A ‘Tough Deal’ For ‘Egomaniac Entrepreneurs’ In Arizona
Some housing bubble reports from Arizona. “Metropolitan Phoenix’s new-home market has slowed drastically from last year’s record pace. People who signed contracts to buy homes are canceling deals as they discover they can’t sell their existing home for what they had hoped.”
From the East Valley Tribune. “So far in 2006 new home permits in Maricopa and Pinal counties are down more than 17 percent from 2005. New home closings are down more than 6 percent compared with the red-hot real estate market last year.”
“‘We’re at that point in the marketplace where it’s not correcting itself,’ said RL Brown. Brown said too few builders responded to price resistance that began about a year ago. ‘We have builders who have been slow to react to a change in the marketplace and that’s not something that should be surprising because these guys made a lot of money,’ Brown said.”
“‘For them to suddenly have to take a different posture in a different marketplace is a difficult thing. They’ve got to explain away how come their velocity is down, how come their margins are down, how come they have inventory and what their plans are. They have to explain that away to those corporate bosses who live somewhere else and don’t care about anything but the bottom line,’ Brown said.”
“The industry was also surprised by the large numbers of contract cancellations that have occurred, Brown said. ‘It’s a function of cold feet, which is natural and probably we should have anticipated it at least to a higher degree than we did,’ he said.”
“In his consultations with builders, Brown suggests everything from lowering prices to blowing out inventory to offering more incentives to those under contract and waiting for their homes to be built. ‘That’s precisely where this marketplace in new housing is going to be very quickly unless suddenly there’s a change and the inventory starts self-liquidating. I don’t think that’s going to be the case.’”
“Significant layoffs in production, marketing and even management have started in the industry, Brown said.”
“Stubborn builders and homeowners have meant the median prices of homes have not dipped in the cooling market, Brown said. But he expects that to change. ‘For somebody that’s an entrepreneur to be faced with lowering his price, that’s a tough deal, and the homebuilders are very much egomaniac entrepreneurs,’ he said.”
The Kingman Daily Miner. “Empty homes on the market and closed office doors does not necessarily equal bankruptcy. Partners of Linn Construction are splitting assets and not going out of business, as some rumors speculate.”
“Linn Construction has eliminated 10 permanent positions and delayed construction of the next phase of Walleck Ranch, according to Ron Linn. Linn said he is weathering a downturn by cutting overhead and not building inventory.”
“‘This thing got so crazy this last year, that people were selling houses making a $100,000, on average trying to make $60,000, they’re going to have to come off that. And the builder that doesn’t discount, if it makes it look like I’m going bust because I would discount, that’s wrong too. It just needs to get back to a normal deal,’ he said.”
The Arizona Daily Star reports one economist thinks some perspective is called for. “The first of the month is a few days away, which means many of us are already making mental notes to make our mortgage and car payments. But forget about those and other bills for a moment and think about this: We’re living in good times.”
“University of Arizona economist Marshall Vest agrees that these are good times. ‘I think the increased standard of living is a story that rings true across the economic spectrum,’ Vest said. ‘Even people at the lower income levels, they’re doing quite well compared with the life those folks had 100 years ago..50 years ago.’”
“There are still problems, of course. The Star’s Joseph Barrios reported earlier this month that home foreclosures in Pima County were up 27 percent in the first three months of 2006.”
“‘Even people who are living paycheck to paycheck to paycheck, they’re doing it while driving a car. They have a cell phone and probably own their home,’ Vest said.”
And a letter writer agreed. “All of us who live in greater Phoenix know what a wonderful place this is. Why then are you printing so many negative articles about our real estate market? Yes, of course, profits are down over last year. That was an unrealistic year.”
“Quit printing articles that are negative about the Phoenix real-estate market. Let’s have some positive news on this subject for a change.”
Thanks to the readers who contributed to this post. Here are more Arizona links:
‘The full cash value of a single-family residence in Scottsdale is projected to skyrocket by nearly 63 percent between this year and 2007, according to the latest estimates from the Maricopa County Assessor’s Office. Bishop’s Scottsdale house cost $300,000 when he bought it in 1999 but now it’s valued at just over $1 million. ‘I think the real estate market is nuts,’ Bishop said, adding that he doubts his house is really worth that much’
‘ For many, the proposed $30 million Presidio Terrace condominium project is a test of whether the City Council will support high-density residential development Downtown or bow to neighborhood critics. For those critics, the Presidio Terrace is just ‘too damn tall’ and out of character for the adjacent historic area, which sits north of City Hall and the Tucson Water building between North Main and Granada avenues.’
“Let’s have some positive news on this subject for a change.”
Yes, like “housing prices are going to plummet so ordinary people can afford modest homes.” That would be positive. Unless, of course, that’s not what the letter writer had in mind.
“University of Arizona economist Marshall Vest agrees that these are good times. ‘I think the increased standard of living is a story that rings true across the economic spectrum,’ Vest said. ‘Even people at the lower income levels, they’re doing quite well compared with the life those folks had 100 years ago..50 years ago.’”
It’s All Good!!!
‘Even people at the lower income levels, they’re doing quite well compared with the life those folks had 100 years ago..50 years ago.’”
This is facile.
Sixty years ago my grandparents, a streetcar conductor and a kindergarten teacher, were able to afford an average house in a middle-class neighborhood in Los Angeles. As a college grad with a good IT job, their grandson cannot afford the same today. Not whining about it, just making an observation that not everything is more affordable than it used to be.
Well, I retired a couple of years ago and am 64. I can remember 50 years ago.
We had a pretty good life back then, didn’t live in caves and ride horses to the store. My parents had a nice place, central heat, telephone, TV, 2 cars. We also had local schools (which taught something), no busing of students 10-20 miles like today. The streets were safe at night and we knew all the neighbors.
In fact, the summers were wonderful. Writing this, I can still remember the pick-up baseball games - just go down the street, get a bunch of kids, go over to the vacant lot, play til dark.
Both of my parents worked, didn’t make a lot of money but their jobs were secure and not likely to be sent to China or India or ??? And everyone I knew had essentially the same lifestyle.
It wasn’t so bad back then.
Ah, but how many cell phones did you have, and how many full television-season DVD sets did you own? Hrmmm!?!?!
LOL Scott )
From the perspective of the human spirit that was a richer time. Life was more real, more genuine, more comforting.
For today’s new owners, it’s life with Ramen noodles for the next 40 years. In a sense, new owners are laboring to fund previous owners’ retirement.
I just can’t help but dispute Marshall. Yes it s good tiimes as compared to 1930’s….But please Marshall.
The popcicle index is at an american low! “The % of people who beleive they can send their 6-7 year old to the local grocery store and return home safely unharmed”.
Minimum wages in Nv only 5.15/hr {legislature just turned down an increase} versus 1970 @ 1.35 to 1.50/ hr. Wages have not kept up with the gerry rigged “core inflation ” and neither has the average worker.
Social Security checks are 70% lower than they would have been if the Clinton team hadn’t hedonically elliminated inflation indexed payements, while taking credit for a so called balacned budget. Bush’s team added their ingenuity to this and whalah, grandma eats cat food till EOM.
If this weren’t so, both parents would not be forced to slave each week for 40 hours on Maggie’s farm, to maintain a home with children. VErsu when i grew up hardly nobodies mom worked.
Two worker drones yet the negative savings rate is the lowest in 50 years - A) can’t save prices are up faster than wages or B) it’s the must have now generation!? C) The Fed quietly devalued the purchasing power of the dollar by 75% since 1966! {CCCCCC}
YEP if things get any better GM sales might drop another 5% this year! But we have Chinese trinkets and $3 gassoline.
It’s just a lull Marshall please, come out of your coffee or BATH house which ever applies…..
grandma eats cat food till EOM.
God I hate this non-sensical image.
Cat food is ridiculously expensive compared to beans and rice which are staples of healthy diets around the planet.
Almost as bad as “turrurrists are ginna get ya”.
Well at that rate the only thing ordinary people will be able to afford, is cardboard panel shack like in the favelas in Brasil and Haiti. Hope you experience it one day dear USA. You can thank Easy Al and all his bunch. God I’m mad, raving mad.
No. People are nuts! And you would think that maniaco-depression was a rare disease. Personally I think it has to do with the air we breed. Mind you maybe, it is the water, the weather, the food and ah yes!, TV and all the Madison Avenue advertising gurus that have transformed the world in raving neurotic madmen and madwomen. No sex discrimination. Don’t trust me. I am as mad as the others but in an another way.
They have meds to help madness. Or lobotomies. Some of the morons involved in this debacle must have had them.
You should check into it for your madness! You will be happier!
Oh sorry, but it is great to have a house worth a $1mil until the tax man cometh. Interesting article I read about all the home extreme makeover’s that ABC has done they said the improvements are not taxable because the they rented the property for less than 14 days. IRS just worte a letter saying they did not see it that way and that they see the improvements as prizes taxed at ordinary income rates. I guess a person could see it as pretty bad for all the good the show does, but just an example of how the tax man has no emotion.
The IRS is a rediculous bunch of crooks & thieves.
They make up the rules as they go along!
where oh where oh mighty OZ does it say this is ordinary income for natuarlly born US american citizen.
where oh where is it written one must file a 1040?
Everyone thinks it so! everyone beleives it is so! Everyone is sure it is so!
But no one has yet claimed the $250,000 dollar reward from an attorney in San Diego proving it so!…
Is there any other so called law that one cannot be plainly shown and told where it is so? Any where ?
Inspired: They say it is so, because they have the guns and the jails to back it. Try selling that one to Richard Hatch, now doing 5 to 7 in a fed pen.
Let’s throw some tea over the Corrnado bridge!
Sorry I am late:
Phoenix
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Side question. ARM mortgage has a celling of about 2%. If this is true, the maximum the ARM reset is 2%. I would think that many people would be able to shelter that. Further, it does not jump to 2% right away because rate is scheduled to reset once a month or once every six months period. Can someone give some insights?
It might only be able to increase 2% each time, but there’s no way the ceiling is 2%.
Going from 4% to 6% at the first reset is a 50% increase in the amount of interest you have to pay every month. It used to be that ARMS set every year and could only change by 2% a year with a 6% lifetime cap over the initial rate. That was before the teaser rates and such. Nowdays there has been so much “innovation” that there is no way to tell what someone’s mortgage is going to do except get out the document and read it. There are no standards for those new exotic, innovative loans.
Yup. 2% of 500k is TEN THOUSAND DOLLARS. Yeah, those people squeaking into the market in the past few years who COULDN’T AFFORD a fixed rate are most certainly screwed.
On that topic - don’t you love how people now trying to refinance have a current adjustable rate that is HIGHER than the fixed they could have gotten when they bought (say, 2004)? Now whaddyagonna do? Get a fixed? Oops, shoulda done that the first time when it was cheaper! Couldn’t afford it then? Well… CAN YOU AFFORD IT NOW?????
Should’ve seen THAT coming. Morons.
I love that comment - Morons indeed.
Man, I have got to watch when I talk about this at work. A coworkers 2nd resets to prime *every month* (maybe prime + a fraction)…
How often do most ARMs reset? Yearly? Monthly? (Yes, that two year fixed period is really going to make a difference in 2008…)
Neil
Man, I have got to watch when I talk about this at work. A coworkers 2nd resets to prime *every month* (maybe prime + a fraction)…
I have a HELOC (zero balance for emergencies) that resets every month. I think all those HELOC do that.
It’s interesting. It’s use to be the bubble blowers didn’t want to talk to us. Now I feel so bad I don’t want to talk to them. What to say? “Sorry you’re stewing in agony, you did ask for it though. Tell you what, I’ll get lunch.”
There are a couple people I don’t call anymore and more than a few I’ll mention anything but RE.
So that way, the price of a house will cost an ARM and a leg.
Neil:
Everytime the Fed raises rates, prime goes up as well so think about your friend on Thursday at 11:15 PST or 2:15 EST when the Fed raises rates again. Thursday is going to cost your coworker a little bit more than Wednesday.
A typical ARM ceiling for 5 year option ARM would be 9.95% for the 5-year period.
The typical FBr with an ARM will have blown up long before the 9.95% ceiling is reached…
Hmm. In San Diego, at 500k, you’d be forking over FIFTY THOUSAND DOLLARS A YEAR in interest to the bank? Sure, tax deduction, blah, blah, blah - it ends up being only 75% of that, blah, blah, blah. I’m only throwing away 37k a year, blah, blah… huh? And this is only talking about interest… crap.
I’ll happily throw away $1100 a month if it means that I am not stupid - relatively speaking.
No you only need a chainsaw to solve your problem. Has anyone seen “Chainsaw massacre” recently. Central bankers would be great in the main role for the sicko. The guy came in the real story, from Texas.
they’re doing quite well compared with the life those folks had 100 years ago..50 years ago
_________________________________________
LOL. Many of you thought we would go from YOY to 2-3 year comparisons. This guy pulled out the 50-100 year comparison. Why no 2000 years ago- When Jesus walked the earth we had to walk in sandals and grow our hair long.
“‘Even people who are living paycheck to paycheck to paycheck, they’re doing it while driving a car. They have a cell phone and probably own their home,’ Vest said.”
I’m astounded… Having a car, a cell phone and a mortgage you can’t pay is this shallow idiot’s defintion of “good times”.
Who needs a house when you can live in your car and you’ve got a cell phone. What I need is a portable shower and money for gasoline. And to think, my grandfather thought he had it good 50 years ago with a house he could comfortably afford, time to spend with his family, a wife who could stay home and raise the kids, and extra money to invest for retirement. What a loser - I’ve got a car and a cell phone.
and remember you can have wifi with a laptop and hotspots all around.
the whole thing about living paycheck to paycheck is that people spend all their money not matter what they earn. and they spend it…on a car…and a cell phone and whatever other crap they don’t need.
So true. My brother and his wife have a combined income of ~3.5 times my single salary and they are living paycheck to paycheck. I cannot understand how. I’M not even living paycheck to paycheck…
Do they have children?
Living paycheck to paycheck has never, ever been about how much you make, but about how much you spend. Unless you were living in Manhatten while making minimum wage or something similar how much you spend is mostly based on your self control and ability to defer satisfaction than anything else.
I’d imagine that some people making well over $1 million/yr are living hand to mouth (they’re doing it in luxury autos and with silver spoons but still doing it) while others making lower middle class wages are saving substantial piles (children or no children in both cases).
Upstater - they have 2 grown children and a house bought long before prices were inflated. I, on the other hand, have a toddler (read daycare, diapers, etc.) and one modest salary.
I’m undecided on this. Yes, there are a lot of Americans who are not frugal, yet there are many more who are just plain poor.
Think about it - I make significantly more than the median income in Bay Area, and don’t have any CC debt, only a car loan to pay, and a modest 2 bedroom apartment. But it’s freaking hard to save say 25% of my income (I’m married with a kid). America is very expensive, and having a profession doesn’t always enable savings.
From the experience, I think it is more important to have an attitude of a saver, than the rigid saving goals. Don’t spend money on attractive crap.
“From the experience, I think it is more important to have an attitude of a saver, than the rigid saving goals. Don’t spend money on attractive crap.” PUT THAT QUOTE ON THE LINCOLN MEMORIAL… IT WOULD CHANGE THIS COUNTRY!
That quote should replace “In God We Trust”
Read “The Millionaire Next Door”.
That should be required reading in America.
“Big Hat, No Cattle.”
I live in a 2 bedroom apartment with a sister, I’m 47, earn well over 6 figures, and my share of rent is $500. I’m extreme frugal and basically I’m saving for a custom house in a few years either in a gated community or in the country in some state with no water crisis (or impending water crisis). My lifestyle is not for everyone, but I can live on my savings for many many years without a job if necessary. I have been laughed at by others for being frugal. But they do not even know my net worth anyway, so BFD. The materialism and waste of my fellow Americans is astonishing, especially after visiting a foreign nation seeing all these people engorged on fries and burgers, couples weighing a combined 500 lbs, big SUVs and 4,000 square foot houses on steroids. Gross consumption! No, I’m not ashamed to live far below my means. I have far more freedom than many people.
I wish to God someone could please teach my husband the value in living like this..spending only what you have to, not going out to buy the first cheap shiny plastic piece of shit he sees… he’s killing me. Grr. Rant /off.
Let the good times roll ! You have to let steam out sometimes.
It’s much better that crashing a plane in a prime real estate building. Mind the real estate explosion will look a lot like that.
This is a true story. I walk to work every day (in San Francisco) and there is a fellow on the corner I pass each day who is panhandling. He’s pretty rough around the edges in terms of his clothes and hygiend, but he’s always friendly (although I never give him any money). Today as I walked by I noticed that he was checking his text messages on his cell phone. So I guess he’s got it going on compared to those hobos in the 1930’s.
The argument that we’re doing better because we have some new technologies has some merit, but it can be completely overplayed. The example that comes to mind is the adjustment to the CPI based on “hedonic value” of various goods, i.e., because my computer has twice the memory it did 5 years ago the relative cost of a computer has gone down. Never mind that it basically does the same thing it did before and costs just as much.
your computer is twice as fast, but your software needs twice as much memory, clock speed and what have u to run your new software reasonably well.
if u get your plasma TV the amount of advertising doesn’t get less from what u were getting when u were watching TV on your old set.
the highway speed limit stays the same whether u drive a Chevy or a Porsche.
the “hedonistic value” adjustments allows to play CPI numbers any way u want and is just another version of “numbers don’t lie…but people lie about the numbers” adage.
Who invented this “hedonic value” thing? A pervert? Bill Clinton?
Economists and statisticians. At some level you have to correct for the fact that most of the time prices are much stickier than portions. Which is easier to quietly shrink the size of a big mac or to raise the price 20 cents (hedonics work in both directions).
Yeah, the estimates for technology are probably out of whack, but I don’t think there would be anyone who would suggest with a straight face that computers haven’t been a huge force of depreciation (the arguement is how big of a force have they been).
…as I walked by I noticed that he was checking his text messages on his cell phone….
Probably just found out that he can qualify for a $1mm no-doc,
no down loan…
Only a million? Wow. They really are tightening lending standards!
OT — can someone good at forecasting suggest when this stock will be back to a price where it makes sense to buy it?
http://tinyurl.com/f5boq
“People who signed contracts to buy homes are canceling deals as they discover they can’t sell their existing home for what they had hoped.”
When does the bad news about order cancelations get fully priced in to the homebuilders’ stock prices?
Looks like it broke out around 15. You could try some there.
I was guessing $9.00/share.
I’d start nibbling at $4.55.
$10
“‘Even people who are living paycheck to paycheck to paycheck, they’re doing it while driving a car. They have a cell phone and probably own their home,’ Vest said.”
Good thing these folks have a car –they may soon be living in it. As to “owning” a “home”, what they “own” is a large mortgage on a SFR or condo, and one that will soon be worth less than their mortgage –if not already. But… they still have the cell phone (for as long as they can afford the monthly payments).
The car is most likely leased
Great comments - and just as Phoenix’s RE market gets ready to go into a tail spin, PULTE’s Del Webb group is breaking ground on Sun City Festival Ranch (http://biz.yahoo.com/bizj/060627/1307786.html?.v=1).
Out in Buckeye, which I like - it’s always been a nice little farm town - but it is not a place to be building a 7000 home community at this time (if at any time.) Seems like this is the same area of Maricopa County that other developers went bankrupt in the 90’s real estate bust.
I don’t know if you guys have seen this.
The median price of a new home dropped to $235,000 in May, down 4.3 percent from the April sales price but up 3.1 percent from a median price of $229,200 in May 2005. That increase, though, was the smallest year-over-year price gain since December 2003.
What do you get if you sell 4.6% more homes, but their price is down by 4.3%? Roughly nothing (no gain, nada), unless you used a bunch of incentives (not reflected in your median price statistic) to sell them at a loss…
University of Arizona economist Marshall Vest agrees that these are good times. ‘I think the increased standard of living is a story that rings true across the economic spectrum,’ Vest said. ‘Even people at the lower income levels, they’re doing quite well compared with the life those folks had 100 years ago..50 years ago.’”
All smoke and mirrors…
USA Today ran a front pager a year ago which stated the federal debt per US household is around $477,0000.00.
Just think of that amount…
Can’t say too many families can pull out the checkbook to cover the bill if the Bond Man came calling to the door and said, time to pay-up.
These ivory tower pontificating types drawin’ a public paycheck don’t have a friggin’ clue.
These ivory tower pontificating types drawin’ a public paycheck don’t have a friggin’ clue.
No…the sheeple who go on voting for Tweedle Dee or Tweedle Dum year after year are the ones who don’t have a friggin’ clue. The clinical definition of insanity is repeating the same actions over and over but expecting a different result. To the toolboxes who keep touting their Democratic or Republican affiliation, you have lost the right to complain about clueless, venal, incompetent “leaders”.
But I voted for the guy with inherited family money that was a member of a Yale secret society.
So don’t blame me!
I think you might have an extra zero in that. Federal debt is ~10 trillion (~$30,000 per person). If we triple that for entitlement promises that are not debt, that still only gets you to ~$90,000 per head). I’d believe $250,000 or so per household (including promises made (which aren’t debt) but not $477,000. The easy solution is to ignore the non-debt promises made.
Charles Schwab Chief Economist Liz Ann Sonders. She has been more and more bearish on the stock market and housing market month after month, and based on all of that she seems about ready to “crack” and say the R word. A few months ago she was not expecting any price declines, noting specifically that prices have never gone down on a national scale during a full calendar year.
For the full view with graphs, here is the link, it tells the story better:
http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/shelter_from_the_storm_the_housing_markets_getting_ugly.html
Shelter From the Storm: The Housing Market’s Getting Ugly
by Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co., Inc.
June 26, 2006
Housing affordability in free-fall.
New and existing home inventories surging.
Adjustable rate mortgage holders to get pinched.
Real estate now a big chunk of household net worth.
The party’s over. I’ve penned a series of commentaries on the housing market, and since my last one in February 2006, conditions have deteriorated even further. The consumer, who rode the now-subsiding swell of easy money, could face shoals ahead.
One picture summing this up is the below chart of the S&P Homebuilding Index, highlighting the stunning 40% decline over the past year.
Homebuilders feel the pain
Affordability in free-fall
Statistics of every variety tell the same story. One of the more popular affordability indexes, the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index, has just experienced its largest eight-month drop in history. The index measures the percentage of homes sold that are affordable to families earning the median income during a specific quarter. Given the previous parabolic increases in home prices, the big jump in mortgage rates—and income growth that’s paled in comparison—this plunge is not unexpected.
Unprecedented decline in housing affordability
Little room for non-essentials
Also hitting the consumer is the combined effect of rising mortgage payments, still-high energy prices and other costs. Consequently, the share of our income now devoted to spending on “essentials” is at an all-time high of 55%.
Spending on essentials up sharply
As of 1Q06. Essential items include housing, other consumer debt service payments, energy, auto leases, medical care and food.
Loads of unsold homes
So, what happens when affordability bites the dust? Inventories of unsold homes begin to creep up. OK, creep is a big understatement. Take a look at the chart, below, showing the sizeable 30% swell in inventories of both existing and new homes. In fact, the past year’s increase is the largest since the National Association of Realtors began tracking the data in 1983!
Home inventories swell
As pointed out in the June 26 Barron’s, this has been an exceptionally long housing boom cycle. HSBC reports that increases of 100-150% in sales, housing starts, building permits and home-builder optimism from the bottom of a housing cycle to its peak are the norm, with advances tending to last four to five years. This one, strikingly, has carried 15 years, with gains in the aforementioned indicators ranging from 130% to 300%!
New home sales up, but …
The news is not universally ugly, but even the bright spots need dissecting. May’s 4.6% gain in new home sales to an annual rate of 1.234 million, was ahead of expectations. Furthermore, readings for both April and March were revised downward.
But there’s more to the story: Homebuilders are offering big incentives such as multi-year luxury car leases, cash payments toward closing costs, and free lifetime country club memberships to lure reluctant buyers.
Getting pinched in the ARM
My commentary in February honed in on the sub-prime borrower group of mortgage holders—those with checkered or no credit histories. Over the next two years, monthly payments on over $600 billion of sub-prime mortgages may rise by as much as 50% as two-year teaser rates on hybrid adjustable rate mortgages (ARMs) expire and interest payments hit their fully indexed levels. The size of these loans is unprecedented: currently, sub-prime loans outstanding account for more than 10% of the total U.S. mortgage debt of $8.5 trillion. “Affordability” products, including hybrid ARMs, interest only mortgages, “no doc” loans, option ARMs, negative-amortization loans, and piggyback mortgages, have been all the rage. Given the meaningful jump in short-term interest rates (with the discount rate now at 6%) and the decline in home equity, we have a real problem brewing.
But it’s not just the sub-prime market that’s set to feel the pinch—it’s the ARM market in general. According to MacroMavens and Fannie Mae, there’s estimated to be $1 trillion in ARM resetting this year and another $1.7 trillion in 2007. The typical ARM holder will see a monthly payment increase of about 25%, while for those in option ARMs, interest only, and negative-amortization loans, the resets could approach 60%!
Alan loved those ARMs!
Ironically, with all the attention and blame coming down on FOMC Chairman Ben Bernanke of late, I think more about Alan Greenspan when I consider how culpable the Federal Reserve has been in both juicing housing, and now pulling away the punch bowl. Recall the praise of ARMs by Greenspan during the latter years of his tenure—even as long-term rates were at 40-year record low levels (low long-term rates are typically associated with higher demand for fixed rate mortgages). You can see how unprecedented this demand for ARMs has been in light of mortgage rates in the chart below.
ARMs surged even when rates were low
As housing goes, so goes household net worth
Finally, there’s the ever important impact of housing on U.S. household net worth. You can see in the chart below that real estate holdings now account for 38% of net worth, up from only 24% six years ago. For now, net worth remains at an all-time high, helping to explain a still-strong consumer. But, what happens to the real estate market now stands to have a greater-than-ever impact on net worth statistics. Given that equity holdings represents another big piece, if we’re right about continued market weakness net worth will be coming under increased pressure, suggesting a consumer-led economic slowdown is in the cards.
Real estate’s growing slice of net worth pie
The National Association of Realtors projects a 13% decline in new home sales in 2006, with the median home price increasing just 0.83%. Overall, the median home price in the United States has never declined in a calendar year since World War II. Maybe I’m out on a limb, but I think 2006 could break that streak.
“Overall, the median home price in the United States has never declined in a calendar year since World War II. Maybe I’m out on a limb, but I think 2006 could break that streak.”
This is truly awesome to learn that Schwab’s chief economist is on board with us bubble bears. From my limited experience (I am a Schwab client), they have a culture which promotes greater honesty than many of their Big Brethren on Wall Street. The broker I spoke with a couple of years ago when I opened my account made no attempt to hide his belief that the stock market was “still” overvalued, despite the correction of the early 2000s, and fundamentals have headed far south of there since then (higher stock prices, increased risk of recession, crashing bond market, inverted yield curve despite sell-off of long-term bonds, openly-acknowledged correction in the housing market, etc.).
I too am awestruck by this post. Its one thing for us bloggers to say this… its quite another to stake one’s reputation and career on such a statement. Kudos to Ms. Sonders. I too hope Ben makes this its own thread.
Think about the *ell* she’s getting at work for such a statement! Think about the business she is scaring away.
Wow… only if BB, Greenspan, or Buffet made a similar statement would it strike me more.
Oh wait, Buffet already talked about the party ending at midnight!
Neil
After reading the linked version, I hope Ben considers giving this article its own post. Kudos to Ms. Sonders in case she reads here. The charts she includes are priceless!
One I suggest the interested reader take a close look at is titled “ARMs surged even when rates were low.” The graph clearly shows a stable relationship between the share of ARM-financed purchases versus 30-year fixed mortgage rate from 1993-2002, which is easily explained by economic logic: When the 30-year fixed rate is low, more people are willing to assume a long-term purchase contract.
A clear break in structure took place around mid-2003, after which the ARMs share of originations climbed up from about 15% to a sustained level around 35% by mid-2004, despite plummeting long-term interest rates. At this stage of the game, when home prices were going through the roof in bubble zones, the ARMs were being improperly marketed as “affordability loans.” The unraveling of this period of extreme abandonment of lending standards is one factor which may help Ms. Sonders’ stated risk of price declines materialize.
Liz - one of the patron saints of the housing bubble blog.
You go girl, but you could be martyred for your statements if your boss is part of the machine.
Two thumnbs up.
Sorry that was so long, will just post the link next time. Worth reading though.
“There are still problems, of course. The Star’s Joseph Barrios reported earlier this month that home foreclosures in Pima County were up 27 percent in the first three months of 2006.”
“‘Even people who are living paycheck to paycheck to paycheck, they’re doing it while driving a car. They have a cell phone and probably own their home,’ Vest said.”
And a letter writer agreed. “All of us who live in greater Phoenix know what a wonderful place this is. Why then are you printing so many negative articles about our real estate market? Yes, of course, profits are down over last year. That was an unrealistic year.”
“Quit printing articles that are negative about the Phoenix real-estate market. Let’s have some positive news on this subject for a change.”
Denial, check. Self-justification, check. Pleading, check. Sounds like it’s over for AZ.
Yes. Don’t like the news? Np- just blame/discredit the messenger. Kind of reminds me of a certain administration… somewhere.
“All of us who live in greater Phoenix know what a wonderful place this is.”
Phoenix, AZ
5 DAY FORECAST
Tuesday
107°F (42°C) | 84°F (29°C)
Wednesday
104°F (40°C) | 86°F (30°C)
Thursday
104°F (40°C) | 86°F (30°C)
Friday
108°F (42°C) | 88°F (31°C)
Saturday
108°F (42°C) | 87°F (31°C)
And less and less water. Do Martians or Venusians need water?
There is no water problem in PHX. The houses are replacing farms which used MUCH more water than homes do per square mile. But you are right on one point: It is hot as hell here.
No water problem??????????????????????
http://www.mdac.com/M-DACForecast.htm
It’s been a pretty mild summer, we haven’t topped 115 at all in greater Phoenix. Anything below 110 is definitely mild for this time of year. Bullhead city has topped 115, though.
>Phoenix, AZ 5 DAY FORECAST
luxury!
Palm Springs, CA:
108, 104, 108, 110, 111
Thank God it has cooled off a bit…
would someone please call a waaaahmbulance for the letter writer in PHX?
The Charles Schwab analyst, Ms. Sonders, has been reading Ben’s blog also. Ben is going to influence a large part of our society is reading this great blog.
Mr. Barrios, I would love to be in your unbearable 116F’ with no water. I think I will pass on your lovely area. I know it is special, BUT.
I just checked. There is still water coming out of my spigots here in chandler az. There is no water shortage here. Next time you fly into Phoenix take a look at how many swimming pools you see.. It only costs $14,000 to fill it up
“‘Even people who are living paycheck to paycheck to paycheck, they’re doing it while driving a car. They have a cell phone and probably own their home,’ Vest said.”
It seems to me that they just have long term rental contracts (leases) on all three…..They just might be turning in the car keys with the house keys…
“Quit printing articles that are negative about the Phoenix real-estate market. Let’s have some positive news on this subject for a change.”
Well, maybe we would print something positive if we weren’t so grumpy about overpaying for our housing!
Every time someone tells a newspaper to quit printing negative articles (Phoenix Real Estate, Secret Government Wiretaps, etc) the ghost of Thomas Jefferson cries a little bit.
Regarding the crashing Phoenix Arizona real estate market, it is interesting to see the plug for Pulte’s new Sun City Festival Ranch development coming out just now -
http://biz.yahoo.com/bizj/060627/1307786.html?.v=1.7000 new homes in Buckeye! I like Buckeye, a nice little farm town, but about the bottom of the list of desirable urban centers in Maricopa County (much closer to PV nuclear plant than downtown Phoenix.)
Arizona RE developers just don't get it - the state's economy is programmed to have them go bankrupt every 10 to 15 years and yet they will keep building to the bitter end.
If the First, 2nd and 3rd morgages add up to $275,000, and the house across the street “just like yours” just sold for $250,000, what do you really “own?”
Aloddda DEBT, my friend!!!!!!!!!!!!!!!!1
Also, who in their right mind would ever take a 3rd mortgage?
Well you are owned by the bank. Humm! That’s great. Future slave labour for Ben Bernanke’s and Bush buddies. You cans always enroll yourself as a mercenary for Haliburton in Iraq.
Ben,
This article initially talks about the health of the banking system in China, but ends in discussions very relevant to the US Housing market - basically how the poor lending practices in home mortgages has led to a “problem that won’t be visible until real estate prices fall dramatically, which WILL happen sooner or later….. the problem is serious”
http://www.washingtonpost.com/wp-dyn/content/article/2006/06/27/AR2006062700584.html
Wuh-Wro. In China, you can be executed for bank fraud.
Danielle DiMartino: We’re still in denial on housing
01:00 AM EDT on Monday, June 26, 2006
Emotions on the housing bubble have never run so high. With so much at stake, there has to be a silver lining on the horizon.
At this point, the data on rising inventories and stagnating prices speak for themselves. And yet, the denial factor has never been so stubbornly embedded in some homeowners’ and homebuilders’ psyches.
The pundits keep confusing the matter, insisting on the prospect of a soft landing. This alone could be causing sellers undue harm, as they hold out for a better price when they should salvage their credit standing instead.
But any man or woman on the street should be able to see through the blather.
Any lingering doubts were dashed with last week’s news: Some $1.3 trillion in adjustable-rate mortgages will reset within the next 18 months; building starts popped, sealing sellers’ fate; and try battling with 4 million other sellers to attract buyers’ attention.
Goldman Sachs recently noted that the rate at which supply is growing indicates the inventory-to-sales ratio will rise “to levels that have historically been followed by real home-price declines.”
And yet the merry-go-round keeps turning, because money is still cheap enough to get business done.
http://www.projo.com/business/content/projo_20060626_dimart26.1823355.html
Off-Topic
I’m sure quite a few of you read the Daily Reckoning, and in particular the Mogombo Guru, disturbing sniglet from his most current editorial.
And I notice with a Grim Mogambo Frown (GMF) on my stupid face that required reserves in the banks actually went down to the bottom of its range for the last zillion years or so. Hell, picking a date in random, say, in May 1995, which was eleven long years ago, total deposits in the banks (”savings”) were only around $110 billion, and total loans and leases on the books of the banks logged in at only $204 billion. And against that, the banks were saddled with $57 billion in required reserves.
Now, I notice how my blood has run chilly, and how everything is dark and gloomy. Gaunt buzzards have gathered in the trees to sit and lick their chops as they glare into the deep, dark, dangerous depths of my soul. I realize, in a sudden cold sweat, that the dollar and the banks (as we Professional Mogambo Economists (PME) say) “are freaking doomed!”
The scene is now perfectly set to reveal the ugly fact that total deposits at the banks are up to $5.2 trillion, which is 47 times bigger than it was in 1995. That’s a growth rate of 42% a year, compounded! And the total loans and leases is now $5.7 trillion, which is 27 times bigger than in 1995, which works out to an annual growth rate of 35% a year! Big, Big increases!
Yet against that monstrous, cancerous rise in both assets and liabilities, the required reserves went down from $57 billion in 1995 to only $42 billion today in 2006! Hahahaha! Surprise! Down! Required reserves went down! Hahahaha! To keep the same 0.518 ratio of required reserves against total deposits in the banking system in 1995, the banks would need to have, right now in required reserves, $2.693 trillion! Instead, they have only $42 billion, 1.6% as much! Hahahaha!
****************
I wonder how much of the 5.7 trillion is mortgage debt?
Excuse me I’m gonna go throwup now.
Can anyone say S&L bailout/scandal of the 90s all oever again. Pishah to those who argue history never repeats itself. When these ARMs reset en masse next year and the year after, goodbye mortgage industry and many of the smaller banks. I better go check my local credit union because that CD better be there when it matures next Feb. BTW, anyone notice what Countrywide is offering, up to 5.5%? Can we say desperate for cash. IndyMAC at 5.51%.
Before my wedding I put some $$$ in a 1 year CD for 7.25%. That had to be 1994 or around.
No to worry! We will be printing just some more paper. That way you can wipe the mess with it. Paper towels as a currency. Now that would be real useful.
Read the second half of this article - very applicable to the US housing market.
http://www.washingtonpost.com/wp-dyn/content/article/2006/06/27/AR2006062700584.html
Upon asking a seller and as to why prices would remain so high, this was his response that may be fairly common……here goes…….forget the land (that is bubbly and a main component of a home price, but material at $115/sq ft..ha ha//
Hey buddy, the market is flat and staying that way for a long time, but
prices will only decline further in a recessionary economy, and we
aren’t
there yet. Regardless, with the ballooning cost of materials, that
house is
and will remain worth what I’m asking, and more in the very near
future.
The site value allone is worth $250K and buidling materials at $115 per
squaure foot (which is what it cost now) will add another $245K in
value for
improvements. Include the pool, hurricane shutters and a two car
garage and
it would cost you $580K to build this house new. This fact of
ballooning
building material costs was splashed all over the front page of the Sun
Sentinel a couple months ago and has been repeated in the Wall Street
Journal and other fincial periodicals. But if you don’t do your
homework or
watch the markets then you won’t know this.
As far as rates, they’re still bellow 7% on a 30yr fixed with is still
a
30yr low. Until they reach 8% the market is sitll going to retain it’s
current value.
Market value is not based on cost. Tattoo that on your forehead.
Lumber prices have been dropping this year(down about 15%). Less demand for building materials going forward, should bring down the cost of construction. Lower demand for labor should also bring down the cost of labor. A builder may even be willing to take some loss on the land if he can make it up on the construction and stay in business. Since most land is controlled by use of options, they can let options expire and negotiate cheaper land prices going forward. Making it possible for the builders to keep building at lower prices and keep increasing inventory and competing for buyers. Of course this sucks for people who bought the last couple years.
The reason for the decreasing lumber price is the US and Canada settled the softwood tariff dispute late last year.
Canadian softwood (doug fir) is now competitive with American harvested softwood, it wasn’t previously.
Don’t worry we have enough inventory for houses to sell below replacement cost for years to come. It _has_ happened before. Just has Texans.
here is a response from a seller about why prices should hold..land bubble notwithstanding, but material cost at $115/ sq ft? ..he he he. here goes
——————
Hey buddy, the market is flat and staying that way for a long time, but
prices will only decline further in a recessionary economy, and we
aren’t
there yet. Regardless, with the ballooning cost of materials, that
house is
and will remain worth what I’m asking, and more in the very near
future.
The site value allone is worth $250K and buidling materials at $115 per
squaure foot (which is what it cost now) will add another $245K in
value for
improvements. Include the pool, hurricane shutters and a two car
garage and
it would cost you $580K to build this house new. This fact of
ballooning
building material costs was splashed all over the front page of the Sun
Sentinel a couple months ago and has been repeated in the Wall Street
Journal and other fincial periodicals. But if you don’t do your
homework or
watch the markets then you won’t know this.
As far as rates, they’re still bellow 7% on a 30yr fixed with is still
a
30yr low. Until they reach 8% the market is sitll going to retain it’s
current value.
“‘Even people who are living paycheck to paycheck to paycheck, they’re doing it while driving a car. They have a cell phone and probably own their home,’ Vest said.”
Anybody old enough to remember Art Linkletter’s “Kids say the darndest things?” This statement qualifies.
Taking a loss in Sedona and actually admitting it. Sounds like a cool place. Do you know where this is, Ben?
http://flagstaff.craigslist.org/rfs/175925310.html
“Let’s have some positive news on this subject for a change.”
Okay, Phoenix will continue to be considered a national trend setter and leader in housing prices.
txchick,
Didn’t that burn down last week?
I love your posts - but I think you were a little harsh on that flipper from SD. We all learn from our mistakes, she will learn minus about $60,000.
I wanted to short Copper at $2.00, glad I didn’t. I’ll stick with corn.
That idiot was a she? Oh my. If I’d known that I’d have been even nastier. LOL
I have received reports of many corporations and government agencies that offer a benefit to employees a relocation package, when they need to move them. And that this relocation package can include buying the house from the old location and assisting them in moving their belongings and buying a new place, in the new location.
Some reports indicate that the employer may buy the old house at “appraised value”, which may be much higher than actual market value.
I am wondering how these purchases get reflected in “comps”, since officially it was purchased at above market value, and an incentive to attract employees, or when they need to move an employee’s place of work in the company to a new location.
Thoughts?
OT, but a very interesting speech by a government official, Mr Emil Henry, who currently is without a boss, so his tune may change once Mr Paulson is confirmed:
http://www.ustreas.gov/press/releases/js4338.htm
“To give you a sense of the potential scope of this one aspect of transmitting a GSE’s financial problems, consider the group of primary dealers. The Federal Reserve’s primary dealer report indicates that the 22 primary dealers–a group that includes many of the dealer subsidiaries of the most important banks and investment banks in the United States–in aggregate typically maintain net long positions in GSE straight debt and MBS of about $130 billion and $30 billion, respectively. These long positions are hedged in part by short positions in Treasuries on the order of about $130 billion. Therefore any widening in GSE debt and MBS spreads over Treasuries would likely result in dealer losses that could be very substantial, especially relative to their capital. Such losses might cause dealers to rein in their positions and market-making activities in the GSE debt and MBS markets and in many other markets as well. Losses sustained by some primary dealers could well be large enough to reduce capital below regulatory minimums. Risk spreads for many private firms would likely widen substantially and banks could choose to tighten credit availability. Financial markets across the board would likely become very illiquid and volatile as firms with significant losses attempted to unwind their positions.”
This sounds like a good argument for making sure the conundrum survives the turnover at the top of the Fed. No wonder the risk premiums on GSE debt are so small (never mind the implicit Treasury guarantee.).
Short CFC and AHM.
Added LEND yesterday and more CFC.
——————————-
The HBs have already rolled over. I’m short 5 of them and will not cover until 2 are in BK.
Subprime lenders are next.
The coming crash will be heard and felt by many…LOL
———————————-
PMs will continue rising.
The USA is little more than a confidence game now with the WS tribe and shills skimming billions.
“The USA is little more than a confidence game now with the WS tribe and shills skimming billions.”
I was thinking this very thought no less than two hours before I read your post. The next shoe to drop (after the inevitable hard landing) will be the taxpayer-funded mop up operation
I’ll take the side of optimists for once. Note I am a renter, not a home owner, and that’s part of why I think these are the best of times. I am never for turning back the clock (except to have my youth). In the long run, life gets better and we win against all forms of superstition. I know that is very abstract and OT, but I just wanted to get that off my chest.