and he laid his eyes upon the massive financial shithouse of his making, and he saw that it was good. End of the third day.”
Given the current number of U.S. households of 110 million, the change in the homeownership rate over the past two years has already subtracted almost 500,000 from the underlying demand for new homes.
Let’s see:
1) There are somewhere around 6 million houses for sale currently.
2) If the homeownership rate drops 5%, there will be another 5 million or so houses available for purchase.
3) Builders are still building more than a million new houses per year.
and most importantly:
4) New household formation rate appears to be under a million new households per year.
These points are based on half-remembered statistics and guesstimates (and the numbers are generally not easy to find to either back up or refute these points), but I don’t think that I am wildly off with any of them.
Taken altogether, it would appear that the USA could completely stop building houses for at least five years, and possibly as long as a decade without having any serious housing shortages. There is no way this bust is going to be over before 2010, and I would say that 2015 is a more realistic time to think about a recovery.
No way would building stop - what would happen to the trade-uppers who must get something new each year?????
I agree with your timelines. The gauge for me as to a bottom is when the mindless drivet worker tells me at the water cooler that housing is the worst investment ever and will never be good again, I will buy a house that day. Not a moment before.
AMEN Brother AMEN
You forgot to include the fact that the operating costs of McMansions are only reasonable if they are divided into three to five housing units each.
It could be that much of the construction in the next decade will be merging condos that are too small to be desirable into larger, family-sized units and dividing McMansions into smaller but still family-sized units.
I hadn’t even thought of that factor … i live next door to seven McMansions that with minimal renovation and workovers could easily house 20-30 families.
Any bids for recovery no sooner than 2020?
I’ve thought about this too… with all the overbuilding, we should be able to get a great price in 2010. Unfortunately, there are very few recently built homes we’d be interested in buying due to the huge cost to heat/cool these monsters.
Will these subdivisions be rezoned for multifamily and carved up the way a lot of the older homes in college neighborhoods are split into student rentals?
THe real question is, who is going to live in them. Even if each McMansion housed 4 or 5 families, what will those families be doing 35 miles from the nearest work? What will they be working at, and will there be mass transit to these dumps just to pick up marginal welfare recipients. The the real question, yes, I can see them being carved up, but really only the ones near or in actualy suburbia. The one’s in exurbia with $6 or $7/gallon gas, what exactly will be their ‘role’ as housing units, even if they are multifamily housing units?
What job does a welfare recipient need to commute to? As long as there’s a liquor store nearby, they’re good to go.
Will all of them be welfare recipients? I don’t know. If that’s the case, at what point doesn’t their check cover their bills, then I guess they’ll just be squating in unheated McMansions in the middle of nowhere.
Not to sound contrarian, but I’ve always scratched my head whenever I read the prevailing view on McMansion operating costs on this blog. Moving from a 2200 SF to a 3600 SF, family of 6, my electric bill has gone up around 20%, heating (not as big an issue in Calif but it still does get pretty cold in the winter) probably went up 10% max, and water/trash/sewage has stayed within the $100-$120 range. I always attributed this to more efficiently engineered homes, (especially since my new home had an “Energy Efficient” tag while the older one didn’t), better insulation, high-efficiency appliances, water saving irrigation system and other things like replacing all light bulbs with fluorescent, installing a solar pool heater, signing up for the local Edison AC program (involves a remote that can kill the AC at peak times, which has happened only once in 3 years) and keeping the thermostat at reasonable levels. I will say that with the electricity issues in California that during the summer, the price spikes are more drastic, and that in the coming years water costs will definitely be on the upward trend, but those factors are separate from the operating costs of McMansions since all houses, big or small, will share in those pains.
The construction standards of today (e.g. 6 inch walls) should lead to more energy efficient homes. But the bigger the home, large windows facing east or west, vaulted ceilings etc… the more energy it will take to heat or cool. A well designed modern home with 2000 square feet might cost $100/mo peak in the winter to heat in eastern WA, whereas a vaulted ceiling beast with lots of poorly positioned windows will take $400/mo in the winter to heat.
Another really silly design problem is that most of these new McMansions don’t have basements so the HVAC units are in the garage with ducts in the attic and crawlspace. You lose 40-50% of your heating/cooling right there.
Your bills might have only gone up 10-20% but we are looking at a significant monthly difference in this climate between a poorly built/designed McMansion vs a well-built/designed modest home. Perhaps $150-$200/mo annual average difference with todays’ utility rates, and escalation built in.
Thanks for the explanation. I do agree that high ceilings require more energy to heat/cool, but that’s where ceiling fans come in (my house has 10 indoor and 2 outdoor ceiling fans!). But it does confirm my belief that the generalization that McMansions have more expensive operating costs is false. Green McMansions, maybe?
Don’t assume utility costs will rise at the rate of inflation. Energy costs will be going up on the elevator as wages go up the stairs. The former Aramco E&P manager Sadad al-Huseini says that global production has reached its maximum sustainable plateau and that output will start to fall within 15 years, by which time the world’s oil resources will be “very severely depleted”.
According to al-Huseini the technical floor - the basic cost of producing oil excluding factors such as geopolitical risk and hedge fund speculation - is currently about $70 per barrel, meaning the minimum oil price could hit $106 in 2010 and $130 by 2012. Actual crude prices, including financial market factors, could be be as much as $125 by as early as 2010.
The American vision of suburbia IS DEAD. To think otherwise is stupid.
“[T]he authors conclude that the availability of new mortgage options accounted for 56% to 70% of the decade-long increase in the U.S. homeownership rate, while demographic changes accounted for only 16% to 31%.”
Finally, using heavy mathematics, they’ve figured out what many have been saying on this and other blogs all along. It easy to conclude some of these guys are economic historians or worse because they cannot or refuse to sense the present.
“Using math-heavy macroeconomic analysis”
Economics, since at least the mid-70s when I studied it, has been captured by math geeks. If you look at the statistics in the study you can easily see where ownership bulged, by age groups. From their its a logical conclusion that something happened making younger buyers enter the market disproportinately to the norm.
Instead of just using the statistics, the facts of when the changes in mortgage lending occured and similarly plotting the concurrent escalation in home prices these economic “experts” contrive math formulas that “prove”…whatever.
I’m not against using math in economics but this drive to mathemetically express EVERYTHING in economics is bogus as it leaves the impression that there is some kind of linearity to a BEHAVIORAL science like economics. Sure, numbers are needed to express and analyze economic factors but the math geek focus isn’t anywhere near (IMHO) as powerful and meaningful as simply writing an eloquent explanation of the factors involved in a particular economic choice.
Young people took out mortgages disproportionately because, for ONCE, they didn’t have to first accumulate a downpayment. More importantly, there wasn’t a big demographic rationale behind the rise in demand for housing. What are the implications going forward?
Young buyers going bust will be disproportionately LESS likely to be able to demand housing going forward. Combine this with little, fundamental, demographic demand push and you’ve got an even WORSE demand picture going forward.
I salute the authors who toiled over their (presumably) impecable mathematical formulas but IMHO they would have better spent their time writing a coherent, logical, explanation of what went on (using the available statistics). That they are more comfortable with math is all well and good but economics that can’t be digested by anyone without a good grasp of algebra isn’t worth a whole hell of a lot in the real world.
Economic pet peeve/rant off.
“Prices could fall much further. In a separate report, analysts at Goldman Sachs figured that prices in California are about 35% to 40% overvalued, compared with past relationships between home prices and income growth. The median sales price of a home in California was $589,000 in August, Goldman said, but should be around $375,000, they said.”
I always wonder how fraud was accounted for in this analysis or was it even accounted for…I think 375k is still to high for a median…should be around 225-250k.
The truth is can you imagine homes in the Bay Area eventually being 375k? That would be outright financial ruin for 50% of it’s citizens. 375k sounds a hell of a lot better than 650k.
Outright ruin. Too bad.
My 3/2 in Berkeley cost 320 in 96 - 375-440 sounds about right for it.
the 3/2 down the street sold for 885 in 2006.
My neighbor next door paid 12K in 1952.
My opinion, although just an opinion is that the classic 20 city index spells out the economic quagmire such cities like Chicago, LA, NYC, Boston, Minneapolis, Miami, SF… basically the coastal ” smart” cities are going to find themselves in. I’ll go as far as to say that many of these are going to be screwed long term from the effects.
The future of economic and infrastructural growth will not be these classic cities which have now clearly damaged their capabilities by severely indebting their citizens, whom in turn will either be broke for a decade, move to other less pricey cities, and otherwise function as less productive workers as a result of their highly disadvantaged situations.
My bet will be on the myriads of “Micropolitians” that survived the boom relatively unscathed. Just like many things we buy, such as cars, laptops, and so forth, the smaller, more economical city will be the key to economic development. Then again, I could be totally wrong.
“Micropolitians” that survived the boom relatively unscathed
I think you need to visit some of these micropolitans. Many have seen greater home price appreciation than the coasts. I would challenge someone to find any place in this country (city or town) with median home prices below 3x median household income or homes that would generate positive cash flow as rentals. There may be such a place, but I sure haven’t found it. If desolate small towns in the middle of central Illinois have become unaffordable, then it is hard to imagine ANY place escaping this bubble.
Oh, I have. I’m from TN originally and the one city that stands out in my mind as being a prime example of a micropolitan that will probably have a better economic outlook is Nashville. Homes can still be easily had for 100-150k. We’re talking nice homes in good safe neighborhoods.
Anyway, Nashville is heavily tied to healthcare. The US is getting older, boomers are retiring, and hence healthcare is actually an extremely good place to be right now. Secondly, Nashville is actually planning for what will likely continue to be an influx of younger professionals. They are building a new transit system and developing plans for smart growth communities.In other words, they are planning ahead. Smart move.
When you say try and find a place that has houses that cash flow…. who cares? I mean- really- there’s way more to an economy than finding homes to buy for renting purposes. My argument wasn’t what cities are great for buying rental property, my case was more about cities that have healthy outlooks economically and offer a better quality of life. There are many other smaller cities just like this.
Again though, Nashville has been helped partly by the influx of people escaping Florida. It’s easy to draw a line roughly from Memphis through to Raleigh, NC as to the belt of area that has experienced unnatural growth due to the massive bubble in FL. As FL cools down, some of the people will return home welcomed by lower prices, and prices will also drop in said belt. In my first comment, I construed ‘Micropolitans’ to be small cities like Terre Haute, Indiana, not a large city like Nashville.
It’s metropolises and megalopolises all the way. Jobs are increasingly specialized, and with 2-incomes a necessity (and increasingly a preference too) only a metropolis can provide good work for a married couple over a lifetime. The focus of the best and brightest in the cities drags the companies and the services there, and so everybody else follows. The exhaustion of cheap oil will drive up the cost of transportation and exacerbate the process.
I agree with you, jetson boy has it wrong. The cities will survive better long term because of the opportunities for job growth are better with plenty of vacant housing units to be had for pennies on the dollar. It’s the smaller towns without industry (Lakeland, FL; Springfield, MO) that experienced the bubbles who will be hurting for many, many years.
I think some of you are looking at this in the wrong way. In basic terms, the US is still an incredibly young country with an enormous potential for future growth. For example, Nashville really didn’t have much in ways of having economic elasticity. Unlike some cities like Raleigh, it isn’t just a repository for Floridians. Nissan, Denso USA, Honda, and a number of other major manufacturing companies have recently moved there. As I’ve also mentioned, healthcare is their biggest industry behind entertainment, which is a 7 billion dollar industry there. Nashville was named number 10 of the best cities to do business.
The fact that it isn’t in the mountains. on a lake, or on the beach will also save it from throngs of retirees from up north wanting a piece of cheap Southern real estate.
The story here is that cities like Nashville have way the heck more upside growth and potential than say- NYC which is now overbuilt and overpriced. Most of these large cities are landlocked anyway due to being on the coast or in a valley. This is not the case with some of these smaller cities. This is a situation you won’t find in many other countries which have little room to grow.
Anyhow, if some of you want to stick to your large cities.. that’s fine with me. Leaves more for the rest of us who know better.
To clarify, my point is that cities like Nashville are still what many would say “young” cities. If they did not have the same economic clout in the past, they are much more attractive in terms of doing business now.
Here you go. Plenty of houses for $75 sq. ft or less. The rental market is pretty tight around here too, you can make money being a landlord, and the unemployment rate was 2.3% in August. You do have to live in the middle of nowhere though.
If that were to happen, it would certainly buck the global trend where the majority of resettlement is into mega-cities. Still, who really knows for sure? One thing, our reliance on services/consumer spending would probably tend to favor the continued mega-city settlement pattern, but there are always variables. And odds are that the U.S. would probably be the country most likely to break away from global settlement trends.
RE: My opinion, although just an opinion is that the classic 20 city index spells out the economic quagmire such cities like Chicago, LA, NYC, Boston, Minneapolis, Miami, SF… basically the coastal ” smart” cities are going to find themselves in. I’ll go as far as to say that many of these are going to be screwed long term from the effects.
Economic quagmire?
Beantown?
Why, we have the new world champion BOSTON RED SOX and UNDEATED NEW ENGLAND PATRIOTS!
How could there possibily be anything wrong with the world?
(withdraws tongue from cheek)
I disagree completely, suburban houses are pretty much the same everywhere and you couldn’t pay me enough to live somewhere like Nashville.
OTOH Manhattan prices have been relatively stable, at least up to now.
Along the lines of the above, post. Just read an article about a policy called “insourcing” currently being used by Northrup. Their plan is to use smaller towns to house parts of their company. That way they can pay smaller salaries and their people can buy nicer houses and not be subjected to long commutes and all the negatives of living in a large city.
I think this idea may have legs.
Only if they actually keep the smaller sites open and don’t shut them down the moment an executive may miss out on part of his zillion dollar salary. That being said, I like the idea. I have no idea why industry keeps piling up on certain areas of various states when beyond a given point it becomes a bad idea: clogged roads, pollution, crime in the cities, skyrocketing cost of living, the typical high taxes and general waste that comes with crowded areas, etc.
“One warning sign: The rate of homeownership has already begun to drop. It was 68.2% in the second quarter of 2007, down a full percentage point from its peak. The third-quarter number was scheduled for release on Oct. 26.”
Does anyone have the 3rd Q number as it stated that it would be available on Oct 26?
Census Bureau: http://www.census.gov/hhes/www/housing/hvs/qtr307/q307tab5.html
More:
http://www.census.gov/hhes/www/housing/hvs/hvs.html
“The 13-month-long decline in home prices in 20 major U.S. cities accelerated in August”
Decline in home prices accelerated? I thought we were told that this downturn was almost over…how can the downturn be accelerating? Does that mean (gulp!) that “it’s NOT a good time to buy?”
I still dont get it - ultimately, some chuckhead had to be buying these loans. Dont the buyers pay army of people 200k per year to manage the risk for these buyers? It seems like a few excel graphs of income and price and there should have been no market to purchase these loans? (am I wrong here - I dont feel like Countrywide is to blame but instead the purchasers of the loans???)
“some chuckhead had to be buying these loans. Dont the buyers pay army of people 200k per year to manage the risk”
All of the financial models assumed that house prices always go up, or, at the very least, stay the same. One of the ratings agencies admitted as much about 2-3 years ago. What risk is there if you can get your money back, plus fees, penalties, etc. when you foreclose on a house that has gone up in value.
It looks like that particular assumption (no possibility of negative Home Price Appreciation) was a bit, errr, wrong.
All of the financial models assumed that house prices always go up
that’s essentially it.. no fear.
this is the biggest question mark i have.
what made these loans attractive to investors? I have heard 2 theories:
1. widespread fraud in the repackaging of the loans so that risk was understated.
2. Investors became desperate for yield when interest rates dropped so low that standard fixed income securities yields dropped too low, so they knowingly accepted the risk for the extra yield.
the 2 factors may be mixed together as the loans were constantly restructured and resold. if people are not planning on holding the loans but reselling, they may see the risk as not so much a function of the contents of individual securities, but of the danger of being caught with the loans when the music stopped playing, like musical chairs. Perhaps that was seen as a more acceptable kind of risk… like i said, i don’t understand this part.
Aflurry - IMO, what made these loans attractive to investors was the grossly inaccurate grading given to them by Fitch, S&P and Moody’s. An chart yesterday showed an example of how dramatically MBS tranches dropped in just a year, with AAA falling to BBB or BB and AA falling to junk status. The resulting losses are mind-boggling indeed and those investors want no more of this paper.
if the price gets low enough i’ll buy some paper.. i like RE but don’t want to be a landlord.
“Treasury Secretary Henry Paulson said it’s too soon to call an end to the U.S. housing slump. ‘We haven’t hit the bottom yet in housing,’ Paulson said.”
C’mon, Hank, you’re a smart man, you know that this thing has just gotten started…welcome to the third inning, baseball fans.
“The U.S. administration is studying what went wrong, with an emphasis on the role of credit-rating companies and accounting rules…”
Hint: Never assume that negative HPA (House Price Appreciation) is impossible.
Hint #2: Always assume that negative HPA is probable sometime after a mania in house purchases.
Sometimes I feel that *we* should be writing the textbooks…
Problem is, if you are the first to underwrite conservatively, you are the first to stop making money on fees.
The flip side is that you are the first to be able to take advantage of the carnage while everyone else is bandaging mortal wounds.
By and large, the quarter-to-quarter “hit the numbers” earnings philosophy has sacrificed long term stability and growth for a short term boom/bust cycle.
As long as we socialize risk, but privatize reward, this will continue.
“UBS repeated warnings of further writedowns, but CEO Rohner declined to give any detailed forecasts. ‘The range of possible outcomes is widening, and most involve a Joshua tree’ he said.”
The Economist magazine was way ahead of that and others like Dean Baker. And if he thinks it’s going to be 10 years, does he really want to be telling everyone how ‘bad’ things are getting for that long?
I think the answer to this is YES! People need to start preparing financially now and taking advantages of home loan rates while their is a surplus of homes. In ten years overcrowding is going to be more of an issue and rates are going to skyrocket.
TROLL ALERT!!!
LMFAO!
Come on Trolls are fun! Especially ones that make predictions on home availability. We all know there is no more land. (I have the absolute last few thousand acres available for development for any one that likes the frozen North. And I also have a bridge for sale in New York City.)
Overcrowding in Atlanta - BAHAHAHHAHAHAHAHAHA
I guess Atl is different? Let me add them to the list of “different” places.
GO back to trying to sucker people into buying overpriced homes with toxic mortgages…
Atlanta IS different - don’t they only have 90 days or so of water left? That is different, but not in a good way.
Overcrowding - easily solved by subletting McMansions. it won’t be a problem anyway
“People need to start preparing financially now and taking advantages of home loan rates while their is a surplus of homes.”
I agree. In 2-4 years, there will be an even larger surplus of homes…so I’m preparing financially now by saving my money for the time when I buy. “It’s a great time to think about buying in 2-4 years” should be the new mantra.
And, before you ask, “why 2-4 years?”, just look at the Credit Suisse/Zelman ARM reset charts…
Bwah. You forgot : “They are not making any more land and RE only goes up.”
The 6%er’s site: http://www.prudentialgeorgia.com/prudential_ga/
Overcrowding will cause rates to skyrocket??
Gee, why didn’t I think of that???
Moron.
Dear Atlanta New Home:
The problem with taking advantage of low rates, instead of taking advantage of low prices, is that you cannot reprice your home later, but you can always refinance your loan. If you buy a house at the bottom of a bubble with a huge down payment and 10% interest rate, then refinance into 6-7% a few years later, then you will have done quite well for yourself. If you buy a house at the top of a bubble at 6-7% interest, then the price of the darn thing drops by 50%, then you are screwed.
Oh, and overcrowding will take care of itself due to this little thing called BIRTH CONTROL. Population in the US only goes up due to immigration, which we can control as well.
“CHILIDOGGG
2007-10-30 10:33:00
375k seems about right. After all, annual median household income in all of California, including El Centro Bakersfield, Fontucky, et al comes out to about $100k.
Try looking up the fact before you type.
Median household income in CA in 2006 was $56,645.
Median family income (2 or more people and related) in CA in 2006 was $64,563
That is a far, far cry from $100,000!
“Affordable” for those households with 20% down is about $267,800 - $306,193
Good work, Ann.
I think he was just joking.
Yes, I think you are right.
Chili was joking.
I have a question. Last night on Houston’s 700 KSEV I caught the last 10 minutes of Street Talk with Lance Roberts. In 10 minutes he game the most concise summation of what’s been going on for the last 5 years that I’ve heard to date. He included the housing and credit mess, outsourcing of jobs, Fed printing money like mad (he said if you compare the new money creation chart with the stock market chart they are almost identical), fraudulent inflation reporting by the government, credit freezing, etc. And then at the end he just basically said “so what?”. He said we should be aware of what’s going on but realize that it won’t have a long term impact on the stock market or the economy. And here’s the kicker - because there’s something like 460 TRILLION dollars of investment liquidity out there.
SO my two questions:
1. Can someone who owns up to all of the above as fact, yet doesn’t run screaming into the hills be trusted (that was the first time I’ve caught his show - anyone familiar with him?)
2. Has anyone ever heard that incredibly high trillions number before? I just about choked when he said it.
“Has anyone ever heard that incredibly high trillions number before? I just about choked when he said it.”
Whenever I’ve seen numbers like that, I believe they included all cross-liabilities of all kinds — all derivatives, SIVs, any instrument and insurance you can think of. If it could be unwound (seems like a ball of string the size of the Milky Way), the net would be far less. But the unwinding would be catastrophic before we could get close to a handle on the true net value, IMO. That’s why you didn’t see those MFs out on their yachts last weekend — they’re too busy sending shorts to the cleaners.
I have read estimates that essentially say that if everything were unwound, 99% of the obligations currently in the (amazingly leveraged) system would receive zero payout.
Musical chairs with money …
Got physical assets (that are actually in your posession)?
The derivatives market allows banks and other Basel 2 entities to Mark to Model. If one of these CDOs fails, and the default insurance derivative is sold by a Hedge fund with $3B in assets, Is the Hedge fund ever going to be able to pay it off? Or like all true Hedge funds just declare themselves insolvent? There are $500T in derivatives in existence in the US. A ticking time bomb awaiting one default.
Yes, I used to listen to him in my previous car. I only stopped because I don’t get a good am reception now. His point is that the money has to go somewhere. Stocks are good home at moment as they are liquid.
btw: Here is Lance’s site http://www.streettalklive.com/ He has a free newsletter.
What is $460 trillion of LIQUIDITY? Liquidity is the measure by which we guage the fungibility of a good, not the $$ available to buy it at any time. If he meant the latter, how did he come up with that #, and what does it mean. How many $$ are currently tied up the stock market as it is? How many of those $$ are just monopoly dollars anyway? Weird.
‘It takes a village to do this.”… said the village idiot
“‘…First-time buyers cannot buy a home now. Only the wealthy and privileged can afford to buy homes,’ “…Angelo Mozilo, CEO of Countrywide Financial, on Monday strongly criticised the US government’s response to the collapse
“…saying there had been ‘zero’ effort to tackle the crisis.”
“…they know NOTHING…NOTHING!” Cramas$
“…the change in the homeownership rate over the past two years has already subtracted almost 500,000 from the underlying demand for new homes.”
so much for ‘pent up demand’ and ‘lurking buyers on the sidelines’.
“‘Markets have made the decision that subprime securitization is much too risky, so problem solved,’ Greenspan told a conference.”
One of my pet peeves about this type of argument is the implicit assumption that free markets have a perfect memory and act rationally based on that memory. History proves otherwise.
Saying that the problem of subprime securitization is solved is analagous to saying that murder has been solved due to the implementation of capital punishment. Just because a disincentive has been demonstrated to the market doesn’t necessarily mean that individual market players won’t repeat the same mistake. Those indivdual mistakes can still cause great cost to the rest of the market.
I think that certain sections of the economy have to be regulated ,like the money game ,because of the power of money to make or break markets . I’m sure after the stock market crash of 1929, people who didn’t even leverage to buy stock didn’t feel to good about paying the price for other peoples greed .
Please stop by and sign this excellent petition.
http://financialpetition.org/
“Although the paper cites lowered downpayment requirements as the biggest factor in raising ownership, co-author Carlos Garriga of the St. Louis Fed says a forthcoming paper will attribute more of the effect to ‘teaser’ loans with low introductory payments that appeal to young and lower-income buyers.”
********
Whatever their appeal locally (unrealistic high house prices?), let’s not neglect the six figure income earners here in the Alt-A Bay Area (aka SF Bay) who chose these teaser loans.
Many of them are not young, nor lower-income.
I personally know many ,otherwise intelligent people, who have stated that of course they have an ARM. Otherwise they would never have been able to afford their $1M plus home!
Right, SF Jack. It is a fallacy that the housing mess is a “subprime problem”. People at all income levels took out exotic financing, and MBSs of all tranches are getting creamed in the market.
Seriously - how can one argue that artificially supporting unreasonably high prices can somehow help the situation? What the hell does Mozillo want the govt. to do? We need to take our medicine and get better. Part of that process will be lots of deliberated equity and foreclosures up the ying yang.
Pardon my French, but Mozillo is a douche.
Henry Paulson, US Treasury Secretary
“I believe there is enough strength in our economy that we will continue to grow through this, housing is the weakest part of the economy.”
and
“All of those markets are doing better every day, as time goes on compared to where they were a number of weeks ago, but it is going to take a while to work our way through…Six months ago, a year ago, people were more optimistic that we had hit bottom. We haven’t hit bottom yet in the housing area.”
Where is Prof GS Bear when I need a new Meth fix.
Hey there Hoz,
Prof GS Bear is madly penciling numbers on the back of his hand as we speak.
Yo Hank,
Care to identify that “strength in the economy” ?
What is it? Retail? Financial services? Fast food?
Come on Hank, let us in on the secret.
Annata,
Individual market players will most certainly repeat “mistakes” in virtually EVERY investment category at some time in the future. The only way there wouldn’t be the possibility of someone “repeating” (in some form or fashion) the mistakes of misanalysis of risk is for there NOT TO BE A MARKET in an entity. The existence of a market for an asset means there are two sides, two opinions, of the assets future. One side is going to be wrong (at least for a period of time) EVERY time a transaction occurs. Its unfortunate someone has to be “wrong” but that’s the price of economic freedom.
Greenspan’s saying there isn’t going to be a market (or much of one) for NEW subprime investments. He’s right. There is a market, one way or another, for the existing debt because there is still some measurable value to the assets. But virtually nothing new will be originated in subprime securities for, likely, a generation.
Will it ever change? Who knows? Who cares? Individuals will be forever better able to base their decisions on these types of securities because of this debacle (should they chose to educate themselves). And if they don’t? Well we should no more stop them from repeating their, individual, mistakes than we should have somehow forced individuals to stop buying houses in 2005 based on the fact of the 1990 decline in housing “assets”.
The mistake made with subprime investing wasn’t in the basic proposition but in the fact that investors were mislead/ignorant/ignored about the change in the historic ways lenders managed the process. Basically, the book on prudent lending was tossed aside.
Should investors have known about that? Prudence would have suggested they keep an eye on that facet of the process but, outside of the loan origination business who knew how ridiculously lax it was getting?
I was one of the people who didn’t know how lax the lending had got . I know alot of people at my old neighborhood were questioning who were the people who could afford to buy their 700K to 900k houses now .
I don’t disagree with anything you’re saying. I was merely pointing out that “problem solved” seems a bit flippant.
Markets often “solve” the same problem over and over again in the same way that evolution “solves” the same problem over and over again. Just as in the case of evolution, market behavior often looks like carefully designed solution to a problem, although it is really the result of random fluctuations in a large population, filtered by a very strong selection process. In the case of design, when a problem is solved, it is usually solved for good. However, the lapse of prudent lending, which you rightly point out as a fundamental cause of the housing bubble, will occur again in a different guise within our lifetimes.
The problem with bubbles isn’t that people make mistakes and bet the wrong way. As you point out, that will always happen, and in fact that is necessary for the whole system to work. The problem with bubbles is that very large groups of people bet the wrong way together, and in a sort of avalanche effect, cause even more people to bet the wrong way with them. It breaks the negative feedback loop that usually stabilizes markets, and when the whole thing comes crashing down, the collateral damage extends even to people who weren’t betting at all.
“the collateral damage extends even to people who weren’t betting at all……”
Yes, great point. Apparently its been the policy of the FED to ignore asset bubbles (asset inflation) the thinking being that this is not part of their “core” mission. What you point out is that bubbles damage extends far beyond participants and, in this housing case at least, can have major collatoral effects to the point, today, where credit market liquidity is threatened.
I’d like to think the FED will revisit this stance. But, then again, were they to raise rates, explicity addressing a “bubble” of some kind or another, they’d likely be accused of meddling in the “free market”. Which, of course, they’d be guilty of doing.
To me the Fed needs to use or get tools to pull liquidity out of specific asset categories. In equities, they should be raising margin requirements as p/e’s rise (and lowering them when p/es fall). In RE they should have some kind of similar mechinism that computes historic, sustainable, RE industry growth and introduces some kind of targeted “friction” when it begins to significantly exceed normal bands.
Is it possible to do these things? “Lean into the wind” in a more targeted fashion? I think so but I could be wrong. If something isn’t done in this vein, I believe, we’ll never get beyond the ham handed use of just raising or lowering rates for each recession and each inflation crisis.
There’s actually an article in last week’s Economist that ponders exactly this question.
One possible approach is to incorporate certain classes of assets into the inflation indicators, which are usually used by central banks. This would allow bubbles in non-consumer asset classes to form, but not bubbles in consumer goods. For example, the internet bubble would still have happened, but the housing bubble would not have happened (the consumer price index could have included a housing price index instead of a rent index).
The downside of this approach is that it may be difficult to identify the asset classes that should be included. In retrospect, housing seems obvious, but twenty years ago no one would’ve guessed it. That’s really the crux of the problem of meddling with a “free” market, although since central banks are already doing that anyway, they may as well do a better job with it.
A more ad hoc approach would be to simply watch the market, identify bubbles as they appear and then use a variety of tools to pop them early. It would be a calculated risk, case-by-case approach, where you’d need to weigh the risk of squelching a genuine boom vs. popping a bubble.
You could think of some alternative approaches that are not financial at all. Bubbles are mostly driven by mass psychology (think about how often you’ve heard “it’s different here” even as the house of cards was beginning to fold). Perhaps you could try to nip asset bubbles in the bud by information campaigns. For instance, when the NRA trumpets on about neverending house price appreciation, some government agency could have responded by publishing data on historical real estate crashes. There are few more appropriate functions of government than public education, and although they may be accused of propaganda, at least they will not be accused of financial engineering.
jag,
I think that is absurd. Our problem isn’t that the FED didn’t control asset appreciation enough. Our problem is that the FED stimulated asset appreciation with abandon. They turned our fractional reserve system into a no-reserve system and started a feeding frenzy. Those that know why (if there are any) will probably carry the secret to the grave. And you want to encourage them to exercise more control??????
One of the ways to curtail bubbles is set a defined inflation rate for any year and if the price of a house exceeds that limit ,than the buyers has to put a greater down payment down for the risk factor .
There’s More Bust Left In The Housing Bust
Yes, yes, YES!!!!!
“All of those markets are doing better every day”
That’s a flat-out lie, Paulson.
Many analysts have pointed to easy lending as a contributor to the housing boom, but the Ben’s Blog may be the first to quantify its effect in a rigorous way.
830 Swiss francs ($713 million)
I knew the US dollar had weakened, but I had no idea it was that weak!
They only jumped the gun a little bit. That’ll be next year, when we are using wheelbarrows to transport our Weimar dollars.
“Bermuda” shorts possibilities?
hmmmm….
“The former Federal Reserve Board chairman, speaking at an investment conference in Bermuda, said ‘we’re nowhere near’ the point where inventories of new homes are set to drop, noting that home builders continue to discount new homes and add other inducements in a bid to cut their inventory.”
“‘We’ve got a way to go, and I’m not sure where that leaves’ the housing industry in the next year, he said.”
“The state-run lender reported on Aug 23 that it held $9.65 billion worth of U.S. subprime-related bonds and collateralized debt obligations, the largest exposure revealed by a Chinese bank.”
This would have been huge news a month ago, it’s kind of ho hum now…
“In the Case-Shiller index, fifteen of the 20 cities tracked in the index have seen prices fall in the past year, led by Tampa, Fla., with a 10.1% decline
With the 10% decline, there is about 40-50% more of a decline to come before housing prices fall back in-line with local incomes in Tampa.