Home Buyers Get ‘Peak Phobia’
Some housing bubble news from homebuilders and Washington. St. Louis, “Developer Michael Lawless is selling residential building sites, ground held for future development, the Valley Park office building where his company is based and his $2.9 million home in an effort to raise money to pay off creditors owed thousands of dollars by Lawless Homes Inc.”
“Lawless Homes’ financial problems hit as the number of home-building permits issued in St. Louis, Franklin and Jefferson counties all dipped slightly between 2004 and 2005.” “In addition to paying off secured creditors, Lawless said he is working to remove liens on homes sold to customers. (Attorney) Dudley McCarter said Lawless Homes is facing an ‘unusually high number’ of liens, in part because word travels fast through the construction community.”
“Builders boosted construction spending to an all-time high. That was the message coming from the latest batch of economic reports released Monday.”
“The personal savings rate rose to negative 0.3 percent in March, compared with negative 0.6 percent in February. Economists, however, caution against reading too much into the savings rate. They say it doesn’t provide a complete picture of household’s finances because it doesn’t capture gains from such things as real estate.”
“Peak Phobia? The volume of U.S. home sales is near the record high seen in 2005, but Americans are much less confident today than they were a year ago about the advisability of buying real estate. Just 52% of Americans say now is a good time to buy a house, down from 71% last April and 81% in 2003. Residents of the East and West are especially likely to consider it a bad time to purchase a new home.”
“Housing looked like a good deal in the recent past when single-family homes were experiencing back-to-back years of double-digit appreciation. Now that the increases appear to be slowing, and home values are leveling off at fairly high prices, prospective buyers are naturally more concerned about paying top dollar. The recent decline in consumer optimism about the housing market is seen with all major income groups and regions of the country.”
Paul Muolo, “Here’s something to think about: A few weeks ago Freddie Mac settled a consolidated shareholders lawsuit, agreeing to pay $410 million in damages. The plaintiffs sued, arguing that they were misled by the company about its finances.”
“Freddie’s woes were a bit different from that of its sister company, Fannie Mae. Freddie was earning so much money that it felt compelled to sock away $5 billion for a rainy day. Fannie, on the other hand, was cooking its books to hide $11 billion in losses that it should’ve been taking.”
“Now, this is where it gets interesting. Fannie, too, has been sued by shareholders. If Freddie’s settlement cost it $410 million, what’s Fannie’s going to cost? If I were a betting man (and I’m not) I’d wager that it could be close to $1 billion. I wonder how Fannie’s directors will react to that?”
“China: A surge in the number of vacant and newly constructed apartment buildings in that fast-growing (sort-of communist) nation is fueling press reports that a shakeout might be just around the corner. Speculators are playing a key role in the boom, and low- and moderate-income families are being priced out of certain markets. Sound familiar?”
“A Colorado insurance regulator told Congress on Thursday that a ‘black market’ exists in which real estate agents, homebuilders, lenders and mortgage brokers are demanding and receiving illegal kickbacks from title insurance firms.”
“The Fed is confident that this slowdown and disinflation will happen as a result of monetary tightening that has already occurred since US interest rates started to rise in June 2004. The Fed sees the softening US housing market as the main driving force of the coming slowdown. Indeed, it is so convinced about housing market weakness that Mr Bernanke’s main concern is to prevent ‘a more pronounced housing slowdown’ than is necessary.”
“But what about the awkward implication: that the Fed will sit back and do nothing, even if inflation continues to accelerate in the months ahead? Mr Bernanke did indeed seem worried about this contradiction, since inflation responds even more slowly to monetary tightening than does economic growth.”
“What will happen if inflation continues to accelerate in the next few months, while the US economy is slowing? Will this not revive the ugliest word in the economic headlines of the 1970s and 1980s, ’stagflation?’ And what impact will this have on the financial markets, especially on the bond markets?”
“The ‘inflation vigilantes’ in the bond markets have spent the past few years in peaceful slumber, but Mr Bernanke’s apparent indifference could turn out to be a rather alarming wake-up call.”
“The personal savings rate rose to negative 0.3 percent in March, compared with negative 0.6 percent in February. Economists, however, caution against reading too much into the savings rate. They say it doesn’t provide a complete picture of household’s finances because it doesn’t capture gains from such things as real estate.”
Sure it does. People are borrowing against their homes and spending the money. It may not capture it 100%.
Is there any data that establishes how much equity is being spent? Many people seem to think that EVERYONE is a foolish spender. Seems to me that there was some data floating around a few months ago showing a very solid equity position for the majority of owners.
Well equity if MV-loans. So yes, I’m sure most people have some equity after a huge run-up in housing prices. Even though 600 billion was removed in cash out refis and HELOCs last year, according to one bank, I think Northern Trust.
If avg. house is 250K and there are 80 million of them, that’s 20 trillion in MV. Don’t know what debt is but 600 billion more was put on last year.
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0603/document/ec031706.pdf
See Chart 7
Yegads! Them’s some scary numbers…
Thanks comrade - very helpful!
Yes, there is too much data! If you are really interested check http://www.Itulip.com - Not only did they predict the stock market collapse in 1999 (including the month of April 2000, with an 87% drop in value vs actual 90%) but the research done by Itulip on the housing bubble is staggering. Including the negative savings rate, outflo of cash in HELOCs, the “scarcity” of land (a joke). IMHO this site has more information than I can digest. After reading thru their data I suspect that even the Trolls from Las Vegas, DC, And Virginia will try to sell any real estate owned.
The figures people are citing to create this rosy image of equity plenty are from the fed flow of funds report.
This report is a very general look at RE values, and, by the way, has listed a steady march upwards in value of RE since the 70s - so even when the bubbles burst in areas in the 70s and 90s, you’d never know from reading this report. The report is a little like going to GP for a cancer diagnosis — you take a superficial look at the patient overall, and you don’t see any hints of trouble.
One thing that is interesting, however from the flow of funds report, is that in the 70s/80s folks had about 69 percent equity or so — today it’s around 57. So equity has in fact gone down, and our savings rate is negative, and the bubble areas of the country seem to be far larger and more widespread than at any other time. I agree with many posters here who say we are in uncharted waters — using past reports about one facet of the picture - equity– is just not sufficient to take into account the potential dangers of this market.
Hey guys-to tell the truth the party is over in refi world. I am an appraiser and we have not had one refi in 2 months. It is all PMI removal and a few purchases. Now those brilliant mind behind the current may be just lending money with automated valuation models but that is not a good idea in a falling market like we have in Orlando, Fl. They wouldn’t do that would they? Naaaaaaaaaaaaaaaah!
“current situation”
STAGFLATION- There, it has been stated now in the media. Good thing I saved my bellbottoms and leisure suits cause the 70’s ae coming back..
STAGFLATION - Rising prices AND rising unemployment…not fun times, so hope it doesn’t come to this.
>Will this not revive the ugliest word in the economic
>headlines of the 1970s and 1980s, ’stagflation?’
Heh heh heh, any Generation-Y folk and younger X-ers should to a google search on “stagflation”, just so you know what’s at stake…
Gen-X begins with those born around 1964. There are plenty of us that remember Vietnam boat people, Watergate, 18% inflation, gas lines, hostages in Iran.
Gen Y is a different matter. They graduated high school around 1993. All they know is short recessions and easy jobs and credit.
It’ll be interesting to see what stagnant house prices due to cash out refinancing. There may be a ton of people with equity who haven’t pulled cash out yet..on the other hand if they haven’t pulled it out by now, maybe they won’t.
Construction spending at a record. So far no housing bubble effects yet. I wonder if that’s SFH construction at a record too. I thought it had fallen off. Maybe there’s a push to get out as many houses as they can while prices are still high. But something doesn’t add up.
why the builders are still building like crazy while the market obviously has softened and inventory skyrockets?
Why did GM keep cranking out cars and just throw more “Cash on the hood” after the post-9/11 incentives started losing their oomph? It’s the same thing. These idiot managers think that any day now, demand will come roaring back. If they can just keep some product coming down the pipeline, they’ll maximize revenue when demand comes back. Trouble is, it ain’t coming back. Also, these builders are carrying billions in debt. They have to keep selling — even at lower prices — to keep cash flowing in the door to service that debt. That’s my two cents, anyway.
that is because they can still make huge profits in most places; just a little bit less than last year. As long as the flow of easy money continues they will keep building, especially the builders who hold lots of land; probably there will be some shift in the kind of homes (price range etc.) that they are aiming for.
Builders will put their homes on the market at a competitive price, contrary to all the speculators who have less wiggle room and who still try to sell at last years prices plus 10-20%.
Because they want to finish before the drops become too extreme. There margins have to by almost as sky-high as prices. The question isn’t how much they’re building, but how much they’re STARTING construction. I’m under the impression that in bubbly markets they can’t get financing to build condo anymore, and alot of people are going to be thanking their lucky stars when(if) they get their deposits back.
New home permits are down 15% in San Diego this quarter. New hom construction lost 11,000 employees nationwide in March, after gaining that much each month for the last 2 years. Any new hiring you see is to finish projects already started. It takes many months for economic cycles to complete. After permits are down, a few months later you’ll see layoffs.
They just can’t stop and close out their business. They will continue to build knowing that they won’t be able to sell as high but they can afford to discount deeply because their profit margin is very high. This is why the recent new home buyers will be screwed royally. The new home you just bought a few months ago during the peak will be worth less than what you paid for because the comparable new ones put up by the builders are being discounted by 50-100K depending on the size.
Lets say you can build a house for 150K and sell for 500. Nice profit, right?
Then the market softens. You can build for 150 still but only sell for 350. You’re still making plenty of money per house.
Do you stop building? I don’t.
It is called “living on your draws”.
The big developments have been in the pipeline for years. Most are financed and have already had a ton on money sunk into them. You can’t just turn them off and default on all of that money unless you want to declare bankruptcy. You finish building and sell them at the break even point or at a loss if you have to. Breaking even or losing a few million on a development is a lot better than defaulting on $150 million if you want to stay in business.
It’s an interesting question: how do they turn it off? Big home building companies weren’t a factor in the past. The growth in the supply of housing now has bureaucratic momentum. It can’t stop until the money is gone.
It happened at least once before, in the 80’s. As a matter of fact, that was a regular defense of the recent public corporate builder boom; that they had learned/observed the lessons of the previous bust and weren’t making the same mistakes. We’ll see.
I need to forward these articles to my parents. I’ve been warning them since August about a bubble, they finally sold their megalith house they owned for 40+ years (waaaay too big for an elderly couple with no kids at home) earlier this year after only ~60DOM. Now they’re thinking they want to buy again, because they keep hearing how all their neighbors bought three years ago and their house has doubled in value. A realtive that is a Real Estate Agent (also happens to be broke 110% of the time despite HELOC’d up to their eyeballs) insists on all the myths - and they didn’t even do a good job selling their old home, the only photo on realtor.com was a single underexposed cameraphone snapshot. Terrible.
This thing is going to destroy families by the time it is all over.
A relative who works in real estate is now called a “realtive”…
Eventually there will be so many houses that prices will be forced down. Builders are building to sell not hold out for top price. You’d think they’d be the lever that forces the rest of the market down. But that hasn’t been true so far.
I have never understood the logic of “punishing” corporations with either SEC fines or shareholder lawsuits. If a company cooks the books to make their results appear attractive it only helps the people who then sold their shares. People who bought the shares at inflated prices were the victims of the fraud. Why then punish the current shareholders further by fining the company?
I am all in favor of penalties for people who are responsible, but holding a ‘company’ responsible seems absurd. What am I missing here? Why would the current shareholders of Fannie-mae have to pay fines for past offenses of the company?
The person who did the crime gets the punishment.
For example: The criminals family may suffer the most , as in jail the criminal is still fed and housed, the family is left to their own, they may or may not have food and shelter now!
It is NOT a fair world.
Most of the speculators made their money and left. They were the one who was HOARDING the real estate assets, created artificial demand and shortage (they did not buy to occupy the house to rent it).
Now ordinary guys got scared and thought if we do not buy , we will be priced out forever.
When the market correction comes , only the last owner will suffer. Agreed the speculators did nothing illegal, however their action led to somebody elses misery.
May be there are better example, I am too upset with this speculative activity and worry too much about the possible downside for lot of people. I and will be affected (never owned), More than me, the final owner will be afected harder.
Am I making sense anymore!
Made sense to me….until the second to the last sentence
“The personal savings rate rose to negative 0.3 percent in March, compared with negative 0.6 percent in February. Economists, however, caution against reading too much into the savings rate. They say it doesn’t provide a complete picture of household’s finances because it doesn’t capture gains from such things as real estate.”
If real estate and/or the stock market should decline in value which does happen from time to time, these losses are not subtracted from the savings rate either.
“If real estate and/or the stock market should decline in value which does happen from time to time, these losses are not subtracted from the savings rate either.”
Blasphemy! Real estate never goes down! To whom have you been listening, those rascals at the Housing Bubble Blog? (I am being sarcastic, if there was any question
So is everyone then presuming we’re going to see Stagflation instead of deflation? I’m still leaning on the other side of the fence.
It will feel like deflation but the spin will be it is stagflation wages will stagnate while prices for essentials like energy dependent commodities and services and “rent” (a combination of BK debtslaves and non owner occupied) will be inflating. Great REbuying opportunities will make it seem like heaven on earth.
I also have this question.
I still cannot tell if we’re going to have:
1) stagflation
2) deflation
3) hyperinflation
4) a combination of the above, like initial deflation followed by hyperinflation.
any thoughts?
clouseau
At some point you risk completely destroying a fiat currency by inflating too much. Hopefully the Fed knows when to throw in the towel.
Bernanke has stated that he has the tools to fight deflation. The question is how far is he willing to go? I have no clue.
If I had to guess, I’d vote for short term inflation (1-2 years) followed by deflation. I think deflation is inevitable, its just a question of how we get there.
“Bernanke has stated that he has the tools to fight deflation. ”
the question is: does he have the tools to fight INFLATION. I don’t think he has any tools left for that.
“But what about the awkward implication: that the Fed will sit back and do nothing, even if inflation continues to accelerate in the months ahead? Mr Bernanke did indeed seem worried about this contradiction, since inflation responds even more slowly to monetary tightening than does economic growth.”
“What will happen if inflation continues to accelerate in the next few months, while the US economy is slowing? Will this not revive the ugliest word in the economic headlines of the 1970s and 1980s, ’stagflation?’ And what impact will this have on the financial markets, especially on the bond markets?”
The impact on the bond markets is already pronounced — since AG started muttering “conundrum” early last year, the 10-year T-bond yield has climbed from 3.8% last spring to 5.13% as of this afternoon’s close, for a level not seen since the first half of 2002:
http://tinyurl.com/qdkb4
Since mortage interest rates move pretty-much in lockstep with the 10-Yr T-bond yield, we can safely assume that mortgage lending rates
have also retraced to 2002 levels. According to research out of the NY Fed, which identifies mortgage interest rates as a key “fundamental” factor in determining the value of housing, I guess we can conclude that the market value of homes (in particular the ones which are not selling because their list prices are way out of line with financial reality) have retraced to somewhere in the neighborhood of their 2002 levels.
Bernanke’s conundrum: Given the meteoric recent trajectory of long-term T-bond yields, which will likely steepen if the Fed pauses now in the face of strong economic production and inflation data that suggest nothing of the much-feared slowdown, long-term interest rates could keep on climbing until they have built in a sufficiently high inflation premium to compensate investors for the risk of a return to late-1970s double-digit inflation levels.
Every day I am a little more happy that I didn’t buy. Let’s see what the market is doing in November.
“The personal savings rate rose to negative 0.3 percent in March, compared with negative 0.6 percent in February.”
LOL, is this what passes as “savings rate” these days?
Why don’t we just change the terminology, to make it less confusing - the personal overspending rate. Because otherwise, people reading the news, migth, like, think that we are saving, or something.