‘Soft-Landing Thesis Is Dead’: Analyst
Some housing bubble news from Wall Street. “Stocks plunged after Federal Reserve Chairman Ben Bernanke vowed to combat the recent ‘unwelcome’ pickup in inflation, even as he told an international bankers’ conference that an economic slowdown ’seems now to be underway.’ ‘He came right out and said we’re worried about inflation,’ said market analyst Arthur Hogan. ‘Just what the market didn’t need to hear.’”
“The second quarter is proving to be troublesome for homebuilders. They have been cutting their full-year earnings projections in droves as orders look weak and cancellation rates rise. ‘If it is not already painfully apparent, the soft-landing thesis for the homebuilding industry is dead,’ wrote A.G. Edwards analyst Greg Gieber.”
“One hedge fund manager, who plays the sector long and short, said that Monday’s selloff could point to a worse-than-expected downside scenario for builder stocks, where the news gets bad at a very fast pace, rather than a slow shakeout over an extended time frame.”
“‘If things get really bad at the time when the Fed will not bail out (and stop raising rates), people might just say, I’m not catching anything with a falling knife,’ the manager says. ‘People are saying, ‘I don’t see this thing turning anytime soon.”’
From the Toll Brothers 10-Q release today. “We have continued to experience a slowdown in new contracts signed. This slowdown, which began in the beginning of the fourth quarter of our fiscal 2005, has continued throughout the first six months of fiscal 2006 and into the third quarter of fiscal 2006.”
“The value of new contracts signed for the six-month period ended April 30, 2006 and for the three-month period ended April 30, 2006, (was) a decline of 26% and 29%, respectively, compared to the value of new contracts signed in the comparable periods of fiscal 2005.”
“We believe this slowdown is attributable to an overall softening of demand for new homes as well as an oversupply of homes available for sale. We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices and interest rates.”
“In addition, speculators and investors are no longer helping to fuel demand..We have been impacted by an overall increase in the supply of homes available for sale in many markets as speculators attempt to sell the homes they previously purchased or cancel contracts for homes under construction, and as builders who, as part of their business strategy, were building homes in anticipation of capturing additional sales in a demand driven market attempt to reduce their inventories by lowering prices and adding incentives.”
“In addition, based on the high cancellation rates reported by other builders, and on the increased cancellation rates we have experienced, non-speculative buyer cancellations are also adding to the supply of homes in the marketplace.”
From Origination News. “Employment in the mortgage industry fell in April for the second month in a row. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector slipped by 2,500 jobs, from 503,600 in March to 501,100 in April.”
‘builders who, as part of their business strategy, were building homes in anticipation of capturing additional sales in a demand driven market’
In other words, building on speculation.
‘We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices and interest rates’
My reading of the Toll Bros numbers is that the decline in new contracts is acclerating. If the six month decline was 26% and the recent three month decline was 29%, my back-of-the-envelope math says the decline ACCERATED from 23% to 29%.
For many many months, I venture to say years for some, it has been like sitting on a roller-coaster that is going up the steep incline and having everyone around you tell you that the incline is the only part of the ride.
It is only now in the last few days (to me anyway), that it is starting to feel like we’ve reached the top of the incline, and are just starting to glimpse the plummeting track over the hump.
Grab onto the bar, it’s going to be one hell of a ride.
‘He came right out and said we’re worried about inflation,’ said market analyst Arthur Hogan. ‘Just what the market didn’t need to hear.’”
Anyone else outraged by this? “Just what the market didn’t need to hear”? So, please don’t bother us with the facts when we are busy speculating.
I’m with you on that. Presumably these analysts are among the smarter, savvier market participants. Are they *surprised* by news of inflation? Have they ignored the run up in oil prices, metals, commodoties, housing, and the fall of the dollar?
Hey, Arthur, what did you pay for gas the last time you filled up your SUV? How about those fancy dinners out and that must have bottle of wine? No inflation here!!! What about tuition at that private school for your kids? or college? or health care?
Can someone explain to me what inflation numbers the government reports that inflation is tame? Some many questions, so few answers.
As famous economist John Kenneth Galbraith writes in his book “A Short History of Financial Euphoria”:
“Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang.”
A soft landing will NOT happen in the bubble markets. There will be a bang. A hard landing scenario is inevitable in many metropolitan areas across the country.
David
http://bubblemeter.blogspot.com
“writes in his book”
Unfortunately, “wrote in his book” would be the more appropriate statement. JKG, RIP…
http://quote.bloomberg.com/apps/news?pid=10000039&cid=wasik&sid=anUCAF5gG2WU
Question for all those knowledgeable finance people (SoCalMtgGuy, BoulderBo, NNVMtgBkr, etc.) :
In your opinion, will lenders finance anything for someone who has great credit and income but whose balance sheet is blood red due to being massively underwater on their mortgage?
If they act fast, yes. What I am seeing here in Florida is many of the former subprime mortgage brokers are getting laid off, fired or quiting and opening their own brokerages here. Now instead of a few massive New Century’s, Ameriquests, Countrywide and others, we have thousands of local brokers offering all kinds of interest only, option payment and no-doc loans. They are filling the void left by big banks and big mortgage lenders who are much less willing to offer these loans.
Basically big lenders = standards tighten out of fear of class action lawsuits and government action for preditory lending.
No name boiler room brokerages started by former sub-prime mortage brokers = offering all kinds of exotic loan products because they are too stupid to realize when these loan products default consumers will sue them too.
Yes, but what about two years from now?
Yes, but let’s see what happens when it dawns on the Chinese and other “investors” that mortage-backed securities are toxic. Mortage brokers will actually be stuck with those exotic loan products instead of doing a hot-potato flip of a future FB loan onto a third party. That, friends and neighbors, is going to lead to much more caution on the part of the lenders and mortage brokers who want to survive the RE meltdown.
Sammy
What makes you think the Chinese don’t already know?
their banking system is f’ed up as it is. they’ve got massive non-performing loans versus industrialized nations.
I 100% agree… all mortgage backed bond buyers are going to become much more conservative.
There are only three things that can happen:
1. The bond (and thus mortgage) rates go up to reflect the risk. Remember that these would be “junk bonds” commanding a 3% to 5% yeild premium!!!
2. Sell bond insurance (effectively, raise PMI rates)
3. Decrease the risk of the mortgage backing the bond (tighten credit, demand a decent down payment)
Neil
“No name boiler room brokerages started by former sub-prime mortage brokers = offering all kinds of exotic loan products because they are too stupid to realize when these loan products default consumers will sue them too.”
Expand on the above quoted I don’t quite get that statement. It’s not adding up.
Laid off brokers need to get funding in order to make the loan. So either they have their own funds, which most do not since they are propably highschool drop outs, then they have to have instituional funds; i.e. Fannie Mae. If instituitons tighten then there goes the subprime market and the independent little brokers. Life sucks should have gotten a real degree or any degree. Life is too short to try to get 5 points from your neighbor and think you are contributing to society. I think strippers contribute more to the economy than do mortgage brokers!!!!
Ummm, wrong answer try again. Your response indicates you have no clue about what your talking about. Ergo speaking out your a$$
If you mean finance anything on the property whose mortgage exceeds current value the answer is pretty much no. There are some lenders out there still doing 125% equity-line seconds, but I fully expect these to be be scaled back in the coming days. Refinancing ends at 100% LTV (usually done via 80/20 combos)
Now if your talking about a lender financing anything else this hypothetical person might choose to buy, the answer is yes as long as the borrower qualifies via normal guidelines. As of now, lenders do not look that closely at whether or not a person is upside down on property he/she might own outside of the subject property that is qualifying for funds to close. It’s all about debt-to-income ratios and loan-to-value on the subject property. There is a place on page 3 of the 1003 (application) where details of the properties owned by the borrower are provided. But these numbers are normally never verified, so you know what happens…that’s right, the numbers always end up positive or at least break even.
Interesting… still, wouldn’t it impede a person’s ability to get personally-guaranteed business loans, etc.?
Otherwise, I expect underwater mortgages to be one of the biggest banes of future home sales. Can’t trade up negative equity, now can we?
“Interesting… still, wouldn’t it impede a person’s ability to get personally-guaranteed business loans, etc.?”
No, there will always be sources of funds. You probably won’yt like the terms but it will be available.
at one time in the not too distant past, lenders used to verify income/expenses of already owned income properties.
but now we’re in a new paradigm, and things aren’t always as they appear.
Being underwater is subjective at this point. It all depends on what you can get an appraiser to come up with. There’s a house that was purchased back in December for 618,000. It supposedly was just reappraised for $750,000 (per the owner). The house just down the street sold in January. It was originally listed at 799,000. It was reduced a couple of times down to 699,000 and sold for 625,000. I don’t have ANY idea where the comps would have come from for $750,000, unless they are looking at sales from last summer and spring. Granted the guy has done some updating, but please. He’s going to hold it for a couple of years until it’s value reaches $1 mil, and then sell it. It’s actually a great house and I told him to let me know when he’s ready to sell it. WHat I didn’t tell him is that I’ll buy it for half of what he bought it for. Good thing he has a secure job as a mortgage broker, or he could be in for some troubled times. He’s fairly new, 3 yrs, to the biz too LOL Guess I might be buying it on the courthouse steps though instead of from him.
Interesting statements that you’ve made here:
1 - “He’s going to hold it for a couple of years until it’s value reaches $1 mil, and then sell it. ”
If that’s what he’s really trying to do, he’ll be in for a rude awakening AND a long wait.
B - “Good thing he has a secure job as a mortgage broker, or he could be in for some troubled times. ”
Being a mortgage broker doesn’t seem to be among the ’secure jobs’ these days. And a 3 year veteran? If he’s in his 20s or 30s, he has no first-hand experience in the 80s-90s boom/bust. I hope he’s wearing his asbestos skivvies.
BayQT~
Mortgage broker very secure if you have the experience and know what you are doing. Employee of a Mortgage Banker like Ameriquest, Option One or Wamu your grasping for air. People often get the two mixed up.
I, personally don’t think he’ll be able to hold on to the property until it reaches a mil. I agree it’ll be a hell of a long time. He’s a young kid, mid twenties and from what I can see has probably spent every penny he’s made in the last few years. New shiny porsche, big tv’s etc. I was being sarcastic about his job being secure. I don’t think it is, but he does.
I think you may have missed the bulge of the poster’s cheek due to his tongue being firmly placed there… heh.
Upgrades don’t increase property value, not at least in the “old fashion RE” sense. The only return you can expect from upgrades is a better showing against other similarly priced properties.
And even with that, the upgrades have to be SPECIFIC ones…like, kitchens and bathrooms.
BayQT~
Amazing how a mortgage broker has no idea of the value of his house. Another thing that amazes me are people who think upgrades actually incresae the value. But then again 3 yrs in the biz he’s in for a very rude awakening
3 yrs in the biz and this is his first “real” job. He has noooo idea what he is in for. I might eat my words and he will find a way to survive the downturn, but I don’t think he has enough experience to do so. Especially considering he seems absolutely clueless as to what is on the way for his business.
No, just from your description of the conversation he is as good as done. Sorta like the kid who told me rates will never go plus 8. A lot will get caught up in the coming flushing of the toilet. Some deservedly so.
someone with verified income and a good credit history can certainly get the money they want, even if they are upside down on their real estate holdings (although as nv said you would never acknowledge that on the app). what i’m seeing is the larger lenders (citibank, wachovia, etc.) are penalizing stated loans (by price or reduced compensation) or avoiding them altogether. i don’t know where the government is getting their “fluff” numbers on the industry. between ameriquest, wamu, aames, option one, mortgage it, acoustic, i’m already up to 30,000. my reps tell me that their contact list (brokers) is about a third shorter than it was in january. what a crock.
Ok , old time lenders would verify what the borrowers position is with the other mortgages . If the borrower was up-side down or at a neg. it would count against the borrowers debt ratio . The fact that the new age lenders do not look/check the borrowers position on other properties is another example of dumb underwriting . This is why these greedy speculators were able to get 10, 14 ,20 loans . Old time Lenders would sometimes make the borrower prove the rental income they were claiming .
Even on a stated income loan you would need to red flag a borrower that looks like they could be in over their heads .
I saw a underwriter turn down a loan once because the evidence showed that the guy went to Vegas all the time and had a 100K credit line that went up and down , (lets put it this way, the underwriter made this borrower put 30% down on the loan he was requesting instead of the 10% down he wanted .)
Now America just has a bunch of inflated property with a bunch of high risk loans on the books with a high % of people priced out of the market .
The conundrum is bleeding to death, as Ben Bernanke has driven a stake through its heart. Kudos to BB for a job well done under pressure.
Ditto. Great job, Ben. You saved us from a ton of inflation. Sure there will be pain in the short term, but what you are doing now is good.
Now he needs to put a silver bullet to the head next Fed meeting!
Granted I am not a finance wiz, but it seems to me that Ben B is more direct than “Bubble Boy” Greenspan was. Alan G could talk for 2 days and you could never tell what he had in mind. Ben B seems to pretty much say outright what is going on and let the chips fall where they may. Maybe he has the onions to pull this off?
Ben has you fooled. He will talk about fighting inflation, but his real fear is asset deflation. One and done won’t do anything to core inflation. Energy costs are at all-time highs, and it will get passed through.
I agree, I am fed up of seeing the fed talk about fighting inflation but all the time pissing away the dollar to nothing by fudging CPI. In reality the inflation is around something like 10% but the official rate is half that. This way they secretly steal your money and finance their deficit.
i disagree with your assertion, watcher. if you read what he said, he said that inflation must be addressed with appropriate policy (something to that effect). it wasn’t hot air, as it was with greenspan. guess we’ll know fore sure later this month.
Well, for me, I think a quick hard landing would be less harmful than a decade long decline.
simmsays…
http:www/americaninventorspot.com
Agreed. A quick pop to the bubble will remove uncertainty and get buyers active. Right now, buyers KNOW that prices must fall by 45% or so, but sellers are holding out. In the end, the real price will drop, either by a nominal price drop or through inflation eroding the real value.
“One hedge fund manager, who plays the sector long and short, said that Monday’s selloff could point to a worse-than-expected downside scenario for builder stocks, where the news gets bad at a very fast pace, rather than a slow shakeout over an extended time frame.”
“‘If things get really bad at the time when the Fed will not bail out (and stop raising rates), people might just say, I’m not catching anything with a falling knife,’ the manager says. ‘People are saying, ‘I don’t see this thing turning anytime soon.”’
It sounds like he is expecting the “waterfall” scenario which another poster mentioned earlier today…
“If it is not already painfully apparent, the soft-landing thesis for the homebuilding industry is dead.”
This thesis never was alive for anyone with a memory of longer than 17 years. Housing cycles are as reliable as locusts.
I’m glad Prof. Bernanke finally got around to reading this particular thesis and rejecting it.
Here’s a good article from the IHT:
Golden age of liquidity is drying up
Money quote:
“In a nutshell, the era of easy and abundant global liquidity is coming to an end - a change in the global monetary backdrop that usually inflicts pain on those asset classes highly dependent on easy money.”
hey short sellers, why has the REIT indexes not budged like the home builders?
Maybe because these are backed by rent producing commercial properties, many of which have long term contracts?
ah, but you don’t think they’ve bought new properties lately? I don’t trust them at all. there has to be some rot in the REIT sector. there has to be someone playing with OPM. didn’t Warren Buffet say REITs are put together by people who wouldn’t do those deals with their own money?
Depends on how far their buys have went away from the fundamentals. Personally, I haven’t seen much of that. Most of the buys I have seen going away from the fundamentals are new players to certain markets. Most of the seasoned have been sitting out for at least 3 yrs.
I have had a couple of RE Agents pitching me drugstores and small office buildings, but the cap rates make no sense. It’s hard to believe they are moving anything at these prices….
Yea, I know I’ve seen some of that stuff ubelievable. The only one’s buying that stuff are inexperienced investors with more cash than brains. Some slug who’s been taking a beating on renting sfr’s over the years sells his ball and chain to a greater fool find himself flush with cash figures he wants to play with the big boys drops 40 to 50% to get a 4% cash on cash and figures he’s winning. CD’s only 1-2% so he figures he’s ahead with the tax write off. Too bad they weren’t around for the last downturn. When golden parachutes from the aerospace industry went into commercial on the advice of CPA’s that wasn’t pretty. This won’t be either
Yeah, I’m thinking they are held by different type of investor looking for yield and instiyutions that haven’t been forced to sell. Yet.
As we all know… most stock market participants are idiots. They’ll buy until very bad news. That’s why so many of us are only now making money on our HB shorts/puts. It was obvious that the HB’s were going to tank to anyone who thinks… but there are still longs out there scratching their heads as to why the HBs are tanking.
WRT REITs. I bought some puts on GGP a while ago (P/E of 128 and a MarketWatch article sometime last year thought it was something like 40%, 80% ??? overvalued…) Until the recession hits, consumers stop shopping, the stores start closing, and the REIT’s earning reports actually start to show the drop, I don’t expect I’ll be making any money on them… Live and learn I guess…
“As we all know… most stock market participants are idiots. They’ll buy until very bad news.”
It gets messier than this. Yes there are idiots, but then there are also savvy market participants who expect idiots to push the price level back up after a drubbing (txchick, Sir Isaac Newton, etc.). These second-generation noise traders, who do not believe the fundamentals justify a higher price, but do believe that other, less-informed, market participants believe that the price is “too low” and will hence buy the dip, unwittingly create a self-fulfilling prophecy by driving the price of beaten-down but still-overvalued shares back up again (dead cat bounce). We will not be able to conclude the bubble has popped until there are no more dead cat bounces in the share prices of Toll Bros and other builder stocks, at which point it will be common knowledge that investing in real estate (and the companies that build it) is a terrible idea.
“… at which point it will be common knowledge that investing in real estate (and the companies that build it) is a terrible idea.”
At which which point it will be time to back up the truck and buy real estate and builders. 2012 maybe.
Well REIT’s are simply TOXIC for this reason.
The underlying properties are not marked to market daily bedcause there is no such thing as daily pricing. The issue is and will remain, liquidity…..when the ants all want out, there won’t be cash…..And the over bloated values have not been adjusted yet!
I don’t agree with that.
Here’s a good article from the IHT:
Golden age of liquidity is drying up
Money quote:
“In a nutshell, the era of easy and abundant global liquidity is coming to an end - a change in the global monetary backdrop that usually inflicts pain on those asset classes highly dependent on easy money.”
“History has not dealt kindly with the aftermath of protracted periods of low-risk premiums.”
The death of the conundrum will not be kind to those who bought risky assets (stocks, houses, MBS, etc) at the height of the mania.
Couldn’t agree more.
Another bloody day for the HBs…
http://finance.yahoo.com/q/cp?s=%5EHGX
dang, look at the puts on KBH…
“We believe this slowdown is attributable to an overall softening of demand for new homes as well as an oversupply of homes available for sale. We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices and interest rates.”
Wow! Toll’s honesty about the steadily deteriorating demand for homes is even worse news for the HB sector than is Bernanke’s news that he is more worried about price stability than bailing out speculators…
“I’m not catching anything with a falling knife.”
Is that an appropriate use of the falling knife analogy? It doesn’t make any sense to me the way he used it. Makes me think these analysts are just reading our blog and stealing our analogies–and they not even using them right!
They may not understand the metaphor. Any bull who understood first-hand what “catch a falling knife” really means is probably a former-bull who no longer trades…
The “falling knife” is an old stock analogy. The old advice, “don’t try to catch a falling knife” is that one shouldn’t buy into a rapidly droping market. The quote in the article is a little mis-worded, but I think we get the point.
In other words, get out of the way, the dam is about to break! Although, we all know this dam will take 60+ days to give way. But oh, look at all of the water building up behind that cracking concrete (inventory building). …
OT
My brother just rented out his empty home. Man, he and his wife wouldn’t listen to me when I suggested “sell.” The love the house, but why carry it for three years while they are out of the country? Insane… even smart people have gone insane. They’re at an affordable “cash flow negative” point. But what do you think it will be like in 12 months? My bet is on reduced rent.
Neil
Reduced rent will not matter compared to the reduced worth.
Spot on. Had I continued to own my apartment, I would have lost more than double what I “lost” this year by paying rent.
“even smart people have gone insane”
No kidding. I just ran into a friend who is an accountant at a big CPA firm. He said he was looking to buy a house in northern Virginia (i.e., bubble central). I casually suggested he wait because prices might drop substantially. He scoffed at that idea. Later I started wondering how seemingly smart people seem to have become braindead when it comes to valuing real estate.
It amazes me too how many educated smart people have been caught up. The same people who warned me that I could only expect to get 50% to 80% of the cost of a home improvement back at sale are now telling me real estate never goes down.
Feepness, I totally agree they’ll lose a bunch in “equity.” Cest la vie.
The crazyness is about to end. I’m just curious how the Fed will get market liquidity started again in a year.
Neil
Breakfast with a friend today. Older ex-accountant for S. American mine conglo. Had a 1.5 offer for his beach house. Wouldn’t sell. Couldn’t seem to grasp that the 1.5 was more than he would make in 50 years of renting it.
Now he’s shocked that he might not be able to get 1 m for it and even more shocked that he has a lot of vacant weeks yet to rent for the summer.
Is speaking in stupid metaphors one of the courses taught to new real estate agents? They sure come up with a lot of them.
One of the dumbest from a few months ago - “Its not a bubble, more like a souffle”
Where do they come up with this stuff?
It is difficult to get a man to understand something when his SALARY depends upon his NOT UNDERSTANDING IT.
– Upton Sinclair
LMAO, I have never heard that before that is new. I really need to circulate around residential agents more.
what a mess…how can people be missing this still. my friend’s dad in SD has been buying a condo/ year until he retires (probably soon!) and when I mentioned my concern I got “real estate doesn’t go down in So. CA - it’s always a win/win situation.” where should i start..
It’s the same here in Boston. It was only 10-15 years ago when we had a RE bust. But I think the 90’s bust rebounded so quickly that most folks missed it. So the folks they didn’t have to sell probably didn’t even realized their homes lost value. I personally experienced a 25% real loss. I damn well know that real estate doesn’t always go up.
Looks like retirement will be delayed unless he enjoys alpo….
I know what you mean. Otherwise sensible people don’t spend enough time studying economics and they get sucked into the notion that real estate always goes up and big mortgages are OK.
They are going to get hammered.
If it is not already painfully apparent, the soft-landing thesis for the homebuilding industry is dead,’ wrote A.G. Edwards analyst Greg Gieber.”
Oh, like this is news???????
Ben’s and his regular readership have only been on top of this for a couple years now.
The soft-landing thesis was DOA so far as our posts were concerned…
’tis unfolding. Just sit back and watch.
employment in the mortgage banker/broker sector slipped by 2,500 jobs
…back to waiting on tables and Wal-Mart.
Well, we all knew the soft landing theory was BS all along. Finally, an “expert” has acknowledged this.
IMO-
The “SOFT LANDING THESIS” was never alive!
‘[Bernanke] came right out and said we’re worried about inflation,’ said market analyst Arthur Hogan. ‘Just what the market didn’t need to hear.’”
Do the sheeple really need Bernanke to tell them that inflation is on the rise? Isn’t that self-evident to anyone with an IQ range above “moron”?
Baaaaaaaaaaaaaaaaaaa!!!
My god.. you would think people would have “caught on” by now that this thing is about to implode… but guess what.. CNN’s poll question for the day is “Do you believe real estate is a good investment?”… And as of right now, a combined 42% say “yes, it is right now” or “it will be in the near future”…
The sheople really are that dumb ?!?!?!?!?!?!
http://money.cnn.com/POLLSERVER/results/25435.html
But is real estate a good investment? Sure, if you bought 1999, 1998… see the problem? Then will real estate be a good investment? 2011, 2012… see the problem? It is the question not the answer.
Very good point Robert. Heck, if you have owned your house since 1980, you are in very good shape indeed.
The 51% who say no is probably a much higher proportion than even six months ago. I’d take this as a positive sign. I’d guess that a some of the people who said “yes” are people who want to sell, not buy.
Every single one of the people who said yes is a desperate seller whose house has been on the market for six months with no offers - this is not sarcasm - the seller’s all want to make nicey-nice
these are the same people whe were buying unproven tech. stocks when NASDAQ was 5000. some people have no judgments.
Ok boys and girls its time again to compare the Snakes most recent forecast for the year of 2006 to his original forecast for 2006 released in December. I will give this guy credit he is the eternal optimist, or it is possible he is just an idiot/liar. So without further adduce…
David suggested 30 year fixed interest rate would rise to 6.6% in ‘06 but has now changed his tune to 6.9%. (I find this very interesting that he uses the benchmark 30 yr fixed interest rate all the while he and his buddies are in the midst of changing the Housing Affordability Index to “better reflect market conditions”???)
Next David said sales of existing homes would drop by only -3.7% but has now changed his tune to -6.8%. (It is my opinion that he is being overly optimistic here. I believe the home builders will begin slashing prices and will actually take more market share from the existing homes.)
David says that new home sales would drop by -4.8% in December but now feels it will be more like -13.4% (Gees that is a pretty huge drop off. As I said before I think the builders will slash prices but sales will still be way down. They can’t let this happen as their housing starts are off only minimally from ‘05 in spite of the huge reduction in the demand side and an explosion of existing inventory.)
That leads us to the new home starts which he expected to decline to 1.92 million units in ’06 but now feels we will only be reduced to 1.94 million units. This is down from 2.06 million units in 2005. (That’s a decrease of about 5.83% from ’05 for those mathematically challenged blokes out there. Seems like if they are going to sell fewer houses they may want to consider making fewer houses??? I think those of you about to lose your shirts get the picture, a large supply and low demand is not a good thing.)
Existing median home price was expected to rise 6.1% for 2006 but has been revised downward to 5.3% increase. New home median was predicted at a 7.3% increase but was revised down to a measly .8% increase. (That new home median does not even keep up with inflation folks and so therefore that is actually a loss predicted by David.)
GDP will not rise by the expected 4.1% but instead will rise by 3.4% in 2006 and the CPI will rise by 3.1% instead of the original forecast of 2.9% in December according to David the “Snake” Lereah. (Ahh David will you just be realistic in your assumptions and stop revising your numbers each month. It really is silly this game you are playing.)
Also I noticed David did not feel like reiterating his comment that this would be the 3rd best year on record. Maybe he thinks it will only be the fourth best on record??? I can only speculate at this point
“But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable.” (Well put David! A plea to BB in this forecast to stop the pain and quit raising the Fed funds rate. Shameless though! He is trying to set the stage for the FOMC to take the blame for the housing debacle we are about to witness IMO.)
“Historically, home prices rise 1.5 to 2 percentage points faster than the rate of inflation, so the rise we anticipate in existing home prices this year is actually a little above the high end of historic norms,” Lereah said. “The double-digit home price gains we saw in 2005 underscore what a superlative year it was.” (Interesting? I wonder if we can deduce anything from those break away years in 04-05??? Why did we deviate from historical norms? I suspect Irrational Exuberance, but hey I am just some dumb kid renting in Phoenix, so what do I know???)
Here is a link to the NAR news release:
http://www.realtor.org//PublicAffairsWeb.nsf/Pages/JuneForecast06?OpenDocument
Can we sort out this “Soft Landing “ issue once and for all? The usage of the term as developed by its originator, in this case Lereah, is fundamentally flawed by its definition.
Landing means:
The act or process of coming to land or rest, especially after a voyage or flight.
Or
A termination, especially of a voyage or flight.
A landing of any sort implies just that. Whether it is immediate or delayed, hard or soft, it is still a landing.
Leareah has attempted to use this term to indicate a comfortable return or close to a high-flying voyage, utilizing the word “soft” to imply all its’ passengers will remain safe and un-harmed.
Problem is, too many of the passengers bought the tickets and got on board based on the propaganda that the journey being would be continuous. Based on that premise, a landing of any sort we will prove to be very uncomfortable for most, and potentially fatal for others.
Perhaps in the future he (and the NAR spin team) will do a better job of thinking out his illustrations prior to making them a national theme.
A more accurate illustration might be that of NAR announcing over the intercom that they are “unable to adjust the cabin pressure” of the aircraft as it lands
I think BB should just bite the bullet and raise rates a full point. Enough, with the quarter or half-point debates. Go the full point and just burst the bubble once and for all. I realize alot of people will pay, but that’s how it is going to end up anyway. Better to go full board and get the mess over with so we can start the cleanup.
True though that might be, he can’t raise 1 full point without getting tons of blame for “causing” the meltdown that follows. At .25 or even .5, he can argue he’s just fighting inflation; not trying to pop bubbles. He’ll catch plenty of flack anyway.
Be careful what you wish for.
I think we may already be a recession, it just hasn’t shown up in the numbers yet. And Fed rate rises take 10-12 months to kick in, so we’re just now processing Greenspan’s increases from last summer. There is a danger that the Fed will overshoot and make things much worse than necessary to deflate the housing bubble.
I agree. Contraction has already started showing up in statistics and economic releases. Give 8-12 months for the experts to officially declare that it started in May 2006.
he would not want a blown kneecap, right?
“But is real estate a good investment? Sure, if you bought 1999, 1998… see the problem? Then will real estate be a good investment? 2011, 2012… see the problem? It is the question not the answer. ”
I hate to say it, but it probably still can be a good investment, provided you’re in for the long term. When housing rises, inflation is their to shove them even higher. When housing falls, inflation softens the blow.
Lets say over the next year there is a 20% drop in housing prices, across the board. Median (nationwide) would fall from 220 to 176. If prices then start to recover at under the rate of inflation (say 3% per year) then in 15 years that median house is worth closer to 260K.
Housing has traditionally risen faster than inflation. No reason for this to be so, and its impossible to continue indefinitely.
If someone is looking to buy in Northern VA, they are better off waiting a year or 2, but if they don’t, can afford the place without a suicide mortgage, and want to live in that house for a while, they should turn out OK in the long run.
If the think they will buy one now then sell and move up in 2 years, then they are greater fools, just what RE is looking for.
you’ll probably earn a lot more in cds than from the difference between renting and owning in that same period you mentioned.
>hate to say it, but it probably still can be a good investment, provided you’re in for the long term.
Really?
>Lets say over the next year there is a 20% drop in housing prices, across the board. Median (nationwide) would fall from 220 to 176
All right - you lost 20% there. That’s a real loss.
>If prices then start to recover at under the rate of inflation (say 3% per year) then in 15 years that median house is worth closer to 260K.
But you gained nothing.
See? That’s the problem with inflation. That is not a real gain.
The word ‘real’ in finance is used to indicate that it’s the actual return, above inflation. The other return you use here, is “unreal”. You think you gained, but you really did not. Your 260K fifteen years later is only worth 176 K now.
This is a big con - the soft landing con. That when prices stay flat, and inflation catches up, you wont lose. In fact you would lose, compounded at the rate of inflation.
If you invested that 270K at near inflation return of 3% , it would be 470K at the end of 4 years.(vs your 260K ). That is a ‘zero’ real gain, but still its 200K more than if you buy the house.
If you invested that 270K at near inflation return of 3% , it would be 470K at the end of 4 years.(vs your 260K ).
^^^^^
That should be 15 years, not 4 years
“If you invested that 270K at near inflation return of 3% , it would be 470K at the end of 4 years.(vs your 260K ). That is a ‘zero’ real gain, but still its 200K more than if you buy the house.”
I agree, but you also don’t have a place to live yet. The person investing that money would pay 200K or so in rent.
Figure 1000/month at start, x180 months, but rent will rise with inflation over that time, so its probably over 200K total.
Buying a house isn’t a way to get rich, at least not anymore. But its not a bad or even harmful decision provided:
1) You can really afford it
2) You actually live in it
3) You plan to stay there
I’d advise anyone who doesn’t plan on wanting to live in place at least 10 years to rent.
>I agree, but you also don’t have a place to live yet. The person investing that money would pay 200K or so in rent.
That assumes that you paid only 270K for the house in 15 years. You paid much more.
In reality, asumming 15yrs at 5%, you would, over 15 years, pay
115K in interest
30-50K in maintenance
15-20K in insurance
(Lets assume that your entire prop.tax is matched against income tax deductions for interest and prop. tax. So we’ll ignore that.)
The renter pays none of those expenses.
In reality, its like this.
You bleed money because of inflation
You bleed tax and insurance around 2%/yr
You bleed maintenance around 1% (very low, this could be more)
You bleed money at mortgage rates/yr as interest.
Almost all the profit is made by buying at a right, low price.
There’s a gal up here quit her job ($50,000 with great bene’s) a year and a half ago to sell RE. A month ago I saw her in a local Starbucks buying java and she just raved at how she loved her job and that she found a job that was meant for her. I’ve been going to Starbucks every Sat morning hoping to run into her to see just how much she loves that job now. She was driving a new Beamer too. Alas, she has no fall back position….burnt her bridges when she left…
Two years ago, a friend of ours couldn’t resist rubbing in our faces how “awesome” he was doing investing in Real Estate here in AZ.
A few flips later, he’s sitting in an 800k custom built home in Scottsdale with a shiny new mortgage, combined with the mortgage of his last home that he’s somehow been unable to sell for the last 6 months.
He recently confided that he’s taken out a second mortgage using some of the “equity” from his investment property in order to get by for the next 5 months. If he doesn’t sell that house for an over-inflated price within the next 5 months, he’s royally screwed.
All of this on a combined income of maybe 100k between him and his wife.
He isn’t so smug anymore…
Heh heh heh heh! (Sorry. couldn’t resist!)
The home builders stocks took a tumble today. Wound is too deep to control the bleeding. It will be financial sucide to buy anything now. Just too much bad news. Its looking worse then the tech stock crash.
How can you say this before we have reached the bottom?
Only slightly off topic - An interesting write up on China’s banking system from Stratfor. I highly recommend them: http://www.stratfor.com/
An Inflection Point In China’s Banking Problem
By George Friedman
The month of May witnessed an interesting phenomenon: a spate of reports on China’s nonperforming-loan problem. What is most intriguing is that these reports did not come from organizations like Stratfor — minor outfits that have been talking about this for a couple of years. It came from real, solid, serious mainstream organizations that were, and continue to be in some cases, quite positive about China on the whole. What is important here is not that China has a serious problem with bad loans in its banking system. That’s old news. What is important is that mainstream analysts in the West now are taking official notice of it. The wide divergence between the Western perception of Chinese economic health and the realities of China’s economy is beginning to close. There will be consequences to that.
The first report came from Ernst & Young, which released a study saying that China had a substantial problem with nonperforming loans (NPLs). We have to confess to not having seen that report, because the accounting firm withdrew it a few days later. The Chinese government blasted the report, using words like “ridiculous” and “distorted.” Ernst & Young, which has a substantial practice in China, denied having retracted the report because of pressure from the government. Whatever their reasons for doing so, we wish we had been faster in asking for a copy.
No matter, because May also brought studies on the same subject from PricewaterhouseCoopers (PWC), McKinsey Global Institute, and Fitch. Each said the same basic thing: that Chinese banks have enormous NPL numbers on their books. The PWC report was issued by a group within the company that specializes in making markets in NPLs. Their news was that the water in China was fine and everyone should come in. McKinsey focused on inefficiencies in the Chinese banking system that should be cleared up, so that NPLs could decline and the Chinese gross domestic product could surge. Fitch was the harshest of the three, but that firm also argued that the Chinese had the tools in place to handle the problem. The bottom line was that all three acknowledged that NPLs were a big issue for China, but they took different approaches in trying to put the problem in perspective. In other words, they gave a warning without yelling “Fire!” Some of the reports were criticized by the Chinese, but none were blasted. Meanwhile, Moody’s Investors Service has told us that they will be releasing a report in a couple of weeks. It will be interesting to see what their take is.
Let’s begin this analysis by looking at a couple of quotes from these reports. McKinsey, for example, writes:
“Underlying these reforms, however, is capital misallocation by the system. Nonperforming loans are the most conspicuous outcome of this misallocation, but our research shows that the much larger volume of loans to underperforming ventures that don’t go bad but yield only negligible returns are potentially more costly to China’s economy.”
Fitch’s report states:
“Summing all of these figures, we come up with total official nonperforming loans of US$206 bn and other estimated problem loans of over US$270 bn in the banking system. We would reiterate, however, that a large portion of this latter figure is comprised of estimated Special Mention loans or loans that currently are not classified as nonperforming [emphasis Fitch's]. At the same time, there is an additional US$197 bn in NPL carveouts still remaining on the balance sheets of China’s asset management companies, which no longer represent direct losses for banks but are a future liability for the government.”
Fitch also states:
“Beyond this, estimating a rate of flow of new nonperforming loans is not an easy exercise given Chinese banks’ extremely weak historical data and ongoing deficiencies in accounting and disclosure. Few banks report data on NPL flows, and those that do show recent flow rates in the extremely low single digits. We believe these numbers understate the likely level of ultimate credit losses, given what we know to be the slow evolution of a strong credit culture and risk management practices and our suspicion that China’s over-reliance on investment-led growth comes at a cost to bank credit quality.”
Fitch is estimating China’s bad-loan situation (our term, lumping all these categories together) at $673 billion, but it warns that — given Chinese accounting and reporting, and the fact that what reporting exists is not credible — $673 billion is a low number. That’s important. If $673 billion was the final number, then measures that are put in place could limit the ultimate losses to a level below that figure. If, however, the total number of bad loans is substantially higher than $673 billion — which is our view of the situation — then the system would be lucky to have to write off only this amount.
Chinese banks have a problem with nonperforming loans, and Uncle Sam has a problem with his credit card spending. This sounds like a match made in Heaven…
There are numerous ways to measure the magnitude of the problem, but one of the simplest is this. China is said to hold nearly $819 billion in foreign reserves. Fitch’s conservative estimate of the bad loan situation comes close to matching that number, and a more liberal calculation would swallow those reserves up and then some. Put very simply, the Chinese banking system is in deep trouble — and with it, so is the Chinese economy.
It has become an article of faith that China’s economy is booming. The economy certainly is growing rapidly. But growth and size alone don’t tell you how healthy an economic entity is. During the Great Depression, the U.S. economy was enormous, but it was crippled. Japan’s economy was growing at a phenomenal rate in the 1980s, all the while heading for its disaster. Size and growth are but two measures of an economy — or of a business. They do not tell you how well it is doing.
The basic problem of the Chinese economy, as in many Asian nations, is that the banks have not made loans with business considerations in mind. They made loans for political reasons and to maintain social stability. In many cases, loans were seen as being more like grants. As a result, they were invested in enterprises that did not make enough money to repay (or even attempt to repay) the loans. Frequently, rather than bankrupting the business or writing off the loan, the banks lent more money to the business — so that it could repay old debts, and there was an appearance that the loans were viable. Loans went into land speculation or to investments in areas that were already overbuilt. (And this does not attempt to take into account ancillary problems, such as corruption and embezzlement, which also have been significant issues for the Chinese government.)
In the first part of 2006, there has been a huge surge in lending in China. With the economy already growing at rates of more than 9 percent, it would seem structurally impossible to grow it any faster. Shortages in skilled workers, management, buildings — all these limit the rate of growth. The truth is that a substantial portion of the loans that went out were issued to keep bad loans floating, like using one credit card to pay the monthly payment on another. You can do that for a while, but you can’t do it forever.
What keeps the Chinese system alive is not domestic consumption, which is not rising in tandem with overall growth. What keeps China afloat is exports — exports in ever greater numbers, and with ever-smaller profit margins. Surging exports are critical to China, as they were to Japan before it. They generate the cash that allows the financial system to continue operating.
This is also the Achilles’ heel of the Chinese economy, as Fitch points out:
“Given the weaknesses already discussed, we believe Chinese banks remain acutely vulnerable to an economic slowdown, although the analysis above recognizes that much work has been done to tackle these weaknesses and at a minimum suggests that Chinese banks and the government are more equipped today than in the past to deal with problems that may arise.”
Here is the problem. The official policy of the Chinese government is to cool off the economy. In fact, the Chinese are attempting to cool growth only in certain sectors, where they perceive particularly dangerous bubbles starting to form. For the most part, however, they are doing everything they can to keep the economy hot, in order to try to manage the financial problem. Now, Fitch argues in its report that the Chinese banks are better equipped than in the past to deal with their problems. We agree with that assessment; they were completely unprepared in the past and now are abysmally prepared. You cannot prepare to deal with a loan situation as bad as that in China. You simply keep cycling as fast as possible and hope that something turns up.
In our view, this spate of reports on China’s financial situation marks a turning point.
One of the things that has kept the Chinese economy booming was cheap exports. But another was the perception in the West that, underneath it all, China was sound. This perception induced foreign banks to invest in Chinese banks. There have, of course, been studies detailing the Chinese debt problem for some time: Standard & Poor’s, for example, estimated the bad debt in 2002 at $600 million. That part isn’t new.
However, when “irrational exuberance” (to quote Alan Greenspan) is at its peak, it is hard to break through the noise. Markets continue to rise, even as bad news comes out. Last week, for example, we saw the Bank of China make its initial public offering and shares soar, just as these financial reports were emerging. That doesn’t mean these reports are wrong or that the Chinese have things under control. It simply means the market is ignoring news and rising on its own giddiness.
Nevertheless, a turning point has been reached that will be difficult to ignore. Reports from Stratfor are, of course, one thing. Reports from a single credit agency are another. But when a series of reports from highly respected, mainstream analysts all come out within a few days of each other — with each, in their own way, telling the same basic story, it becomes hard for the system to dismiss that. Western companies moving into China have CEOs and CFOs who must exercise due diligence. There are now too many reports out there to be simply ignored. All of them are caveated. None of them write China off. But a critical mass is forming that will cut through the froth in due course.
Obviously, this does not mean that China will implode, disappear or anything like that. It will remain an enormous economy and an important one. But this does mean that the dynamics of the Chinese economy are shifting. The debt issue represents a deep structural problem that China will either deal with — as South Korea did — or not, as Japan did not. (Japan reaped more than a decade of economic stagnation as a consequence. It is significant that China lacks the degree of insulation that Japan built up; the economy has more external exposures and would not weather a similar crisis as well.) The point is that, ultimately, the books have to balance everywhere. That means that the huge structural imbalance of China, which these debts represent, must be rectified. And that process, as in all such matters, will be painful.
It is not clear how much pain Chinese society can withstand before it fractures. This is clearly a concern for Beijing as it tries, simultaneously, to reform the economy and to crack down on dissent. The Chinese, like anyone in this fix, try to put the best possible face on the situation. Which is why they exploded at Ernst & Young. But even the government in Beijing couldn’t shout down the ensuing tidal wave of financial reports; instead, they grumbled and pointed to the passages that said it could all be managed.
Perhaps it can. But if it can, it won’t be easy — and we doubt that it is possible. We have been writing about this problem for several years now, and people keep asking when the crisis will come. Our answer is simple: If this isn’t a crisis, what would a crisis look like? The Chinese financial system is sinking under nonperforming and underperforming loans. Mainstream Western analysts are all writing about the problem and calling for reforms that the Chinese cannot possibly implement in time to make a difference. At some point, the weight of evidence will shift the behavior of the Western financial community, and that will be that.
In the meantime, let the exports flow — for they surely will, and in breathtaking quantities.
“In many cases, loans were seen as being more like grants.”
That sounds vaguely familiar — rather like subprime mortgage lending in the US.
There are many fascinating parallels between your analysis of the Chinese and stories we have read on this blog about matters closer to home. For example, please forgive my following counterfactual rewrite of one of your passages above:
“Frequently, rather than bankrupting the homeowner or writing off the loan, the banks lent more money in the form of home equity financing — so that the household could consolidate old debts, and there was an appearance that the loans were viable due to the every-rising property values. The home equity which was extracted from these loans went into speculation in other housing markets besides where the homeowner lived, or to high-rise condomium purchases in areas that were already overbuilt.”
“Chinese situation…”
Getstucco,
What an amazing rewrite. What makes it so scary is how accurate it is…
Oh, I hope you noticed my apology on the other thread, I was trying to reply to another comment, not subtract from your post that I agreed with.
Neil
No offense taken — I can tell when people are trying to offend me
Part of the unraveling of the housing bubble will be the death of the symbiosis between the Chinese and US economies. As I write, the Asian markets are falling overnight in response to the weakness today on Wall Street. Does the bearish sentiment bounce back over here tomorrow morning? It certainly could, given the global capital glut and the way that hedge funds have used it to bid up asset prices in every corner of the planet to absurd levels.
http://tinyurl.com/k99m2
sigalarm: You should quote your source (I too just read the latest Stratfor Geopolitical Intelligence Report). For those of you interested, you can order the weekly report (as you just read above) for free. I highly recommend it. George Friedman is very insightful.
Acutally if you read the top if this, the source is indeed quoted as stratfor, the link is given and the authors name is cited.
Wow - this is all too technical for me - this, off Craigslist says it all for me as far as how desperate the brokers are to turn GF’s into FB’s …
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Reply to: dmjst2@yahoo.com
Date: 2006-06-06, 4:09PM EDT
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djackson@1cfloan.com
Checked some internet stuff. Now, having several desperate mortgage brokers calling my voice. They appear to be very desperate for business. Calling over and over, begging me to call them back. Good thing that they only got a voice mail, so it is kind of funny to hear their desperation. And then it is a little 3 (button on phone) to erase their message, and they will never get me live. Recommend to folks to have a voice mail for screening callers if you are afraid to give a real home/cell number out.