November 15, 2012
Just sayin' ... you should listen to Dave.
People still buy real estate that will be underwater in a few decades. Think about that.
... Think about what will happen to real estate prices in coastal areas when we do start taking global warming seriously. How much will people pay for real estate that is going to be under water in a few decades?
2010: Real Estate Near The Gulf,
I was already concerned with the effect of global warming on real estate prices when it suddenly sinks in that a lot of land is going to be underwater. Seriously, would YOU buy a house anywhere in a coastal area that has an altitude lower than maybe 30 feet? One of these days everyone is going to realize what that means - all at the same time.
April 21, 2012
Uh-Oh. High-end SF-Bay-area housing is back up to bubble levels.
The Bay Area's recovery from the housing crash is proceeding ZIP code by ZIP code, with only a few upscale communities nearing the values they saw before the bubble popped five years ago.
...According to an analysis by this newspaper of home values by ZIP code, with higher priced homes, such as the core of Silicon Valley and parts of San Francisco, have recovered much of the home equity lost in the crash.
And take a look at this recent not-high-end listing: 2br, 1ba, $795K
April 13, 2012
Calculated Risk, commenting on Fed Reserve Chair Bernanke giving a "no one could have predicted" the crash, where he said it "was difficult to anticipate..." CR writes,
I disagree that the crisis "was difficult to anticipate". I think the potential for the housing bust to lead to a financial crisis was fairly obvious (I first mentioned the possibility of a financial crisis as a result of the then coming housing bust in 2005).
Here is this blogger, in August, 2002: Multiplier Effects ,
From what I read, the economy is currently being propped up by what most people seem to agree is a "bubble" in housing prices. So far this housing bubble has allowed consumers to keep spending just enough to keep the economy afloat for now. But if refinancing houses rather than rising incomes is the source of funds to keep up the spending binge, won't this have a multiplier effect on any downturn? (Economy propped up by housing bubble, spending slows, economy slows, pops the housing price bubble, people stop spending, economy slows more, many lose houses, economic drop accelerates.)
Multiplier effects are worrying me lately. We have had a period where stock prices rather than the underlying strength of the companies became an underpinning of the economy. For example, the pension problem - pension funds invested in stocks, stocks rise, companies don't have to make contributions, AND their books look better because the pension funds are claimed as assets. As long as the market was going up everyone's books looked great but now underfunded pension plans will have to drain cash out of companies, lower that previously claimed asset, all lowering earnings, eventually causing the market to go even lower, accelerating any downturn. Same thing with insurance companies - reserves in the stock market, market drops, not enough reserves to cover obligations. As I said, many companies were propped up by their stock prices not their own strength. So when the market drops it multiplies the effect.
Note that I said I was already reading about it. I'm not claiming some kind of credit or anything of the sort, only that there were already enough people worried about that we were heading for a big fall that I was reading about it and looking into it. People were already worried, after the dot-com crash, seeing the Fed pumping up a different bubble.
Then I had many entries in 2003 and on, and it became a regular thing, and generated a lot of traffic because others were worried and reading about it, too. This was because I was reading about it at so many other sites. When I moved to the new web host I set up a Housing Bubble category.
December 29, 2010
About 200 charts and explanations, but comes down to this: Housing prices will revert to the 100-year mean. Gary Shilling: House Prices Will Drop Another 20%
October 10, 2010
You might be starting to read about the big mess with foreclosures and the paperwork.
During the bubble so many mortgages were given out and then resold to investors, and it was all happening so fast, that the paperwork was not looked at very closely. See this explanation. The result is that it might be clear that you have a mortgage and ought to be making payments, but it is in no way clear who owns that mortgage and who you should be paying, and who should be foreclosing on you if you are not.
That is the root of the huge problem that is opening up right now. It is becoming very clear that the paperwork on many of these mortgages was not done correctly, and sometimes was even done fraudulently. If an investor bought a mortgage or package of mortgages, like a CDO, it was with an assurance that the paperwork was correct. So now that investor has recourse they they might not have had before and might be able to go back to whoever sold them the toxic assets and demand their money back.
* People who have been paying mortgages might have been giving money to the wrong people. One investor has been getting extra payments while the correct investor was getting no payments. Now they are all going to have to sort that out and get the money to the correct people.
* Banks sold these packages of mortgages with assurances that the paperwork was correct and will now be on the hook to buy them back.
* Those banks might not have the means to buy them back.
We might be heading for a second round of the really big banks being insolvent again.
The 911 of the Middle Class is the consumer credit debacle. It is the gift that keeps on giving. The reality is that the housing crisis is just one piece of this really big, ugly mess. It seems to me that our President MUST call for immediate reform and take action through executive order. Call me politically naïve, but we need action. Unemployment continues to hover close to 10%, and higher in badly hit areas. Interest paid by the banks on savings ranges from less than 1% to maybe 2.5% on a good day. The consumer credit card companies, though regulated now sort of, ran naked through the streets jacking up everyone's interest rates to over 15 to 30%. Yes they have to notify the poor, irresponsible slobs now before they do things, but the banks still get to burn kerosene in the town square with no permits. And we haven't even gotten to the health insurance yahoos that have four more years for their trickery. Oh Nelly, bar the door! It's the Wild West again as the cattle are corralled - only this time it's the American people being herded to ruin by the giddy-up bankers and health insurance companies, not just the mortgage guys.
People are getting sick from worry. Their backs hurt, their necks are out, and they are grinding their pearly whites. Few sleep well at night. Pharmaceutical sales are up. The banks we saved are savaging us. They are bulldozing the Middle Class under mountains of debt. People are losing their homes, divorces are up, businesses are closing, and unemployment is rampant. The consumer credit world and their FICO scores are broken. They are based on a world that no longer exists. In two short years, many consumers have watched their scores collapse under an avalanche of debt. The FICO scores were calibrated for a different time when consumer credit cards were not the only source of money available, mortgages were not under water, and unemployment was not soaring. If we are ever to unwind this situation, these algorithms must be reset. Otherwise the banks will never lend again. The Middle Class needs a do-over, just like the banks got.
Yes sir, Obama stood up against the broad sweeping foreclosure legislation, and Bank of America seized the moment halting foreclosures nationwide. But we're all holding our breath waiting for the other shoe to fall as even Progressive strategist Mike Lux gens up the netroots to re-engage with the President and Congress. It is inconceivable that people have not taken to streets in protest over their lost pensions, and the absence of any kind of interest bearing bank account -- except on consumer credit cards. In fact, this week Robert Sheer wrote brilliantly about Obama's "No Banker Left Behind" -- while every normal person has been thrown under the bank bus. How did we allow the bail-out of every financial institution, while abandoning the common folk? Why are Democrats -- whether conservative, moderate or netroots - not able to channel this collective anger, rage and disappointment other than to take aim at one another? Given the data, there is no way out for the once resilient Middle Class without a do-over. Instead of "No Banker Left Behind" let us heal the Middle Class by fixing the credit industry; restricting the health care industry now, not in four years; and making those banks lend the money we gave them and not hide behind FICO scores. All of the Democrats are writing, but no one is demanding change now. The Tea Party has successfully harnessed the anger and rage, but has no plan. Frankly, they are just another distraction taking our attention away from the gravity of the problems.
Mr. President, come back to us as Mike Lux laments. We need you. We, in the Middle Class, are living this nightmare everyday of our lives. Figure it out, and get the Middle Class out from under. The numbers do not lie. This is our emergency, our call to action, our 911. Friends and neighbors are collapsing from the stress when they can ill afford it. Unemployment is not going away. Consumer debt is skyrocketing. Mr. Obama, Americans are not being frivolous and irresponsible as Dr. Summers would like you to believe. They are boxed in with no escape hatch. Consider enacting a nationwide job core like the WPA, putting the banks on real notice, corralling those nasty health insurance folks, redoing the credit industry, and loosening up cash. No one is sleeping at night. People are nervous and cannot see a future.
Please, inspire us again, show emotion, get messy, and let the wrinkles show. Mr. President raise your voice in outrage. Give us voice. Come back to us. The time is now.
This was originally published on the Huffington Post earlier today.
See the pearltree below for the references for this article.
August 13, 2010
This is pretty important, because, as we know, when a huge housing bubble bursts it takes an economy down with it. China's Coming Property Bust
So everyone recognizes that a correction must come soon, right? Not exactly. “I don’t see any bubbles,” 44-year-old Zhang Xin told Hong Kong’s South China Morning Post ( SCHPY.PK - news - people ). “The next few months will be a fantastic time to buy.”
Really? There were, a few months ago, 64.5 million urban flats that showed no electricity usage for six consecutive months. That’s one in four city apartments, enough housing for some 200 million people. The value of vacant apartments held by speculators is about 15% of gross domestic product. Beijing’s bank stress tests assume a 60% fall in property prices. In fact, official statistics show that property price increases slowed in July.
64.5 million empty urban flats now, but,
And there is more bad news for the residential market. Property developers, who are already building 20 million flats, have company. Local governments are constructing another 20-30 million, and other government agencies and companies are also building housing for employees.
Real trouble ahead, if China doesn't manage this properly.
July 1, 2010
Atrios notes Greenspan saying "nobody could have predicted." He was writing about it in 12.07. I'm sure he was writing about it earlier.
My Housing Bubble archives go back to April, 2005, but only because I switched over from the terrible Blogspot blogging system. I was already titling my posts "Today's Housing Bubble Post" (sometimes several a day.)
This one in March, 2005, ends with, "How many of you remember the Savings and Loan crisis, and the root causes?"
September, 2004, "let's see, massive trade deficits, massive budget deficits, housing price bubble, dollar overpriced, interest rates held unnaturally low... LOTS of rubber bands ready to snap back just after the election... Watch your backs!"
Here is one from July, 2002, the very first month of this blog. Not housing, but warning about another part of the current problem: The Pension Problem - "at least 50 WorldComs"
November 24, 2009
Have you noticed signs of "bubble mentality" in the housing market in your area? In my area the bubble is reignited by cheap credit and government subsidies. Just this week a relative told me that "housing prices will come back" because "housing always goes up." People are talking again about "snapping it up" and doing it "before you get priced out of the market." Low-end houses are getting dozens of offers above the asking price.
People have been trained to think that the way to get ahead is to buy real estate. You buy a house, after a while you use the equity you build up in that house to buy another. Either "trade up" or buy investment property. In my area most of the home sales are at the low end, are bought with cash, and are bought by investors who plan to rent the house out. (Even though rents are falling.)
People still don't get it that we were in a bubble. People don't get it that prices have not yet reverted to the mean.
Here is the hard news: The tulips will never be worth more than gold again. The "path to wealth" isn't real estate anymore.
And it isn't working. The Wall Street Journal this morning:
Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.
The bubble won't end until the bubble mentality ends. Until then a lot of people will only get hurt.
A house is a home, not an investment.
August 19, 2009
I'd really like to see actual recovery begin before everyone starts talking about "the recovery," please.
August 6, 2009
Quick question - are we seeing demand or anticipation of demand?
I am hearing the it is mostly speculators buying up the foreclosures, because they think they "see a bottom." So they are anticipating that regular people will start buying again and "things will get back to normal." And by normal they mean housing bubble, where you get rich buying real estate and sitting on it a few years.
This is anticipation of demand, not demand. It's also why you see a "dead cat bounce" when prices drop in any bubble. People are used to the bubble, and when prices drop they think things will "get back to normal" and start up again.
I wrote about this psychology in April, in Today's Housing Bubble Post -- A New Wave Of Foreclosures and Price Drops Coming,
A story:It seemed cheap at $12 but too expensive when it got down to $0.50. Think about the psychology of that. 'Cause we all know how well the speculators have been doing, right?
In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.
By the way, prices have only gone down since I wrote that in April.
So, is there any reason to believe that regular people will start buying up real estate again, and prices will start back up?
August 3, 2009
“We’re in a ‘trade-down’ environment for the first time since the 1930s.”
Instead of trading up, selling a house and using the proceeds as down payments on larger houses, people are trading down into smaller places.
But this was expected right about now, regardless of the housing bubble. The boomers are starting to retire, and need smaller houses. I have heard for decades that this will happen.
The other thing that happens now is they start selling stocks instead of buying them = also regardless of bubbles, etc. The great upward pressure on the market while the boomers invested for retirement (sadly, sold on stocks by Wall Street marketing) will from now be downward pressure as they sell to meet retirement expenses.
Everything at the worst possible time for regular people. Wall Streeters, however, are enjoying the largest bonuses ever. I wonder if there is a relationship?
May 29, 2009
Go read James Boyce: The Recovery Myth: Caveat America and take a look at the chart.
While you're at it, look at this chart as well.
I think we need to go through a period of disappointment for the "always goes up" crowd before they realize that this isn't a pendulum swinging, a natural part of the cycle, a temporary setback, etc. We went through fundamental changes in the economy in the early 1980s, and since then household debt has been increasing, wages have been stagnant, and predatory capitalism has sucked the consumer dry. The consumer is tapped out and until the nature of our economic system changes, and the people start to benefit from their own work again, things can only get worse. Top-down economics doesn't work. Democracy is the only economics that works.
May 4, 2009
I came across this at the Wall Street Journal, of all places: The Next Housing Bust
The bill that passed last summer more than doubled the maximum loan amount that FHA can insure -- to $719,000 from $362,500 in high-priced markets. Congress evidently believes that a moderate-income buyer can afford a $700,000 house.
May 2, 2009
Oddly enough I find myself back in the position of warning that the housing market may be heading to a terrible crash in the near-future. The bubble mentality has not changed at all and appears to be restarting in the very places where the bubbles were the worst. This is probably because people got used to unaffordable prices and think that a drop from unaffordable to just really, really expensive is a buying opportunity. Meanwhile government and the real estate industry are trying to "reignite" the market -- hoping that starting another bubble will put off the reckoning.
People still think that what we are going through a temporary "correction" and that real estate prices are going to "go back up," that houses are "cheap" now, that they should "snap them up" before they are "priced out." They still think real estate is the path to wealth, instead of somewhat of a burden that should only be undertaken under certain circumstances. Namely, when you plan to live there for a long, long time, and you'll pay less (including closing costs, taxes, insurance, maintenance, possible price depreciation, etc.) than rent.
Here's what I am talking about. Combine this,
As of March 1, investors can now buy 10 homes (up from four) with Fannie Mae-backed mortgages. That’s also stimulating demand.With this, Some of Us Still Think They Can Get Rich Quick from the Real Estate Bubble,
... the ad offered a mouthwatering menu of claims on "How to cash in on the biggest real estate liquidation sale in our entire United States history" and "how to maximize your profit with lucrative foreclosures."
Option ARM rates are going to be recasting soon and in increasing numbers. That's the magic moment when people can no longer make minimum payments, when they can longer make interest-only or neg-amortization payments.What that chart shows is that the foreclosure problem is about to get a lot worse. Two more huge waves of "resets" are coming. Many, many, many more homes are about to reach a point of unaffordability for a lot of their owners, one way or another those homes will also be for sale, on top of the huge inventory that already sits unsold, and this will drive prices down even further, which will trigger even more problems.
When that magic moment comes, all of those people are going to look at how high their now unaffordable mortgage payments are. Then they'll look at how much their house is actually worth relative to how much though owe. Then, maybe, they'll try one of the various initiatives to modify their mortgage terms. And then, quite likely, they'll jut walk away. [. . .] as the chart tells us, hasn't even really started yet.
Here is what I am saying: As long as a house is considered an "investment" instead of a place to live for a long time we will continue to be in a world of hurt. Real estate does not always go up.
Here is why prices can't go up any time soon: There is a huge inventory of unsold houses. The houses that were built in the last decade are too big for regular people to be able to afford to heat and cool -- and energy prices are going up. The water for the lawns will cost more and more. The gas to get to the malls and any jobs that might exist (good luck) will cost more and more. The "boomers" are retiring and selling their houses. The median price in many areas is still way above affordability by a medium-income family. You won't get sufficient "positive cash flow" over your payments from the rent you'll receive if you are renting the house.
The psychology of this is just like the stock market bubble. Things won't get better until the bubble mentality of "it always goes up" is shaken out of people. Like I said the other day
In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.Unemployment in my area is 11.2% and people are "snapping up" houses that are "cheap" at $580,000 because they were at $850,000 a year or two ago. But the median income here can't support that. It couldn't even support $350,000 before unemployment went up.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.
Here's the thing. After the stock market crash the Fed intentionally created the housing bubble to prop up the economy for a few more years. Now the consequences have arrived. If you are thinking of buying a house as an "investment" ask yourself who is going to buy it from you at a higher price, and how they are going to get that money. Will that housing demand come from a healthy job market in which people are getting raises?
Don't bet on it.
April 17, 2009
This is my prediction: there is a new wave of housing price drops and foreclosures coming as holdouts stop holding out. Only when reality intrudes on people's belief that owning a home is supposed to be an "investment" will things be able to start to stabilize. You are supposed to buy a house to live in.
The current "green shoots" euphoria will subside, and then people who have been holding out because "real estate always goes up" will stop holding out. Only then will expectations and behavior start to change in ways that begin to make a difference for the long term.
1) Unemployment is still rising, and rising fast. Unemployed people can't pay mortgages forever.
2) Houses still cost more to buy than to rent in most areas so it is still a bubble. House prices have not fallen to the level they were before the bubble, so it is still a bubble. And the average house price in most areas is still higher than the average-wage person can buy so this is still a bubble. Meanwhile there has been an increase in the number of houses (supply is up), while the boomers are starting to retire and want to sell their large house (demand is down). And unemployment is also reducing the demand side. The increase sales and price drops we are seeing is from people who are being forced to sell, not from people realizing house prices are too high.
3) Distressed people have been holding out since the recession started, but can't hold on forever and savings are running out. This includes renters so rents will have to start dropping as they run out of money for rent (feedback to #2 above) and some of the houses that aren't selling become rentals. Compare California to Michigan, and you'll understand what I am saying. Michigan stopped holding out a while back and rents and house prices have adjusted accordingly and are affordable. California still thinks things are temporary and will get back to "normal" and people are "snapping up" houses that are as "low" as $400,000 for a 3br/2ba.
4) I'm including everyone whose house is "under water" in #2, and this is an increasing number of people. Everyone thinks "housing will go back up" so they aren't walking away yet. But if it turns out that housing doesn't "always go up" they will stop holding out and go buy something based on what they can afford with no expectation that it will go up.
5) There is a HUGE inventory of houses being held off the market. Banks are holding houses off the market. People who would have sold are waiting to sell (holding out), and there are still just a record number of houses on the market now that haven't sold yet. This inventory is going to overwhelm any current increase in sales that is based on people believing we are "at a bottom." There just are many many more houses for sale or waiting to be sold than there are buyers. This is not a "crisis of confidence" where people just aren't buying because they are scared, it is a crisis of too many people not having money, just debt.
6) People buying now (those who aren't yet broke from buying real estate) will lose their shirts, too, because they are expecting that "this is a bottom" and it isn't.
What it comes down to is that expectations and behavior haven't changed yet. Real estate doesn't "always go up." Real estate is not the path to wealth, except as a bubble is developing. Real estate is not a sure thing otherwise. You would think that so many people being wiped out by thinking these things right in front of everyone's eyes would be a clue, but not yet. This is because the bubble developed over a long period, and people got used to real estate "always" going up. When people start to come down to earth and see reality and realize that owning a house can be a costly burden, then things will get to the point where stabilization is possible. As long as owning a house is seen as a path to riches things cannot stabilize.
In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.
March 22, 2009
Brad DeLong defends the current Geithner plan, in Grasping Reality with Both Hands: The Geithner Plan FAQ,
Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?I hear a lot about how the markets need to "recover" and how they are trying to "stabilize" the housing and stock markets.
A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
I submit that they are recovering. The markets are recovering from huge bubbles, and they are stabilizing to pre-bubble trend lines.
This means they have a ways to go - down - and then they will be "recovered" and "stabilized."
For example, the other day I had a post, A Long Way To Go Still,
Stocks have fallen to where they were in 1996/7. Here is a chart that shows where stocks were in 1996/7.Specifically, that chart shows where the market was in 1996/7. It was in a bubble, and it still needs to recover to the trendline that preceded that bubble.
Does anyone else see the problem?
March 6, 2009
The people in charge of the economy are basically bankers. Not too many plumbers are involved in running the Federal Reserve or Treasury Department.
Bankers will say the economic crisis is a banking problem. Bankers think banks are very, very important to the economy -- the most important component. They say things like "Our economy runs on credit." And they say the way to fix this mess is to prop up the banks -- give them trillions and trillions of dollars until the economy is fixed.
And because bankers think bankers are so smart and important to the economy we can't fire them or put them in jail, or even ask for all that bonus money back.
So they are putting all the money in the world into the banks. For some reason it isn't working.
Of course, a plumber would say that the problem with the economy is that all the pipes are clogged. Keeping the pipes working is the most important component of our economy.
And a historian will tell you that the problem is a return of the Great Depression. Not repeating the Great Depression is the most important thing to the economy.
I'm a regular person. I think regular people are the most important component of the economy. I think the problem with the economy is that regular people stopped being able to share in the benefits of the economy. I think too many jobs were shipped overseas -- without the people getting those jobs being paid enough to participate in the economy themselves. I think that not providing health care caused too many bankruptcies. I think the people who still had jobs were asked to work harder and work longer hours and accept less, so that a few greedy executives could get more and more money. I think not providing sufficient vacations and day care and pensions and empowerment used everyone up. I think regular people used up their savings and then went into debt and then finally couldn't do it anymore.
I think we should fix THAT. I think our economy might work if regular people around the world received some of the benefits from that economy. I think that the economy might work better if people did not have to get into deeper and deeper debt just to get by. I think our government (which is us, isn't it?) should make sure businesses are engaging in honest and safe and sustainable practices, provide us with human rights like health care, and make sure everyone gets good wages, and sufficient vacations, and safe & empowering workplaces and some choices and some say in things. Then maybe people would be able to participate in that economy and it would start working again.
But I'm just a regular person. What do I know?
March 2, 2009
Like the housing bubble, where house prices are still way, way above where they should be, the stock market is, too. In fact, the stock market has only fallen to where Greenspan famously warned it was too high due to "irrational exuberance."
February 4, 2009
There is all this talk about "reigniting the housing market." This is a joke.
Let me tell you what will make housing demand go up.
One: Everyone who lost a job or now works part-time since 2001 gets a well-paying job.
Two: Every group whose income has been flat since Reagan took office gets a raise to match the raises CEOs got.
Three: Bring the price of houses back to earth. Where I live you need an income of $10,000 A MONTH to qualify for the lowest-priced house on the market -- AFTER 20% down.
"Unless the stimulus bill includes some fix for housing demand, it just won't be successful," says Gear, whose coalition includes homeowner and community groups and home builders.Oh, that reminds me, Four: Make everyone forget that housing prices actually CAN go down.
After taking ALL these steps, including dropping housing prices back to where they should be, then you might see housing prices stop dropping. Any ideas that you can "fix housing" in the stimulus package are fantasy.
January 27, 2009
Last August, we wrote about the double bubble in the housing market: a more traditional bubble, then over-inflated by a massive asset bubble that drove prices up and up and up. The bigger the bubble, the bigger the pop.
In that post we wrote,
In every modern recession, the fall in housing prices follows the economy slowing down. What we have yet to see is the falling economy's effect on housing prices. So if you think prices have already dropped, and might even be reaching a bottom, we think it's the other way around: prices are about to start dropping.And so here we are. Yesterday's news of a mind-boggling 50,000+ jobs lost in a single day brings us now to the start of this second bubble popping. Because for all of economic talk about housing markets and prices and fancy new mortgages that were created, at its economic base, housing prices are just about the simplest thing in the world.
When people make more money, or more people move into a market, housing prices slowly go up. When people make less money, or people move out of a market, housing prices slowly go down.
The housing bubble popped, leading to recession, and the recession is now going to lead to a further decline in housing prices. Where will that lead?
The problem at the root of the housing asset bubble is that over the last few decades -- since Reagan and the Republican free-market supply-side, trickle-down policies took over -- Americans have not been earning more, they've just been able to buy more thanks to a litany of mortgage and other debt-raising products that compensate for the lack of earnings.
People used to be required to put 20% down before they could buy a house. How many people do you know, honestly, that have 20% to put down on a house now? How many do you know that actually have 20% equity accrued in the house they already own? We're betting not many.
That 20% down payment requirement kept housing prices in check. But that became a 15% requirement, then 10%, then 5% then a negative 10% requirement, where you could actually get a mortgage for 110% of the value of your house. Well, they helped inflate the bubble.
On top of that, loan standards used to require that people spend no more than 25-28% of their income on housing expenses. This also kept prices in check. This was also set aside, and "liar loans" further inflated the bubble. Now that all has to be undone.
Last August, real estate experts were claiming that 2009 was to be the bottom of the market, and housing prices were going to head back up. Just like they claimed that 2008 was going to be the bottom and that 2007 was when the market would turn.
Sadly, the chances of real estate prices turning back up, in real dollar terms, has vanished for the next decade at least. There are two coherent facts behind this.
First, the size of the bubble means that someone who bought a house for $500,000 in 2005 is already 20-25% down in the price of the house. Factor in inflation, and it's closer to 35 - 40% down right now, four years later. Of the millions of Americans who will lose their jobs this year, many will be unable to cover their mortgages. And foreclosures, short sales, sales right before the short sales, these will continue to increase, driving prices down even further. This all means there is little demand for high-priced houses.
Second, the bubble caused a building boom, and along with all the foreclosures there is now a huge supply of houses and condos waiting to be sold. And only then will the "shadow" market of people waiting on the sidelines for a better market in which to sell their houses kick in.
Only after all of these factors are cleared will market conditions even start to return to normal.
By 2010, perhaps 2011, perhaps we will see signs of a bottom of the real estate market, with prices having returned to their historical norms at a level that many suggest is 30-35% below where they are today.
For many, this will be personal financially troubling, even disastrous. From an economic point of view, it is the fundamental principal of supply, demand, and income proving to be true again, and a return to economic reality.
What can be done about it? The root cause of this and many other problems in our economy is the stagnation of incomes that began when Reagan was elected. Republican policies brought a massive concentration of wealth at the top with a select few reaping all of the benefits of our economic system. But this double-bubble collapsing-economy problem is costing their wealth as well. Trickle-down doesn't, and when the rest of us are tapped out by misguided policies like these it spells disaster for everyone.
January 11, 2009
A very interesting Nightline from 2007, before the housing bubble burst. But who could have known/
January 10, 2009
December 24, 2008
India is having none of it: The Left Coaster: Greenspan (U.S.) v. Anti-Greenspan (India)
December 16, 2008
This chart explains where the economy must go, and why. Sorry.
It wasn't just the housing bubble, it was debt in all of its forms.
For extra credit, see if you can identify the year Reagan and the "supply-siders" took office and any changes that occurred at that time.
P.S. I will not accept any cleaning bills.
Question: How does it help our economy for our government to borrow money from China and use it to lower interest rates in an attempt to persuade people to borrow even more money to buy even more stuff that was made in China?
Update - What I am trying to say is, loosening credit does not help the average person. If you can't afford something, buying it on credit doesn't help you afford it. Who you need is higher wages, health care, etc. Then you can afford things.
This is a solvency crisis, not a liquidity crisis. Predatory capitalism harvested the consumer, ate the consumer, shat out the consumer, and loose credit isn't going to revive a consumer that has been through that.
James Boyce, in one of his best posts ever, says that if something is unsustainable it can't be sustained. And here we are. Go read James Boyce: The Darwin Depression: Time To Say Goodbye To How It Should Have Never Been.,
It is very dangerous for an empire such as America's, faced with ebbing influence around the world, to amp up on cheap credit and buy out the store. At the end of the day, you have a frustrated country, swamped in debt and merchandise it doesn't really need, wondering how to pay the bills. Japan has never really recovered from its bubble, and its bubble is looking pretty small compared to the one we're popping.Of course, you have to click through to see the charts.
Look at this. Consider this image.
November 25, 2008
The Housing Bubble bursts on a speculator:
One of the funniest things I have seen in quite a while!
November 12, 2008
Brokers Believe Worst Is Over and Recommend Buying of Real BargainsOh, and here in the SF Bay Area I'm told that it is time to "snap up" real estate. It's at a "bottom" now, and you can actually buy a 3br, 2ba "fixer upper" for "only" about $650,000.
Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.
-- New York Herald Tribune, October 27, 1929
Snap it up.
October 23, 2008
Here's a scam I'm hearing about. Some people used the easy loan situation to buy multiple houses. They rented them out. They had tons of cash coming in, maybe not enough to cover the payments and taxes, etc. but they figured they would sell the properties after a while for much more than they paid.
Lately they have stopped making payments on the mortgages, but are still charging the rent. So lots of money still comes in, but none goes out. This goes on and on.
Maybe eventually things catch up, and they are foreclosed. The tenants are evicted - often with no notice at all, with the rent and deposit already paid in advance. The scammer ends up with six months, maybe a year of rent money. Or maybe they haven't been foreclosed yet and the scam continues.
Will the scammers be eligible for government help to "keep them in their homes" because they haven't been making their payments?
What about the people who HAVE been making their payments? They won't be eligible for help? This whole idea of helping people with their mortgages is a dangerous path to go down...
October 21, 2008
People in my area think a 2-bedroom, 1-bath house for "only" $550,000 is a "bargain" that they should "snap up" because "prices will go back up like they always do."
That is the language of bubble.
Think about this: People thought that stock in sillyname.com was a "bargain" when it fell to $20 a share, but a little while later no one thought the same stock was a bargain at ten cents a share.
September 29, 2008
OK, the problem is that there is "toxic debt" out there and no one knows who will be affected by it. The toxic debt consists of "packages" of mortgages or other debt bundled up together. So imagine buying a package of 500 mortgages. What you now own is this obligation on the part of the mortgage holders to pay you a certain amount each month for the next 30 years (or until the mortgage is paid off.) If ALL the mortgage holders continue to make their payments, it is easy to know what your monthly revenue is going to be. But when you just don't know how many people are going to stop paying, it is nearly impossible to know what this package is worth.
And that is what is causing the problem. No one knows what the revenue from these things will be, so no one knows if they themselves can make their own payments and certainly doesn't know if others can pay them. And since everyone owes everyone else so much money from so many loans, no one knows who will be paying and who won't and therefore who will go out of business or not.
And that means that you can't trust ANYone to make their payments, because the people who pay the people who pay the people who pay them... might not be able to pay. Figuring out all those relationships is called "unwinding" it. THAT is what the bailout was about -- buying that "toxic debt" so companies could say that they are free of it and still in business (or not) and therefore get or give loans (or not). That lets the situation unwind.
The root of it is the housing bubble. And the root of that was a credit bubble -- too much credit. And that CAN'T be solved. Because NO ONE should ever have bought a house for so much money, or taken out second mortgages to buy cars and stuff. And it is done so it is too late really to do anything there. Like the answer to Iraq: don't invade Iraq. Now it's too late to solve it.
The problem though is what happens to businesses that ARE doing OK, but can't get the money they need, because the whole banking system has f'ed itself up? (Why would a sound company need money? Well, when you sell something you don't usually get paid for a while. And if you are owed ten million next Tuesday and have a payroll to make tomorrow, you have to borrow a bit.)
Even sound banks can't lend because they need to keep a certain amount in reserve and have loaned out the limit of what they can loan. The Fed has been propping that up.
The Bush plan was basically to just give money to the firms that might loan them money, so they could make the loan, by buying toxic debt from them without really caring what it turned out to be worth. It is an OK idea, IF the public is protected and the process is transparent. But the Republicans would have none of that.
This bailout can be salvaged IF they really do stop executives from being paid ridiculous amounts across the board, really do get real equity in the firms so that the public gains if those firms gain from this, really do get (fair) deals in bankruptcy court for some of the holders of those mortgages so they can pay, and really do tax Wall Street firms and transaction enough to recover the money involved. That is a start and should be done right away, even though it doesn't address root causes.
But like I said, Republicans are not going to go for that and we have to wait until Bush is gone.
One solution might be to set up new banks, from scratch. But that takes a bit of time. Another might be to set up what I call a Red Flag/Green Flag system so companies that do not hold toxic debt themselves get a green flag, and then you can visualize the networks of debt that do NOT have toxic debt in the chain...
In my morning paper,
Q How will the plan affect the housing market?This is just wrong. If you qualify for a mortgage you can get a mortgage. If you do not qualify you can't and this bailout makes no difference.
A If it works as intended (a caveat with all these answers) the $700 billion should help level off home prices. The huge infusion of money into the financial sector, designed to buy up the most toxic mortgage-related assets held by banks and others, should loosen up the mortgage market, making it easier for potential home buyers to secure a loan and get into the market.
That, in turn, should stabilize prices, as more buyers make bids for homes.
The problem happened because people who did not qualify were getting mortgages. They were offered low "teaser" or "qualifying" rates. This enabled people to pay much more for houses than they should have and could afford. So in the bubble frenzy this allowed houses to go way, way up in price. Later the mortgages "adjusted" to the real rate, dramatically increasing the monthly payments.
Now the old rules are back, requiring people to prove they could afford to make the payments. Those rules are not being changed by this bailout bill. So people will not be able to "bid the price up" way beyond what a house ought to sell for.
Prices are not going back up. Give that idea up.
Instead, ask yourself why this bailout is being sold to you with lies?
September 27, 2008
I keep hearing that there is a "credit crunch" and that people and companies can't get loans. That is not what is happening right now.
There is a TON of money out there to loan. If you can demonstrate an ability to pay it back you can get a loan. In fact there is so much money out there to loan, looking for a SAFE place to get a return that if you can show an ability to pay it back you can get a really good deal right now.
This is not a credit problem at all. It is a SOLVENCY problem. No one wants to loan money to a person or company that is about to go bankrupt.
Update - OK that was a bit too simple. If YOU want to buy a house and have the down payment and good credit and can afford to make the payments, you can get a loan. They're dying to find you to loan money to you. If you are a solvent manufacturer with cash flow and a good credit history and you need a lot of cash to build a new plant the problem is that many of the banks that you would normally get a loan from are in trouble and THEY can't borrow the money to then loan out to you.
September 25, 2008
If this story, Deal said near on big financial bailout is correct I think I feel a bit better about the bailout. Not completely better, but a bit.
1) If executives are really limited in pay (and stock) by this deal they won't be involving their firms unless it is really necessary. They won't be in it for themselves.
2) If we get equity in the companies that get bailout money then WE profit if they do.
3) It is phased in, so we don't just dump all the rest of our money onto a few companies at once. Instead we can see if it is working - and a new President can change what is being done.
If we get these things, it's a start. I think we should get rid of many of the executives responsible. I also think we need to redesign the system from scratch, insist that ALL corporate money be removed from politics immediately, impost a 90% or higher top tax rate and several other things.
And about this meeting with McCain and Obama at the White house today... is it possible they're going to be injected with something, and then replaced by pod-people?
When we the taxpayers foot the bill for the excesses of the bubble, we are bailing out the lenders who enabled the behavior below:Note - at the asking price we ONLY lose $209K. But at the asking price the buyer has to come up with $90K AND have an income of $115K for a CONDOMINIUM.
* The house was purchased on 2/6/1998 for $183,000. There was a $173,500 first mortgage and a $9,500 downpayment.
* On 8/21/2002 they refinanced the first mortgage for $165,500. They actually paid down their debt.
* On 3/12/2003 they opened a HELOC for $50,000, just in case... Their first taste of kool aid.
* On 2/13/2004 they opened a HELOC for $226,000. The kool aid is flowing now.
* On 10/22/2004 they opened an Option ARM for $492,000.
* On 5/2/2005 they opened a HELOC for $75,100.
* On 10/21/2005 they opened a HELOC for $126,000.
* On 9/28/2006 they opened a HELOC for $150,000.
* Total debt on the property, $642,000 plus accumulated negative amortization.
* Total mortgage equity withdrawal, $468,500 including their tiny downpayment.
Basically, these people put $9,500 into the property and made $459,000 in 8 years.
. . . If this property sells for its asking price, and if a 6% commission is paid, the US taxpayer is going to lose $209,694.
The bailout's success depends on housing prices not dropping any more.
September 24, 2008
This is a great blog post explaining what is really happening with this financial crisis.
Governor Palin says that America is not heading for a recession, it will be another Great Depression. Go see: Palin: America may be in for another Great Depression
September 21, 2008
Why are only U.S. taxpayers being asked to put up $700 billion to bail out the world's financial system?
The U.S. is $10 trillion in debt.
Europe's economy is the same size as ours.
China is sitting on hundreds of billions if not trillions of surplus funds.
Middle Eastern countries are sitting on hundreds of billions in oil profits.
So why is the AMERICAN taxpayer supposed to suddenly step in and save the world's financial system? Tell me that?
I suspect it is because we're the ones who are currently set up for harvesting, and our Congress can be stampeded to do this with 48 hours notice.
Here is the justification for The Plan:
If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.Sorry, if houses are overpriced because of the bubble, then they are overpriced. This idea that people are not buying houses that cost $300, $400, $500, $600,000 because banks can't lend them the money is just preposterous! Even if a bank can lend the money, they can't lend the money because TOO FEW PEOPLE MAKE ENOUGH TO QUALIFY. The other day I showed that you have to have an income of $12,000 a month to buy a low-end house in the San Francisco Bay Area.
The idea that you can stop housing prices from falling back to where they should be is like the idea that you could have stopped the stock of golfballs.com from falling after the dot com bubble. I worked at a company where the stock went up to $35 a share for no reason, and then after the crash the stock went back to WHAT IT WAS WORTH: five cents a share.
You CAN'T prop up the price of house ABOVE WHAT THEY ARE WORTH. This is why the bailout plan can not work.
September 17, 2008
In the Seeing the Forest: Is Your Money Safe? post a few days ago I suggested that you make sure your money is in bank accounts that are insured by the FDIC.
Well, there is a possible hitch in that plan. As Atrios points out today, Washington Mutual is teetering and if they go under it could swamp the FDIC. Like so many other institutions FDIC doesn't have the necessary reserves to cover what is happening.
The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.What does this mean to you? Well, it might be a good idea to have some cash literally under your mattress in case your bank goes under and it takes a while for Congress and the Treasury to bail out the FDIC. That contingency means it might take a while before you have access to your money.
I wouldn't worry that you are going to lose your money -- Congress just won't allow that. But it might be a little while before you can access it. So have enough cash at home to pay for things for a little while. I'm sure that checks will still be OK for paying the rent, etc...
September 16, 2008
I'm hearing a lot of talk about plans to "stabilize" or "prop up" housing prices. Plans include cutting interest rates, providing tax credits, etc. in order to "keep prices from dropping too far."
Here is a news flash: after a speculative bubble prices always revert to the mean. You can't stabilize prices any other way except by letting them fall until they are back where they should be again.
Housing prices will "reach a bottom" and "stabilize" when the following occur:
Prices will revert to the mean. After a speculative bubble prices always revert to the mean. This is another way of saying they go back to where they should be. When there was a bubble in tulip bulbs prices went back to where they should be, which was not much above zero. Remember "dot com" stocks? They fell to reflect the actual value of the companies. Many of those companies weren't worth anything.
Prices will stabilize when supply does not exceed demand. Currently there is a HUGE inventory of unsold, foreclosed, newly-built, unfinished or whatever houses on the market. There are speculators still sitting on two, three and more houses. And there is another supply of people waiting for a "better time" to sell. At the same time there is almost no demand, because people understand that prices are falling, and they will lose their future if they buy a house at these inflated prices. AND lenders are starting to want to know if the buyer can pay back the loan, which means fewer loans for buying houses. (Especially if they start getting honest appraisals again!)
Prices will stabilize when the price of a house reflects the local rents people are paying. That is when it makes sense for a landlord to buy a property. when they can make money on the rent.
Prices will stabilize when the average-priced house in the area is affordable by the average-income person in the area.
Prices will fall to the point where houses are worth what they are worth when purchased for what they are meant for. This means that a psychological change has to occur and people stop thinking of a house as an "investment" or a savings account, and merely as a place to live.
A house is a place to live. That is what a house is. When everyone involved comes to understand a house as a place to live housing prices will stabilize. Part of that understanding involves understanding that people should never pay more than 25-28% of their income on housing expenses. (That's mortgage payment, insurance and property taxes added together. In some regions you should add heating and cooling costs to that.)
The bad news is that this means prices in many areas still have a long, long way to fall. In the San Francisco Bay Area, for example, two bedroom houses in bad neighborhoods are still being offered for $500,000. This means a $100,000 down payment, and monthly payments of $2400 PLUS insurance PLUS maybe $500 a month in property taxes. This means you have to have $100,000 in the bank and an income of more than $12,000 a MONTH to be able to buy a two bedroom house in a bad neighborhood. And this means that prices have a long, long way to fall.
August 4, 2008
Look what the Republicans have done to our economy by following their core "trickle down" economic ideology, which really means borrow and spend. They have run up a massive debt which combined with no oversight, a near total removal of regulations on corporate conduct, and watched and let Neil Bush run a savings and loan (oh, sorry, that was that other Bush presidency -- when S&L owners and Republican campaign contributors robbed us blind and bribed Senators like John McCain and then got a massive government bailout.)
We have all been hearing a lot about housing prices falling, and about the effect housing prices have on the economy. The impact to date, while real, is actually overstated. Why? Well, housing markets and their impact are the turtle of economics, they happen very very slowly. Prices have to fall and people have to sell, when they sell they, if they get less than they expected, may not spend as much as they would have if they had reaped a huge profit.
Of course, the lack of higher equity is hurting those home equity lines people were tapping like McCain at an open bar. But ask yourself, honestly, how many people do you actually know who have either been forced to sell or have sold and not made a profit? Not that many -- yet. People are still holding out.
Unquestionably the economy is slowing. Consumer debt is massive, companies are cutting jobs, inflation is rising, unemployment is a full percentage point ABOVE where it was a year ago, and with a work force of 200 million plus, that's 2,000,000 newly unemployed Americans.
Just this morning, we saw that planned July Job Cuts skyrocketed to over 100,000 meaning that unemployment will continue to climb, the economic impact of those layoffs won't be felt till mid-fall at the earliest when severance packages run out and the reality becomes apparent, new jobs are hard to come by.
But now the time is arriving when we will start to see and feel the real impact of the slowing economy -- layoffs will pick up over the next year and the forecast is for increasing and increasing unemployment, it almost surely will be another point or more higher next year than it is now.
Slowing economies manifest themselves in many ways. But the most prominent is in the corresponding fall in housing prices. In every modern recession, the fall in housing prices follows the economy slowing down. What we have yet to see is the falling economy's effect on housing prices. So if you think prices have already dropped, and might even be reaching a bottom, we think it's the other way around: prices are about to start dropping.
Even Alan Greenspan agrees with us. Greenspan Says Housing Prices Not Yet Near Bottom
Former Federal Reserve Chairman Alan Greenspan said falling U.S. home prices are "nowhere near the bottom'' and the resulting market turmoil isn't showing signs of abating.
How can this be?
How can prices that have fallen 25% in Los Angeles year over year be about to start falling? Well, because unlike every other real estate boom of the past century, this past boom was, in fact, a boom and a bubble. This numbers below, from the Case-Schiller Housing Index showcase that and how the first bubble may have popped, the excess speculation bubble, but the underlying bubble remains, and now will begin to deflate.
Prices in San Francisco were set to an index of 100.00 in January of 2000.
By January 2004 prices had jumped to 155.93, a massive jump by historical standards. This alone is a real estate bubble.
By January 2007, they had already softened a bit but still were at 211.78. This is the second bubble.
Now the index stands at 162.70. Still up 60% since January 2000.
The prices have lost some of the home equity / no money down madness bubble, but have let to be impacted by the slowing economy. And they will be
How far will they go down? Well, economics is ruled by larger trends and post bubble, prices eventually revert to the historical mean.
For example in the ten years from January 1987 to January 1997, prices increased 22%. And, fyi, that's after inflation, meaning a house purchased for $400,000 in January 1987 was actually worth less, in real dollar terms, in 1997, ten years later.
That's not a rant, that's a fact, all of these prices don't include inflation.
In real dollar terms, house prices really don't escalate much. Some studies of ONE HUNDRED YEAR time frames of the US Market show, in real dollar terms, that house prices remain flat.
How can that possibly be?
Well, we've been inundated with ten years of powerful powerful advertising messages that tell us, "housing prices always go up."
We borrowed money and spent it like good Republicans, because housing prices always go up.
We just know we can buy more and more because housing prices always go up.
But they don't.
So how can you estimate what the actual value of a house in San Francisco really is? How far can they fall? Another 40% to historical norms of growth? More? Well, Dave recently calculated how far prices in the San Francisco Bay Area could fall using three different methods.
The first was the rent to price ratio. With this method you take the average rent and calculate the amount of money you need to put into a decent investment to make the same amount. For example, if you are clearing about $833.33 per month ($10K oer year) from a rental property unit (remember to account for maintenance and property taxes and something for your time...) then the price of the property would be around $100,000 for a 10% return ($10K is 10% of $100K) and $200,000 for a 5% return (sufficiently higher than a CD pays right now).
So if houses in your area are renting for about $1400-1500 per month this is a rough way to tell that similar houses might be worth around $150K at best. If you double that and they rent for $2800-3000 then house prices would be $300K. And those prices assume that rental prices are not dropping.
James lives in a rental house in Boston which at market peak might have sold for $800,000 or $900,000 but now rents for $2,400. What does the landlord clear? Not $28,000 because he pays the taxes so more like $20,000. If you had $400,000 in the bank would you be happy with 5% return? Perhaps. But that's the highest amount you can estimate the house is worth in the market. And guess what? 10 years ago, the house was worth about $350,000. So it actually is about the right value.
The next method involved the average person in the area's income affording an average priced property. Look around at prices in your area, and average wages. At what price can the average person (or husband-wife) (or husband-husband/wife-wife in Dave's California and James' Massachusetts) buy a house? Right: uh-oh.
The third method is to look at the historic mean plus inflation. When prices triple in a few years, then when they correct they have to fall to 1/3 of the peak (plus inflation). It's just the way it is.
When Dave calculated these for the Bay Area all three methods came out the same and showed that prices can still fall as much as 30-40%. We say "can" but an economist might say "should."
If it falls 30% from that index where it is now, it only drops to 112. Can't happen? Well, remember that 1987 - 1997 DECADE, it was up 22%. Now, after 8 years, it would be up 12% on that index. That's pretty normal growth to be honest.
And what is cumulative inflation of the past 8 years? Let's make it easy on ourselves, and we'll say an average of 3%. The 100 Index goes from 100 to 126 with the combined effect of eight years of Inflation at 3%.
You see, housing is not the perfect "always goes up" investment. And it is clear that the housing prices in San Francisco and many more places could have 30% - 40% to go down from where they are today.
But, you guessed it, the news is actually worse than this. First, there is a huge amount of excess housing inventory on the market. So this needs to be factored into your thinking about where prices can go. On top of the need for prices to revert to the mean, these extra houses have to find buyers before prices can stabilize. This is supply and demand, nothing more, nothing less.
Next is the effect of gas prices. Many, many housing developments have gone up in areas that are far from city centers and far from non-automobile transportation like light rail or even buses, and buyers are going to be factoring the price of gas now. Along with this, the price to heat and cool the monster homes that developers tended to build will become a consideration and will reduce demand for these houses.
Another factor is that the "boomers" are starting to retire, and will be selling the larger homes in which they raised their families or ended their careers, looking for apartments, condos and even senior facilities. This will also reduce demand.
And, just as the price of energy was not considered when these houses were designed and built but has lately become a factor, one day the implications of global warming will start to sink in. In particular, is the house sufficiently above sea level? Is it located near an area that is experiencing increased fire danger? LOTS of Californians are starting to think about these issues.
But if you think we're wrong, and the above factors are non factors. Consider the recent decline in the stock market, General Motors and their 15.5 billion dollar quarterly loss, that's the recession that's here.
This is the big one: A falling economy always forces housing prices to fall. Even when housing prices are not in a bubble to start with a recession forces prices down. And this hasn't even started acting on housing prices yet -- the falling prices we have seen are not because the economy is slowing, they are causing the economy to slow. The slowing economy will make this worse as people are laid off around the country. The foreclosures we are seeing today are not the result of people losing their jobs, but they are causing people to lose their jobs. THEN the foreclosures that come FROM people losing their jobs will start.
There are no, none, nada, zilch factors that we see driving any hope for a "bottom" in housing prices any time soon.
Thanks Republicans for ignoring the country's problems for so long, refusing to regulate the financial companies, refusing to address the need to find alternative energy sources, refusing to fund mass transit alternatives and refusing to provide oversight and enforcement of our laws. Thanks for bringing us to where we are today.
They borrowed and spent. We borrowed and spent and drove the housing prices up through a double bubble. One bubble may have popped. The next one will soon.
Post-Script: We worked on this post last week and over the weekend. This morning, The New York Times has this article: Housing Lenders Fear Bigger Wave Of Defaults. It echoes many of our arguments in this piece.
June 15, 2008
I was driving this morning and clicking through the AM radio stations. On one station there was a "financial advice" show, with a guy talking about how to make a "236% return" by buying foreclosed houses and renting them out until prices go back up.
In case you were wondering who is buying houses right now, it's the people who fall for this stuff.
Where will housing prices fall to? Prices will revert to the mean, and the mean is where prices were before they started going way up, plus a bit for inflation. Another way is to realize that the price of the house, if rented out, should be low enough that you have positive cash flow after all expenses, and that cash flow should be a lot better than you could get from buying bonds because of the work you are putting into it. (In my area that means house prices should be about a third what they still are.)
But before they do that they will fall a bit below the mean. Here is why. There are several factors that will pressure housing prices even when they reach the pre-bubble level.
- Before prices can normalize people have to stop thinking that prices will go up again, and get rid of property they are "holding on to." So at the point where they reach the normal level there will be little buying interest. In fact people will understand that buying a house can be a good path to financial ruin.
- Everyone who wanted a house really, really had a chance to buy a house. If they didn't buy a house when you could get money without even stating whether you had a job...
- Next there is the huge buildup of inventory. There are many, many more houses out there than there were before the bubble.
- There are all the housing developments built way outside of areas where people work, with the expectation that they would buy at as lower price there and when prices went up they could sell and make the down payment for a place closer to the job. Now that gas prices are up no one will want to buy these.
- Then there is the coming rise in utility prices which means that the McMansions are going to cost too much to heat and cool.
- The baby boomers are retiring, which means they will want to sell bigger houses and rent or buy smaller houses.
May 28, 2008
When will the housing market reach a "bottom? I hear this question a lot. I hear a lot of people talking about "jumping in" when they think there is a "bottom" so they can "catch the next wave" and "make money." They want to "put some money into real estate."
The market will reach a "bottom" when you no longer hear about the market reaching a "bottom." This is because "bottom" is a term of speculation. The market will reach a bottom when all of the speculation and speculators have been squeezed out, and don't want to get back in again. And then housing prices probably won't and shouldn't go up more than the rate of inflation after that.
A house is not an investment, it is a place to live. You buy a house to live in it, not to get rich. You buy a rental property to make an income off of the rent, not from the increase in price. Price appreciation does not have a place in these calculations.
So here is the answer to when the bottom is reached: when the average person can afford the average house and when the rent you get from a rental unit is just right to yield a desirable rate of return on the investment, after figuring in the costs of maintenance, depreciation, property taxes and other costs.
We are a long, long way from that point. That point will be reached when prices revert to the historical mean. When you look around YOUR neighborhood and think that the average price is just right for the average person, and no one -- repeat: no one -- is talking about making money from housing, that is when prices will have settled back to where they should be.
May 27, 2008
Prices of single-family homes plunged a record 14.1 percent in the first quarter from a year earlier, marking a pace five times faster than the last housing recession, according to the Standard & Poor's/Case Shiller national home price index reported on Tuesday.And this is before the ripple effects of recession hit. They will ripple out from this to construction, automobiles, etc. And then the resulting job cuts will ripple back to the housing market. The fallout from the housing bubble's bursting is still only just beginning.
. . . Falling home prices have become the scourge of the housing market that is seeing its worst downturn since the 1930s. Home values since last year have been dropping below balances owed on many mortgages, leaving borrowers with no equity and more likely to succumb to foreclosure.
May 16, 2008
Haven't had enough of foreclosures and financial crises? Don't worry, there's more to come. This pretty much guarantees it: Fannie Mae eases down payment rules,
Fannie Mae said Friday it is easing rules on down payments on home mortgages, replacing a policy that required higher payments in markets where home prices are declining.
April 29, 2008
We'll see a bottom when the average person can afford to buy an average house - and wants to. We are a long, long, long way from that now -- and keep in mind that we're about to see a big reduction in what the average person can afford as the recession takes hold.CNN's Money.com today: No brakes on housing prices8
As housing price losses extend, he said, the fall-off in demand for homes will deepen. And Schiff expects to see a national price decline of 30% - and by as much as 50% in the worst hit markets.50%? In my area a 50% drop from the peak would bring houses down to maybe $400K. Will the average person around here be able to afford a $400K house a year from now, after a year of recession and after a tightening of loan standards? Not a chance. The price runup here saw a tripling to quadrupling of prices. And then they build thousands and thousands of houses in areas surrounding the SF Bay. So prices will have to fall by more than 50% - and the recession will have to end, and loans have to be available, and gas prices will have to fall a lot so commuters can drive to these houses - before houses will start selling again. Sorry for the bad news.
Yes, I do understand the cascading implications of that. It means that pretty much everyone who bought a house (or borrowed money on their home equity) since about 2001 - at least in this area - is going to be owing more on their mortgage than the house is worth. In many cases they will owe a LOT more. And they will decide to either be "good consumers" and sacrifice to protect the bank's profits by making payments for 30 years on a house that is worth hundreds of thousands less than they owe (while their neighbors move in to the foreclosed house next door with payments that are less than half what they are paying), or they will make an economic decision to "walk away," giving the house back to the bank, and make a fresh start. What do you think most people will do?
It's just getting started and home prices dropped 12.7% in February from the previous year. Home prices fall record 12.7% in past year, Case-Shiller say,
The decline in U.S. home prices quickened in February, with prices down a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor's. "There is no sign of a bottom in the numbers," said David M. Blitzer, chairman of the index committee at Standard & Poor's. Prices in 19 of the 20 cities have fallen over the past year, with prices in all 20 cities falling month-to-month for six straight months. The biggest declines were in Las Vegas and Miami, with declines of more than 20% in the past year. Prices in Charlotte, N.C., are up 1.5%.Remember, this is before the impact of a recession on housing sales.
When will we see a "bottom?" (The point where prices stop falling.) We're nowhere near a bottom. We'll see a bottom when the average person can afford to buy an average house - and wants to. We are a long, long, long way from that now -- and keep in mind that we're about to see a big reduction in what the average person can afford as the recession takes hold.
April 24, 2008
Sales of new homes plunged in March to the slowest pace in 16 1/2 years as a two-year housing downturn extended into the start of another spring sales season. The median price of a new home in March compared to a year ago fell at the fastest clip in 38 years.This made me laugh out loud:
. . . The median price of a home sold in March dropped by 13.3 percent compared with March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.
Some analysts said they believe the slide in sales may be close to ending although they said any rebound is likely to be slow and anemic with prices continuing to fall, possibly until this time next year.Listen, the problems we have seen so far have come about BEFORE the economic slowdown. Think about what that means. These foreclosures and people otherwise needing to sell their houses, etc., are not the result of a stressed economy. And we're just beginning to have a stressed economy. So we haven't even started to see the usual problems that come from layoffs, etc. So no, I don't think we are at a "bottom." Sheesh.
April 15, 2008
Home foreclosure filings surged 57 percent in the 12 month-period ended in March and bank repossessions soared 129 percent from a year ago, as homeowners struggled to make mortgage payments, real estate data firm RealtyTrac said on Tuesday.This brings up something I have been thinking about. So many people are "looking for the bottom." (Signs the bottom is behind us?) They think things are "leveling off." Well guess what, all the problems, all the foreclosures, all the credit card debt, all developed before the economic downturn began. And now we are entering a recession. No question. And a recession means that people are going to lose jobs, companies are going to go under, etc. And those people and companies are not going to be able to make their payments.
So no, we are not looking at a "bottom." We're looking at the beginning.
March 21, 2008
There is a fine, fine line between a gain and a crushing decline:
March 17, 2008
For years and years and years people have been saying that Americans are taking on too much debt. The government has been borrowing too much. People are using credit cards too much. Second mortgages used for consumption are too much debt. There is too much corporate and financial system debt.
Debt has been fueling the growth we have been seeing for some time. It fueled the housing bubble. And now with the housing bubble bursting the debt bomb might also be exploding.
You might be hearing about problems on Wall Street and with the big financial firms. You might be hearing about the mortgage market having problems.
Well today you'll be hearing about big financial firms having serious trouble. Over the weekend a number of things happened. The big firm Bear Stearns basically went under and the government helped JP Morgan buy them for $2 a share. And the Federal Reserve did an emergency rate cut last night, with another expected tomorrow.
Asian stock markets are way down, and when the markets open this morning there are fears that it will drop.
Part of what happened with Bear Stearns is there was a "run." People were worried that the company would go under and asked for their money. And Bear Stearns didn't have it. This means that other people will be wondering if their money in other firms is also at risk, and might be asking to get it out. This might be what happened over the weekend.
If you have any money in money-market accounts, move it into federally insured bank accounts. You can lose money if it is in these accounts. You shouldn't have any money anywhere that is not federally insured until this thing blows over. Federally. IF, if we are looking at a systemic problem the private insurance companies will also be affected.
Have I mentioned that you shouldn't have any money anywhere that is not federally insured right now?
March 7, 2008
Go see his chart of housing prices, to see how far prices have yet to fall.
A house near us was offered at $800,000, after several months only one offer came in for $500,000, and they accepted it. But all I can think of is some sucker just spent $500K for a 3 bedroom house that is going to be worth about $300K next year. Another in our area, asking $750K, sold at $450K. Still way too high.
March 4, 2008
The bloggers were calling it a few years ago, talking about how this was a bubble, and that it would lead to a dramatic collapse. The professionals weren't seeing it. The lenders were acting like prices alway go up. (Remember the same thinking with the stock collapse?)
And now here we are.
"Housing is in its "deepest, most rapid downswing since the Great Depression," the chief economist for the National Association of Home Builders said Tuesday, and the downward momentum on housing prices appears to be accelerating.And this is just the beginning. Prices always revert to the mean, and the mean is going to be mean.
The NAHB's latest forecast calls for new-home sales to drop 22% this year, bringing sales 55% under the peak reached in late 2005. Housing starts are predicted to tumble 31% in 2008, putting starts 60% off their high of three years ago. "
February 22, 2008
If they did realize that house prices could fall then they would be discussing this possibility in the context of the Office of Thrift Supervision's proposal to have the federal government buy up bad mortgages, paying the current market price of the homes. The plan would give the current holders of the mortgage a certificate equal to the difference between the money outstanding on the mortgage and the current value of the home. The reports then tell us that if the house price does not rise back to the amount owed on the mortgage by the time it is sold, then the mortgage holder will eat the loss.Answer - if prices fall further, the taxpayers get to hand even more dollars to the banks. Republicans bail out big business and let the rest of us pay for it. Always. The branding is that Republicans are anti-government and fiscally responsible, but it's just words. Look at what they do, not what they say. They get into office, destroy the government, destroy small businesses, and hand all of our tax dollars to their cronies. Did I leave out the part about getting rid of all oversight (regulation and law enforcement) so the big corporations can rob us blind?
That's fine, but what happens if house prices fall further? I didn't hear this scenario mentioned in Market Place's discussion of the proposal on the radio this morning, or indeed in any other reporting on this proposal.
Government buying bad mortgages? Great, just great.
January 28, 2008
Sales of new homes plunged by a record amount in 2007 while prices posted the weakest showing in 16 years, demonstrating the troubles builders are facing with a huge backlog of unsold homes.CNN: New home sales: Biggest drop ever,
New home sales posted the biggest drop on record in 2007, according to the government's latest look at the battered housing market, as a year that saw a meltdown in the mortgage market and a drop in home values ended with yet more signs of weakness.What is there to add to that? I keep hearing that "we're at a bottom." I got yer bottom, right here.
December sales came in at an annual rate of 604,000, the Census Bureau report showed, down from 634,000 in November, which was also revised lower.
The reading was well below the consensus forecast of 645,000, according to economists surveyed by Briefing.com.
. . . No bottom yet Adam York, an economist with Wachovia, said the report confirms fears that the housing market won't bounce back anytime soon.
"We're expecting sales to decline into at least mid-2008," he said. "We think housing still has a long way to go." [emphasis added.
January 27, 2008
There is a discussion over at Calculated Risk on whether it is "smart" to just walk away from a house that is worth less than you owe. Many states allow you to do that, without owing the difference. In those states, giving the house back pays the loan in full if it is a first mortgage. (Yes, it ruins your credit rating, but you could save hundreds of thousands of dollars.)
What about the moral question? Aside from whether it is smart or not, is it moral? I wonder if a better question is, when dealing with a big corporation, should you ask what the corporation would do if the shoe was on the other foot? I'm thinking about corporations that use the bankruptcy laws to get rid of union contracts and pension obligations, and that always do the "smart" thing at the expense of the employees, customers, public and even shareholders...
What do you think? Especially our conservative commenters?
January 22, 2008
Go to The Agonist to read today's housing bubble post: Most Clueless Banker of the Year Award. It is a comprehensive explanation of that happened, including a timeline.
[. . .]Like the real estate industry in general, banks believe and tell their customers that home values never go down. Their internal models are predicated on this assumption. Everything communicated to the consumer tells them that their home is a piggy bank of ever-increasing value. Withdrawing cash from the piggy bank is made as easy as possible. Consumers are given loans allowing them not to pay any interest at all and build up a balloon balance, which will assuredly be taken care of down the road by market appreciation. These option characteristics allow the banks to charge even higher points up front and stick penalty clauses into mortgages forbidding the homeowner from paying off the loan until the bank receives all fees due them.Go read.
Update Market has been open for four minutes, Dow down 439... NASDAQ down 118.
Update 2 Market open 15 minutes, Dow down 369 ... NASDAQ down 78.
Update 2 Later, markets recovered for now, DOW down 50 ... NASDAQ down 23.
People are nervously waiting for the stock market to open. So the Federal Reserve made and "emergency" 3/4 point drop in interest rates. This is a very big drop.
The backdrop: stocks around the world plunged yesterday while our market were closed for the Martin Luther King holiday.
Stock markets across Asia plunged even farther and faster on Tuesday than they had on Monday, as anxious sellers dumped huge numbers of shares on worries that an economic slowdown in the United States could drag down growth around the world.
. . . The Japanese stock market dropped 5.7 percent, for the worst two-day loss in 17 years, while the Australian stock market tumbled 7.1 percent, its worst single-day loss in nearly two decades. The Shanghai market lost 7.2 percent while the Hang Seng index in Hong Kong plummeted 8.7 percent.
Inflation is running at 4.1% and the Fed's interest rates are now 3%. The Fed will PAY banks 1.1% to borrow.
What this means: bailing out the stock market by dropping the dollar, increasing inflation nd trying to trigger an asset bubble like the bursting housing bubble. Remember, it was ridiculously-low interest rates that caused that bubble.
By the way, I'm not sure if I have mentioned this: Do not leave any money in "money-market funds" right now. Make sure that your money is in FEDERALLY INSURED ACCOUNTS. 'Federally' is the key word there. And learn the rules on how much you can have in any accounts and still be insured.
January 21, 2008
The problems of the housing bubble are catching up to us. The real estate crash has started, bringing big losses to the big financial firms -- over $100 BILLION in write-downs so far!
And in the past few weeks the stock market has been catching on that things are not so great anymore. But today - with markets closed in the U.S. in honor of Martin Luther King Day - stocks have been plunging around the world. Markets in Asia down as much as 7%, even more. Europe as well. Canada down.
Dow futures are down dramatically - 540 points, more than 4% - which could mean a very bad day tomorrow - or not.
“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”Remember what I said about money market funds. Make sure that your money is in FEDERALLY INSURED ACCOUNTS.
The sell-off was evenly distributed from West to East, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul and Bombay. The Frankfurt Stock Exchange’s Dax index plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in Bombay’s Sensex index was the second-worst single-day tumble in its history.
January 20, 2008
Also titled "I told you so!"
In the LA Times today, How we cashed in before the housing crash,
Our friends said we were crazy. Relatives asked whether we were in financial trouble. But in April 2005, my wife and I bailed out of the American dream. We sold our two-bedroom Pasadena condominium and became renters again.Sold too early. And now they're saying "We're at the bottom." Right.
We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit -- and a sign that the market had been pumped up beyond reason.
. . .But at the time, a lot of people thought we had sold too early. To stay on course, I adopted a personal anthem. It was a Public Enemy song that hit big in 1988 during the previous real estate run-up: "Don't Believe the Hype."
December 30, 2007
So far we have been hearing about a "problem" with "subprime" mortgages that went to people with bad credit. Then we heard about problems with "adjustable" mortgages where the payments go up after a period of time and mortgages with no down payments and mortgages where the borrower didn't have to verify how much income they really had. You can readily see where there could be problems with all of those.
My prediction for next year is that the problem will spread to regular mortgages given to regular people with good credit. The reason I think this will happen is that I think housing prices are going to fall quite a bit. If prices go to where they should be according to historical norms, or according to the historic ratio between rents and prices,or according to what always happens when bubbles pop, then they are going to fall as much as 40-50%. Maybe even more. (And never mind that the "boomers" are starting to retire and will not need the houses many of them have further increasing inventory and decreasing demand...)
So next year we're going to see a LOT of regular people with regular mortgages go "underwater" -- meaning they will owe a lot more than the current market price of their houses. In many states the regulations allow people to get out of their mortgages by giving the house to the lender and not have to make up the difference if the mortgage is for more than the house can sell for. And many will do exactly that. (Which will even further increase inventory and put pressure on prices.)
So next year I predict the credit crisis is going to get a LOT worse.
December 28, 2007
A bulletin arrived in my e-mail this morning with the headline, "U.S. new-home sales fall more significantly than forecast in November" All I could think to say was "NOT"
No, everyone who actually learns about what is going on with housing is surprised that ANY new homes were sold, and that ANYone is stupid enough to buy ANY house until the price reverts to the mean. This is a popping bubble, people. If you buy a house now it will be worth a third less in two years. ANY house! Remember how many stocks went to zero after being "golden" for so long? This is what HAPPENS when bubbles pop. DUH!
Sales of new U.S. homes fell by a more-than-expected 9% in November to a seasonally adjusted annual rate of 647,000, the Commerce Department reported Friday. Economists surveyed by MarketWatch were expecting new home sales to drop to a seasonally adjusted annual rate of 710,000 in November. Meanwhile, October's sales rate was revised downward, to rise by 711,000, or 1.7%. They were previously estimated to have risen to a seasonally adjusted annual rate of 728,000. In the past year, sales of new U.S. homes are down 34.4% nationwide.
December 26, 2007
Home prices in 20 major U.S. cities were down 6.1% on average in the past year as of October, according to the Case-Shiller price index released Wednesday by Standard & Poor's.This is only the beginning.
Since October 2006, prices in 10 cities fell 6.7% -- a record drop. The prior largest decline was 6.3% in April 1991.
. . . Miami sustained the largest drop over the past year, with a decline of 12.4%. Next came: Tampa, with a drop of 11.8%, Detroit with a drop of 11.2%, and San Diego with a drop of 11.1%.
By the way, does this price drop take into account 4% inflation? If not the real decline was quite a bit greater.
December 21, 2007
Here's what's going on in the financial markets:
Part 1: Mortgages
After the 2001 stock market crash the Federal Reserve dramatically lowered interest rates. This made the monthly payment on mortgages very low, so more people could afford to pay more for houses, or could refinance their house. This increased the demand for houses, making housing prices rise. Because housing prices were rising people started speculating, "flipping" and a number of other things that made prices rise into a bubble - with people buying houses solely because of the price increases.
So the price increases caused prices to increase, which cause an exponential price rise curve to develop.
Because of this, builders started flooding the market with housing developments and condos, greatly increasing the inventory of houses.
While all this was going on people with poor credit histories were able to get mortgages without any down payments, at a very low interest rate that would "reset" after 2 or 3 years, and without even having to show how much money they made.
Then came the day when prices stopped rising. Which caused all of those people who buy-because-prices-are-rising to stop buying. But many of them were "leveraged" -- they had huge loans that depended on rising prices for them to be able to sell to pay off the loans.
Then for some reason more and more of the poor-credit-history people who had no down payments and never proved how much they made started to not pay their monthly payments. Go figure.
And a lot of other things happened that caused people to stop being able to pay their mortgages. So more houses came on the market at the same times as fewer buyers wanted to buy and prices started to drop. As prices dropped people who had bought or refinanced their houses started finding that they owed more than the house is worth.
So lots of people will be foreclosed on and lose their houses, etc. and the lenders who loaned out those mortgages will eat the losses. Except,
Part 2: Credit markets
The lenders borrowed the money to make those loans. Or they "sold" the loans to "investors" looking for monthly payments at a higher interest rate than banks pay. And those investors borrowed the money to buy the loans. And because many people are defaulting on their mortgages, the people who made or bought them aren't getting paid, so they soon won't be able to make their payments.
So the companies that loaned the money to them won't be paid. And they borrowed the money to make those loans, and because they might not be paid back, they might not be able to pay the companies that loaned THEM the money.
To understand where this vicious cycle ends go to the beginning of the previous paragraph and read it again. Each time you finish, go back and start again. Keep doing that until you get the point. In other words, anyone who has made any loans is - or at least should be - wondering if they will be paid back.
(By the way, deposits in a bank, brokerage, etc. are part of that loop. Make sure that your money is moved to federally insured banks. If you have money in a money market fund you are somewhere in that loop and your money has been loaned out and you are not insured. That money has been loaned out to someone who doesn't know if they can pay it back. That's what a money market fund is. That's why it pays higher interest -- because risk = return.)
So that in a nutshell is what is going on. Until everyone "comes clean" and lets everyone else know how much "exposure" they have to bad loans, there is no reason to trust that they will be able to keep making their own payments on their own debt. And coming clean, or "unwinding" this might involve playing things out until everyone who is going to go bankrupt actually does so until we see who is still standing. Anyone who made loans or borrowed money is facing some level of risk right now. Anyone.
December 14, 2007
In for a Surprise... Go read it, but I just had to reproduce the chart here:
In August, 2006, I wrote a post Today's Housing Bubble Post - How Far Can Prices Fall?
Suppose rents are $2000 a month for a 3-bedroom house. Subtract from that repairs, maintenance, etc., and let's say you are clearing $1800. Instead of trying to calculate property taxes let's just say $400 per month - which is lower than what they would be ($650) if purchased now but you'll get my point in a minute.That's SF Bay Area pricing, by the way. And prices tripled here in the bubble, so that sounds about right.
So you're clearing about $16,800 a year from your investment. Let's say you are shooting for a 7% return. That means the house SHOULD be priced at about $240K, approx 1/3 of current pricing.
But I'm not going that far in my prediction. You have to account for ten years of inflation - which is higher than reported. Also the dollar drop means people from other countries will find higher prices cheap and the Bay Area is a premium place to live. And other demographic factors. But I don't rule out a 50% drop. Prices here really shouldn't be much higher than maybe $400K
December 9, 2007
It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.It's widespread:
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.So why the "freeze?" What does that really accomplish?
The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"Cuomo in New York is going after some of the fraud - the inflated appraisals, for example. If I had money in these mortgage-backed investments rated AAA I would be demanding MY money back - and if you are in a money-market fund, you just might be who I am talking about.
But you wouldn't have any money in a money-market fund NOW, would you? You're smarter than that.
Update - Mish's Global Economic Trend Analysis says the fraud / lawsuit avoidance theory from the above article is "preposterous."
The goal of the freeze is not to "stop bond investors from suing". The goal of the freeze is to Peddle a Sucker Trap Disguised as Hope.Go read.
However, so few people will qualify for the program (see Little Hope For Hope Now Alliance) that no one can possibly claim it will stop much of anything, including lawsuits or foreclosures.
December 5, 2007
This is the story of part of my life:
h/t Big Picture
There's more ...
So the song got me thinking, and I found this. I never knew that the words in the song were also in chronological order!
Here is the video from that page:
And lots of people have made their own videos. There is a great full-screen one here.
Here is one:
December 3, 2007
The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance.Don't feel too badif the underpinnings of this crisis are more complex than you have time to grasp. Partly it is happening because things became so complex.
How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.
For just one illustration of the complexity, here is what happens when a "CDO' is "unwound." A CDO is a big batch of mortgages and other debt, backed by collateral. That's the C in CDO: Collatoralized Debt Obligation. To find out what is really in your CDO you should examine each one of the mortgages (car loans, etc.) to see if the mortgage-holder really does have all the income that is on the application, and whether the house was appraised properly or is really worth less than what is still owed on the mortgage, etc. And that is just one level of the complexity.
You might ask, why didn't the buyers of these CDOs check these things before they bought them?
December 1, 2007
Fallout from the bursting of the housing bubble is rippling further and further out. In the last few days three state government funds have realized they are in big trouble and are experiencing "runs." And as a result, in the next few days we are likely to hear about the same thing happening in many other states. These are funds that cities put their cash into until it is needed to pay city employees, teachers, etc. The cities have people who understand finance watching the money, and they understood this so they started getting their money out. And because the fund had lost some of the money in mortgage-backed securities, it couldn't give money back to all of the cities, and had to say "no more withdrawals until this gets sorted out." The ones who asked for their cash first are OK, the ones who didn't will lose out.
This is exactly what could happen to money markets and banks as people realize this is their money everyone is talking about in the news. YOUR money. Find out where your money is, your parents' money, etc..
The crisis underscores how the upheaval in credit markets could spread to affect mainstream investors, institutions and their employees. In recent weeks, local authorities in regions as disparate as Australia and Norway have reported similar problems.and Florida freezes $15 billion fund as subprime crisis hits,
[. . .] Most of the securities were short-term debt backed by mortgages and other assets, and issued by off-balance sheet investment vehicles, many of which have run aground in the credit squeeze. Lehman Brothers sold most of the distressed assets to the Florida fund, people familiar with the sales said.
Florida halted withdrawals from a $15 billion local-government fund Thursday after concerns over losses related to subprime mortgages prompted investors to pull roughly $10 billion out of the fund in recent weeks.
. . . The decision shows how far this year's subprime-fueled credit crisis has spread. Florida's Local Government Investment Pool, which had more than $27 billion in assets at the end of September, is like a money-market fund that's supposed to invest in ultrasafe assets to provide participants with a secure place to stash spare cash. But even these types of funds have been hit by the widening crunch.
"It's spreading into areas that people didn't expect and this is a good example," Richard Larkin, a municipal bond expert at JB Hanauer & Co., said.
Controversy is heating up in the state over who is at fault for having put $20 million, about 3 percent, of the state's roughly $725 million cash pool this summer into an investment fund called Mainsail II -- two weeks before its sterling ratings crumbled to junk.And Run on Montana Fund,
The investment met all of the state's investment criteria, but exposed the state to the mortgage market-related losses that have roiled credit markets for a few months.
Montana school districts, cities and counties withdrew $247 million from the state’s $2.4 billion investment fund over the past three days after officials said the rating on one of the pool’s holdings was lowered to default.But don't think for even a minute this is limited to state government funds. It's just that the municipalities that had cash in those funds understood what was happening. MANY holders of money, especially money-market funds are in exactly the same situation, except the depositors in money-market funds are not necessarily as sophisticated as municipal finance officers, and don't yet realize what all of this means.
But it is starting to hit the news.
The billions of dollars in subprime losses are now tainting a mainstay investment vehicle whose safety consumers take for granted: the money market mutual fund. Bank of America, SunTrust, Wachovia and Legg Mason are among the institutions reportedly taking steps to prop up money market funds that contained worrisome securities. . . .Is your money market fund safe?,
[. . .] Many money market funds have sought higher-yielding investments such as subprime mortgage-backed securities. High-yield funds don't get those yields by investing in government securities. For instance, according to Money Fund Intelligence, the average yield for the top-yielding prime individual money market funds is 5 percent, while the average yield for the top-yielding Treasury individual money funds is 4.39 percent.
. . . if you have money in a fund that's exposed to subprime mortgages, consider finding one that has no commercial paper and shift your money to that.In search of a security blanket,
Meet money manager Axel Merk... Recently, Merk took more than $100,000 of his personal savings out of money market funds. These funds take your cash and put it into highly rated -- and therefore, supposedly safe -- investments, giving you a set interest rate.That's right, this is a time to know where your money is. If you are not sophisticated enough to be reading a money-market prospectus - and you aren't - put your money in a bank up to the limits of FDIC insurance, or into treasury bills. Period. When everyone else is worried it will be too late to get your own money out. What do you have to lose by doing that? Why keep it where it is instead of getting it into a FEDERALLY insured back account, until all of this gets sorted out?
Problem is, some of them got entangled in the subprime mess. That's why Merk dumped his money market funds.
[. . .] You can't assume that all money market funds are safe. Remember, they're not insured by the FDIC. Now, banks do offer something called money market accounts. Just like savings accounts, they are protected by the FDIC, but they have a lower return.
The question is, when do people realize that their own money might be at risk, and start asking for it? That is when it hits the fan, like it has with the Florida and Montana state funds. No one knows where all this mortgage risk is right now, and you don't want to be the one who asks for your cash just after the cash runs out.
November 28, 2007
Sales of existing homes fell further in October even as more homes came on the market, driving the supply of homes to the highest level in 22 years, the National Association of Realtors reported Wednesday. Sales dropped 1.2% to a 4.97 million seasonally adjusted annualized pace in October, the real estate advocacy group said. The sales pace is the lowest since 1999. The inventory of unsold homes rose by 1.9% to 4.45 million, representing a 10.8 month supply, the highest since 1999. For single-family homes alone, the inventory of 10.5 months is the highest since July 1985.
November 27, 2007
If SoCal prices fall 25%, then prices in other areas - like Miami and Las Vegas - will probably decline a similar amount.Keep in mind my own observation that houses near here are not selling even after a price cut of almost a third.
OTHER bubbles, like the "dot com" bubble, have seen prices fall right back to where they would have been without the bubble. In fact, haven't ALL other bubble fallen like that? Why will this one be different? And that means you're looking at 50% or more.
November 24, 2007
A for-sale house around the corner from us (SF Bay peninsula) has gone through all the stages, and now even the "price reduced" sign is gone. The house is empty. The flyers are still there, however. Walking the dog the other day I picked one up to see what they're offering.
The house, a modest three-bedroom in a modest neighborhood, was originally listed at $725,000. Now that is crossed off by hand on every flyer and $495,000 is written in.
So, marked down from $725,000 to $495,000 it still isn't selling. No one is looking at it. It is still priced higher than the average person can or will pay for a house like this to live in this neighborhood. House prices around here still have a long way to fall, but you can't expect other houses around here to sell for a lot more than $495,000 now - not with that one sitting there. But most of them are still priced in the $600-700,000 range.
That leaves a long way left to fall.
November 14, 2007
I guess I'm just ahead of my time... I've been warning about money market funds, and now it's really hitting the news:
Millions of U.S. investors with cash in these mainstream vehicles are asking that question as some leading banks, investment managers and mutual-fund companies take steps to shield money funds from potential losses on troubled debt in their portfolios.Do you want your money in a place where managers are "taking steps"?
So what can you do?
... if you are concerned about your money fund, experts say there are some ways to investigate.No shit.
The first -- calling the company to ask about the fund's holdings -- might seem daunting given the complexities of many of these portfolios. But in fact the request can test a company's responsiveness to its customers, observes Bruce Bent, who created the money fund 37 years ago.
"A number of funds will say 'we don't give that out,'" said Bent, whose New York-based firm, The Reserve, has about $80 billion in money-fund assets, none of which, he adds, is exposed to subprime loans or SIVs.
If the fund company isn't forthcoming, he says, "take your money out and say goodbye."
And there's always what I have been recommending:
The ultimate safe move would be to put your cash in a bank money-market or savings account - they're insured up to $100,000 and sport comparable yields to money funds, which recently averaged about 4.6% for taxable investors.Meanwhile,
,With money-market mutual funds scrambling to cover their costs as credit meltdowns spread, some advisers say they're seeing more interest from high net-worth clients in short-term, bond exchange-traded funds.Not just yet?
One of those is Jerry Slusiewicz. But the president of Pacific Financial Planners in Newport Beach, Calif., doesn't recommend investors pull out of their money-market funds just yet.
Several major financial services firms have moved to protect money-market assets in recent months. The latest is Bank of America Corp., which on Tuesday said that it plans to use a $600 million reserve to shore up a group of its money-market funds. Another big financial-services firm, Legg Mason Inc. has made public plans to establish credit lines of roughly $238 million to keep intact credit ratings of two money-market funds.Did I read that right? They're putting hundreds of millions in to cover their money market funds so people don't lose money? So if you have money in one of those funds the only reason you aren't losing money is because the fund managers are pumping their own money in to shore it up? So what happens if the parent companies are in trouble - which they certainly will be if they'reputting in hundreds of millions to cover the money market funds!
Remember, the money you have in a money-market fund can drop - you can lose principal.
And Atrios has found a General Electric managed fund that is already in such trouble it is paying its depositors only 96 cents on the dollar.
Ypu'll be seeing this headline every month for a while, I expect: Foreclosures nearly double from year ago: report,
Cities in California, Florida and Ohio dominated the 25 U.S. metro areas with the highest home foreclosure rates, though rates jumped in most of the top regions during the third quarter, RealtyTrac said on Wednesday.HOW many foreclosures?
. . . A broad credit and liquidity crisis during the third quarter exacerbated U.S. housing industry troubles, pushing sales sharply lower and unsold inventory to record highs.
Overall, residential foreclosure filings nearly doubled in the third quarter from a year earlier, RealtyTrac reported earlier this month.
Stockton's rate of one foreclosure filing for every 31 households, the highest of the metro areas, was a surge of more than 30 percent from the prior quarter. A total of 7,116 filings on 4,409 properties were reported in the metro area during the quarter.
In Detroit, the foreclosure rate of one filing for every 33 households ranked second and was more than double the number of filings reported in the previous quarter, RealtyTrac said. A total of 25,708 filings on 16,079 properties were reported.
November 5, 2007
This is actually a very big story. The world's richest model (earned $30 million in 6 months this year) is now refusing to take her pay in dollars. She is insisting on Euros. This is huge because it will penetrate past the financial pages and cause people to start understanding what is going on - possibly starting a stampede from the dollar.
The world's richest model has reportedly reacted in her own way to the sliding value of the US dollar - by refusing to be paid in the currency.
Gisele Bündchen is said to be keen to avoid the US currency because of uncertainty over its strength.
The Brazilian, thought to have earned about $30m in the year to June, prefers to be paid in euros, her sister and manager told the Bloomberg news agency.
Smrat people got 7% fixed-rate loans because ARMs were obviously trouble. Their defaulting neighbors had 1% "teaser" rates and now get 5% loans as a bailout. The smart ones lose out all the way around.
Right, because in a free market, capitalist economy it would be wrong for home prices to drop and for me to have to spend less on the condo I'm looking to buy. Since when was it anybody's job to artificially drive up the prices of homes in my or any other neighborhood? Since when is it wrong for someone else to have their home value decrease because of a market adjustment, but it's right for me to have my future home cost increase because of an artificial intervention? They lose money, it's wrong - I lose money, it's right. Uh huh. I am just increasingly sick and tired of every bail out of the rich and the poor, from the right and the left, coming at the expense of those of us in the middle who never seem to get anything, except an increasingly large bill for helping everyone else at our own expense. I'm not opposed to helping others. I am opposed to never being on the receiving end of such help. The Republicans help one side, the Dems the other, and no one thinks of the middle.People who did the RIGHT thing is losing out now. On Wall Street people who took depositor and stockholder money, gambled it away, and got rich in the process are getting sweet bailout deals. Fairness should become an issue in this.
In the continuing story of the bursting of the housing bubble, this weekend at an emergency Board meeting Citigroup President Charles Prince "resigned" and the company announced it will write down up to $11 billion more for mortgage losses. But guess what? Citigroup problems grow,
Citigroup Inc's (C.N) problems deepened on Monday as it was unable to assure investors a potential $11 billion write-down for subprime mortgages won't grow, and its nearly pristine credit rating was downgraded.Also, Citigroup is sitting on $134.8 billion in questionable assets. A lot of that could go, too.
The largest U.S. bank also reduced previously reported third-quarter profit because of credit market problems that it said could reduce future cash flow.
In my opinion it is urgent that everyone understand how FDIC limits work. This is a time when you need to know that your own money is safe. The limit is $100,000 per bank, $200,000 per couple, and $250,000 for retirement accounts. If you are lucky enough to have more than that in one bank, split it up. Ad I did say bank - not brokerage. And tell your friends and relatives to do the same.
November 1, 2007
U.S. residential foreclosure filings nearly doubled last quarter from a year earlier, and appear set to increase into 2008, a report said on Thursday.One results: soon there will be many more homes on the market. And remember, MOST of the "ARM resets" - loans with low "teaser" or "qualifying" initial rates that reset to high interest rates - happen into next year. So expect the foreclosures to continue to increase for at least a year. The housing market is nowhere near a "bottom."
Foreclosure filings for July-September rose to 635,159, representing one in every 196 households and a 30 percent jump from the second quarter, according to RealtyTrac, a marketer of foreclosure properties based in Irvine, California.
October 31, 2007
This is really a housing bubble consequences post, but really they all are... With a 3.9% GDP report, the dollar at a record low, oil pushing $95 and various "regular people" costs rising at double-digit rates our Fed cut interest rates today. They are trying to put off the inevitable reckoning.
The fuse is now lit. The structural imbalances worldwide have never been greater and the fuel at the end of the fuse is enormous. In addition, amount at risk increases every day.My wife is British, so we look at exchange rates. And we look at the price of oil. And food. We're losing a percent or so of our buying power each week.
The interesting thing is that no one knows how long the fuse is. For some inexplicable reason everyone acts as if they can get out before the stick ignites. It's simply not possible.
October 30, 2007
The 13-month-long decline in home prices in 20 major U.S. cities accelerated in August, with prices dropping a record 0.7% in the month, according to the Case-Shiller price index released Tuesday by Standard & Poor's Corp.Key line: "Prices could fall much further."
Prices were down 4.4% in the past year, the fastest decline in the seven-year history of the 20-city index. In the original 10-city index, prices have fallen 5% in the past year, the biggest decline since 1991.
"The fall in home prices is showing no real signs of a slowdown or turnaround," said Robert Shiller, co-creator of the index and chief economist for MacroMarkets, in a release.
... Millions of homeowners who took out adjustable-rate loans in 2005 and 2006 face sharply higher mortgage payments this year and next, with foreclosures having already soared as the result of payment resets.
... Prices could fall much further. In a separate report, analysts at Goldman Sachs figured that prices in California are about 35% to 40% overvalued, compared with past relationships between home prices and income growth. The median sales price of a home in California was $589,000 in August, Goldman said, but should be around $375,000, they said.
October 24, 2007
Sales of existing homes and condos fell 8% in September to the lowest level in at least eight years, further evidence that the credit squeeze in mortgage markets is hurting home sales, the National Association of Realtors reported Wednesday.
Sales of existing homes and condos fell to a seasonally adjusted annual rate of 5.04 million, the lowest since 1999, when the real estate group began tracking combined single-family and condo sales. The 8% drop was the largest monthly percentage decline in that period.
Nationwide, sales of existing homes were down 19.1% in September compared with September 2006.
October 18, 2007
Housing crisis in California:
October 11, 2007
It gets worse and worse. Foreclosure filings nearly double,
Foreclosure filings across the U.S. nearly doubled last month compared with September 2006, as financially strapped homeowners already behind on mortgage payments defaulted on their loans or came closer to losing their homes to foreclosure, a real estate information company said Thursday.And remember, the real wave of ARM resets is yet to come. (ARM resets are adjustable rate mortgages resetting out of their initial, low "teaser" rates to the real interest rate. When this happens mortgage payments can as much as double.) Figure maybe five months after an ARM reset until the homeowner is in such trouble that a foreclosure occurs.
So this is just the beginning of the beginning. And as more and more foreclosed properties come up for auction, prices WILL fall, and fall... until houses are again selling for what they are worth.
October 8, 2007
A homebuilder is marking homes down from $630,000 to $285,000. The front-page story includes a large graphic: "$630,000 - current residents -- $285,000 prospective residents"
A San Francisco Bay Area homebuilder can't sell all the houses it built in a development in Manteca. Current residents paid up to $630,000 for a 3-hour round-trip commute. But now they're auctioning the remaining homes, starting at a more realistic price of $285,000.
This headline is going to have a huge impact because it means every homeowner in the SF Bay Area who thinks they have a $630,000 property now will begin to realize that in the end, if they want - or need - to sell that house, they are going to be competing with $285,000 prices.
Let that sink in a while...
October 5, 2007
This one takes some explaining. The big homebuilders borrowed money and bought up a lot of land. Now they are in trouble, running out of cash to run their businesses and pay down the debt - and the only way they can hope to surive is to build MORE houses to sell at a steep discount, because this brings in at least SOME cash.
Of course, the effect on the rest of the economy will be terrible: MORE houses dumped on an already-saturated market, at even lower prices. This will force prices to drop further, and more people to be in trouble.
We could make fun of the analysts that claimed the homebuilders would have strong cash flow during a downturn (due to less investment in land and improvements) and that the homebuilders were "land banks". Those investment ideas were Dumb and Dumber!
But the more important point is that the homebuilders struggle to survive shows why the builders are still overbuilding. Building homes, and selling at a deep discount, is the only way they can liquidate land to raise cash and pay down their debts in the current environment. This is why housing starts are still too high and will likely fall further over the next few quarters.
October 1, 2007
Home-builder stocks rose Monday after a Citigroup analyst raised his stock ratings on several of the sector's largest companies on signs the worst may be behind the embattled industry.Worst may be OVER?
Let's see, highest housing inventory ever, difficult to get credit, mortgage rates rising in response to Fed bailout attempt, prices far, far, far above what an average person can afford, a huge wave of ARM resets coming next year... and some probably-23-year-old analyst sees a price bottom?
Oh yes, go buy stocks based on a bottom - suckers.
September 27, 2007
Median sales price down 7.5% in past year, biggest drop in 37 yearsThe worst is yet to come. Maybe a year from now is the time to start thinking about loking for a bottom.
Sales of new homes dropped 8.3% in August to a seasonally adjusted annual rate of 795,000, the slowest sales pace since June 2000, the Commerce Department estimated Thursday.
Sales are now down 21.2% in the past year, with no sign of a bottom in the crippled housing market.
... The median sales price fell 7.5% to $225,700 compared with a year earlier, the largest year-over-year decline in 37 years.
September 26, 2007
Imissed this yesterday because I was traveling... S&P: US Home Price Decline Accelerates,
U.S. Homes Post Steepest Price Drop in 16 YearsSo the situation: a huge wave of "ARM resets" - steep rises in monthly payments for holders of adjustable mortgages - is only beginning. Then it takes several months before they get into enough trouble to be forced into foreclosure. At the same time, it is hard to get a mortgage now, the largest number of homes for sale in history, and everyone aware that prices are falling and it is just stupid to buy a house now. So prices are going to be dropping, maybe a lot, for some time. There is no way around it.
The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.
(Feel free to add other "doom and gloom" factors in the comments.)
September 18, 2007
The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2006 and jumped 36 percent from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes amid a national housing slump.The BIG ARM Reset jump - increasing numbers of people with adjustable mortgages that adjust to much higher monthly payments - hasn't happened yet. And then it takes several months for them to fall behind on payments and eventually face foreclosure. So this is just the start of a wave - a tsunami.
... The national foreclosure rate last month was one filing for every 510 households, the company said.
Nevada reported one foreclosure filing for every 165 households — more than three times the national average. The state had 6,197 filings in August, an increase of 21 percent from July and more than triple the year-ago figure.
California's foreclosure rate was one filing for every 224 households. The state reported the most foreclosure filings of any single state with 57,875, up 48 percent from July and an increase of more than 300 percent from August 2006.
Florida had one foreclosure filing for every 243 households. In all, the state reported 33,932 foreclosure filings, up 77 percent from July's total and more than twice the year-ago total.
Georgia, Ohio, Michigan, Arizona, Colorado, Texas and Indiana rounded out the 10 states with the highest foreclosure rates.
September 14, 2007
This is filed under Housing Bubble, because this is more fallout from the bubble's bursting. Here's the deal: financial institutions loan out money to people (and companies and countries, etc.) who, because of the "credit crunch," might not be able to pay it back. That means that the financial institutions might not be able to pay back the money THEY owe, including to depositors.
It's housing bubble burst time - do you know where YOUR money is?
Calculated Risk: Northern Rock Bank Run, with photos:
From Bloomberg: Northern Rock Customers Crowd London Branches, Withdraw MoneyA bank run happens when people feel that a bank might be having trouble, and realize they might not be able to get THEIR money out of the bank if they don't hurry. Everyone knows that a bank (money market, stockbroker, etc.) only keeps so much cash on hand. So they show up to withdraw their money before it is too late. It is a "run" because you have to run down to the bank to get your cash before other people get their cash. Only the first people in line are going to get their money.Hundreds of Northern Rock Plc customers crowded into branches in London today to pull out their savings after the mortgage-loan provider sought emergency funding from the Bank of England ...
In the US bank deposits up to $100,000 are insured by the government, so if the worst happens you will eventually get your money (up to $100,000) -- after all the paperwork gets done. So if you feel like running down to the bank, you don't really need to take out more than you will need to pay you bills for a few months.
September 8, 2007
Here is one more problem from the housing bubble - all those big houses they built cost much more to heat and cool than regular houses. As utility costs rise this will compound the monthly-payment problem. Then, on top of that there's the maintenance costs like eventually re-roofing them, watering the lawns, etc.
And then there is the terrible environmental impact. Very few were built withing walking distance of stores and public transportation so cars are required. How many of the world's trees were cut down to build them?
And, if the public somehow manages to regain their senses, these house monstrosities - like the huge, pre-oil-embargo land-barge cars of the 1970s - will become even harder to sell.
The just-popped housing bubble has left behind a couple of million families in danger of losing their homes to foreclosure. It has also spawned a new generation of big, deluxe, under-occupied houses bulked up on low-interest steroids.
The National Association of Home Builders (NAHB) estimates that 42 percent of newly built houses now have more than 2,400 square feet of floorspace, compared with only 10 percent in 1970. In 1970 there were so few three-bathroom houses that they didn't even to show up in NAHB statistics. By 2005, one out of every four new houses had at least three bathrooms.
...the manufacture and transportation of concrete to build a typical 2,500-square-foot house generates the equivalent of 36 metric tons of carbon dioxide.
... To make outsized suburban manors more interesting, builders tend to avoid boxy forms, loading up their product with multiple rooflines and gables, dormers, bay windows, and other protuberances. Such houses have more surface area than does a squared-off house of the same size, thus requiring more fossil-fuel to cool and heat them. Additional energy is wasted by the longer heating/cooling ducts and hot-water pipes in a big house.The whole article is worth reading.
... Square-footage fever emerges in a doubly wasteful form in cities where normal-sized, sound, comfortable houses are being demolished to make way for bigger, more luxurious ones.
September 6, 2007
The number of homeowners receiving foreclosure notices hit a record high in the spring, driven up by problems with subprime mortgages.And don't forget, NEXT year is when MOST adjustable mortgages reset upwards, greatly increasing monthly payments. This is just the very tip of what is coming.
The Mortgage Bankers Association reported Thursday that mortgage-holders starting the foreclosure process in the April-June quarter reached 0.65 percent, marking the third consecutive quarter that this figure has set an all-time high.
The delinquency rate, which tracks the number of people who are behind in their payments but have not yet entered the foreclosure process, was also up sharply during the spring, rising to 5.12 percent of all loans, up nearly three-fourths of a percentage point from the same period a year ago.
August 31, 2007
Have you been responsibly managing your debt? Have you been sacrificing so you don't get in over your head? Saving instead of borrowing? Accepting lower returns on your money rather than getting greedy and taking on high risk for higher yields?
Bush announced "home loan relief" today. What does this mean?
In short, a huge taxpayer transfer to the rich. Partly by moving more mortgages to federal insurance - meaning the government pays the investors when the mortgage fails. Also getting the housing agencies to raise the limits on "conforming" loans, in other words,a higher threshold before a loan becomes a "jumbo." Which means taxpayer involvement in the higher-priced housing, too.
Bush said the government will work toward, "lowering down payment requirements, by increasing loan limits, and providing more flexibility in pricing." Also to, "change its federal mortgage insurance program in a way that would let an additional 80,000 homeowners with spotty credit records sign up." In other words, MORE bad mortgages.
Jill at Brilliant at Breakfast on the housing bailout,
Don't kid yourself for one minute that this is about helping low-income Americans stay in their homes. If helping low-income Americans stay in their homes were the goal, the 9th Ward of New Orleans wouldn't still be in ruins two years after Hurricane Katrina, its citizens dispersed elsewhere, the better to turn Louisiana into a Republican state and a cash cow for Bush's corporate cronies. This Administration has dragged its heels on helping the most high-profile poor people in the country, but when the wealthy start to feel the effects, suddenly this president rushes into action.
August 30, 2007
As I observe the professional reaction to the "mortgage crisis" and the credit crunch - coming from the bursting housing bubble - I am struck by the degree to which everyone is looking entirely to the Fed to bail out the big players. It is an expectation. It is the understanding of the financial class that they will be bailed out by the government - at the expense of the taxpayers. Again.
The stock market swings violently up or down depending on what they think the Fed might do. Everything depends entirely, entirely, entirely on the Fed -- and not on the supposedly "free market." Everyone is so used to the government stepping in and bailing out the fat cats. It happened after the S&L crisis. (In fact, it was a feast for the Republican-connected.) It happened when the Long Term Capital Management hedge fund got into trouble. So they are sure it will always happen. And they continue the financialization and securitization foolishness.
For decades massive debt has been building up - both on the government and the consumers' books. In fact, Democrats keep reducing the borrowing when they are in office -- Johnson balanced the budget, Carter submitted balanced budgets and Clinton was actually paying down the debt. But then Republicans get in and cut taxes on the rich, and the borrowing just SOARS! No one denies that we are in an unsustainable situation that has to lead to crisis eventually. But every time a reckoning comes near the Fed bails out the fat cats, and a new and bigger wave of financial foolishness commences.
Imagine if you were sitting at a blackjack table, and every time you ran out of money the manager of the casino said, "It's OK, we'll cover it for you." What kind of blackjack player would you be? Would you be a careful player, managing your money, ready to step away from the table when you lost your limit? Or would you just bet more and more and more, until the casino manager came over against to tell you not to worry, he'll cover it for you? You wold act exactly like the financial professionals are acting.
The Fed will bail out the fat cats again, which means that when the reckoning finally does come it will be a tsunami that realigns the entire world order.
August 28, 2007
An "ARM Reset" occurs when an adjustable loan (ARM) changes (resets) from its initial "qualifying" rate, and goes up to its real interest rate. This reset can cause the monthly payments on the mortgage to as much as double.
Much of the trouble we are seeing now in the mortgage markets now is coming from people not being able to meet their payments. But the problem of this rise in payments has only just barely started! Many, many more mortgages reset through the rest of this year -- and then the number really takes off next year.
How many more mortgages reset next year than this year? Go look at the chart of upcoming ARM resets: Calculated Risk: ARM Reset Charts. This is huge. We have only seen the smallest beginning of the problem. This is going to be really, really big next year. A really bad problem.
And the reason there was a "qualifying" rate? The buyer couldn't afford to buy the house and needed something to get around this limit. So they used a "qualifying rate" to accomplish this - to make it look like the buyer could afford the payments. In other words, after an ARM reset, people can't afford to make their monthly payments. Se can talk about the reasons loans were given to people who can't afford to make the payment in another post.
Update - Bonddad shows the same graph with some explanation, in this post.
U.S. home prices fell 3.2% in the second quarter compared with a year earlier, Standard & Poor's reported Tuesday.It's only the beginning. The psychology hasn't set in yet. What happens next is sellers hear this news and start to realize that the game is up. So they'll start to accept that they have to lower prices if they are going to sell. And this doesn't even take into account that foreclosures are going to start serious price drops soon.
It's the largest decline ever in the 20-year history of the Case-Shiller home price index.
A year ago, home prices were rising at a 7.5% pace nationally.
... Meanwhile, prices fell 3.5% in the past year in 20 major cities and 4.1% in 10 major cities.
I'mnot trying to be doom and gloom here, I'm just describing what has to happen when we have seen the kind of price bubble we have seen. Prices have to revert to the mean.
August 27, 2007
US consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.Ripples.
Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years.
Sales of existing homes dropped for a fifth straight month in July, falling to the slowest pace in nearly five years, while home prices fell for a record 12th consecutive month.Listen, people, this is only just starting. Where I live in California it hasn't even started - owners don't understand yet that the "price" of their house isn't what they think. And MOST of the adjustable loan payments haven't even started ratcheting up yet.
Oh no, this is barely just starting. Prices have to fall a tirid to a half of where they are to get back to normal, and to where regular people can afford to buy a regular house again.
August 26, 2007
The effect of the "credit crunch" are starting to ripple out.
You've probably been reading the houses "at the top" are still selling. Expensive houses require big mortgages - called "Jumbo" loans. And getting a jumbo loan has gotten much harder, which means there will be fewer buyers for the houses at the top, which means they are going to sell fewer of them, which means prices there will also have to start dropping. Growing mortgage crisis spreads to jumbo loans,
The evening before their home purchase was to close, Gary Becker and his wife, Amy Dacus, learned their mortgage to buy a Woodinville home had evaporated.Why is this happening?
Unlike subprime borrowers defaulting on loans, the couple had a stellar credit score, a 20 percent down payment, strong employment history and had effortlessly purchased three prior homes.
But their new home's $670,000 sales price was large enough to require a "jumbo" loan, so named because it was for more than $417,000, the limit the nation's largest mortgage backers will fund.
The credit crunch isn't universal.Update - I just have to add this. Maybe we need a version of the Darwin Awards for people who just refuse to keep up with the news and try to buy a house in this market. The people who are not getting the jumbo loans are dodging a huge bullet. What kind of idiot is trying to buy an expensive house in a market where every single news story talks about how no one can sell a house, no one can make their payments, and prices are going to drop dramatically in the next few years?
Borrowers with good credit scores, good jobs and a down payment still have ready access to 30-year "conforming" loans — those funded through banks and mortgage brokerages by Fannie Mae and Freddie Mac, the giant federally chartered companies that fund the bulk of the nation's mortgages.
But Fannie and Freddie cap their loans at $417,000, which means that banks and mortgage companies must tap other sources, such as mortgage-backed securities, for jumbo funds.
In recent weeks a skittish Wall Street has loudly signaled its unwillingness to invest in these securities.
I mean, if you can get a seller to accept an offer for 1/3 less than they want for the house - well maybe then, but you still might lose your shirt of prices fall to where they should be, which is about half where they are.
August 22, 2007
Bloomberg.com: U.S.,Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, became the first firm on Wall Street to close its subprime-lending unit and said 1,200 employees will lose their jobs.
The number of U.S. homes facing foreclosure surged 58 percent in the first six months of the year, the latest sign of mounting problems in the mortgage industry, a data firm said Monday.
... "We could easily surpass 2 million foreclosure filings by the end of the year, which would represent a year-over-year increase of over 65 percent," said RealtyTrac CEO James J. Saccacio.
California, Florida, Texas and Ohio were among the states with the highest number of homes receiving foreclosure-related notices, the firm said.
Accredited Home Lenders Holding Co., reeling from the collapse of its planned sale to Lone Star Funds, will shut more than half of its mortgage operations and fire about 1,600 people.And another Capital One to shutter mortgage-banking unit, cut 1,900 jobs,
The subprime lender expects to close its 60 retail branches and five support centers within two weeks and halted for now U.S. wholesale mortgage applications from brokers, San Diego-based Accredited said in a statement today. The cuts will shrink Accredited's workforce to 1,000 from 2,600.
The battered residential mortgage market and slumping housing sector are claiming victims left and right these days, and the Washington area is feeling some of that pain.Update -- Sorry - I had Capital One yesterday. Substitute this: HSBC to close Indiana mortgage office,
The latest news comes from McLean-based Capital One Financial Corp., which is ceasing operations at its wholesale mortgage-banking unit, GreenPoint Mortgage Funding Inc., resulting in the elimination of 1,900 positions.
Capital One will close GreenPoint's Novato, Calif., headquarters along with 31 locations across 19 states.
The U.S. mortgage unit of HSBC Holdings PLC said on Wednesday it will close an office in Indiana, a move that will affect about 600 workers, amid a severe downturn in U.S. credit and housing markets.And this: Ariz.-based finance firm to lay off 541, shut mortgage unit,
The widening mortgage slump hit the Valley again Tuesday as one of Arizona's largest financial firms announced the layoffs of 541 people.
Scottsdale-based 1st National Bank Holding Co. said it will discontinue its national wholesale-mortgage unit and close mortgage centers in Virginia, North Carolina and Nevada, keeping open just one operations facility, in Tempe.
August 21, 2007
We're seeing the tip of the tip of the iceberg of the debt bomb. The "subprimes" were the first to surface, and we're seeing the ripples of that spreading.
First National Bank of Arizona has become the latest casualty in the mortgage collapse that is gripping U.S. lenders.And more, More Mortgage Firms Fire Workers,
The privately held bank has shuttered its wholesale mortgage lending division, according to mortgage brokers who have spoken with the lender.
Trouble in the mortgage market spread Monday as Capital One cof said it will shut its GreenPoint Mortgage unit and fire 1,900 employees because it expects tighter credit to squeeze both lenders and home buyers out of the market.More and more bad news as the ripples spread, Thornburg Loses $930M Selling Mostly AAA Mortgage Securities,
SunTrust Banks sti also said Monday it expects to lay off about 7% of its workforce to cut costs...
The news follows an announcement Friday that First Magnus Financial was closing down and had let go its nearly 6,000 employees. And Countrywide Financial, cfc the nation's largest mortgage lender, told employees it would cut an unspecified number of jobs in its unit that specializes in loans for those with good credit but often undocumented income or assets, The Wall Street Journal reported.
Thornburg Mortgage Inc. said on Monday that it lost roughly $930 million selling billions of dollars worth of AAA rated mortgage securities, while reducing borrowing and unwinding interest-rate hedges.Later this year and throughout next year many, many adjustable mortgages reset to current rates from their initial "qualifying" rates, and many mortgage-holders will find themselves with whopping payment increases. And even THAT is only the first wave of the debt bomb.
August 20, 2007
I strongly recommend reading The Rise and Collapse of Wall Street's House of Debt | The Agonist,
To understand the accelerating financial crisis that is afflicting various global markets you have to realize there are two credit creation processes at work in the world today. The first is the traditional one run by the central banks through the commercial banking system. This process has increasingly been shunt aside in the past ten years by a new credit creation mechanism run by the Wall Street investment banks. It is this new lending machine which is now imploding, and which threatens to impose severe economic pain.
The unwinding of the housing bubble takes us way beyond mortgages and into the financial markets of Wall Street. That's why I titled this Today's Housing Bubble Post. (By the way, it's a generic title. We can have several Today's Housing Bubble Posts on a given day.)
Reading this, iIt strikes me that it is describing a situation in which investors are borrowing to purchase these instruments, and to some extent the instruments are a repackaging of the loans that went to the investors tp purchase them.
August 16, 2007
The market is tanking again today. What we are experiencing is just a taste of the long-expected debt explosion. Just a little taste.
Today investors are being forced to sell what they have to meet margin calls because they had borrowed so much and the losses are adding up. They have to raise cash. And now everyone understands that everything is dropping, so they want to get out while they can.
But here's the thing - yes, "sub-prime" loans are going bad. But it isn't just the sub-primes that are a problem. Regular people with good credit borrowed too much as well. They bought houses that cost too much, based on low initial "qualifying" rates. Others refinanced so they could buy SUVs. And most of those loans will be resetting in the next couple of years, forcing payments to rise as much as 50-100%. Meanwhile the price they can get for their houses is dropping.
So this isn't the debt bomb going off, this is the fuse being lit.
August 14, 2007
More and more...
Trading was halted yesterday in shares of the lender Thornburg Mortgage Asset after they plunged 47 percent, the most since their 1993 initial public offering. Earlier, five brokerage firms downgraded the stock and Moody’s Investors Service cut its debt rating amid turmoil in the home loan market.Not just sub-primes...
The company announced later that it would delay payment of its quarterly dividend, 68 cents a share.
Brokerage firms cited concerns that Thornburg, which specializes in high-quality, prime jumbo mortgages, might need to sell assets or reduce its dividend because of a liquidity squeeze.
... The nation’s biggest lenders face a worsening cash shortage because investors who buy their loans are not bidding, and bankers have cut off credit lines. The fallout has toppled at least 70 mortgage companies.
Do you have money in "money-market funds?" If so, you need to read this.
You have been hearing about a "mortgage meltdown" and a "credit crunch." You might have been wondering how this could affect you. Well, the mortgage and credit markets are part of what is sometimes broadly referred to as the "money market." Your money-market funds buy various types of "instruments" that generally offer higher yields than bank savings accounts. These instruments can include mortgage-backed securities.
Well, one money-market fund just asked for permission to stop redemptions. This means that the people who have money in that money-market fund will not be able to get their money out - at least for a while. From this news report, Sentinel management seeks to halt redemptions: report,
Sentinel, a money market mutual fund firm for commodities, has asked the U.S. Commodities Futures Trading Commission to allow it to halt client redemptions until it can conduct them in an orderly fashion, CNBC television reported on Tuesday.
"We had previously thought the market would return to some semblance of order and that our clients would not join in the panic," Sentinel wrote in a letter to clients CNBC said it had obtained. "Unfortunately this has not been the case."
Until things sort themselves out I suggest that you get at least a portion of your money into a safe, FDIC-backed account. If things melt down further you won't be able to get at it for a while, but eventually the government insurance will cover it. If it is not government insured you might just lose it -- because the insurance companies also have their money in these instruments.
August 13, 2007
Mortgage problems are causing a tightening of credit, which means fewer people can purchase houses, even as inventories are already at an all-time high. In other words, no one can sell their houses, which causes more foreclosures which means more credit tightening and higher interest rates which means prices drop which means buyers stop buying which means no one can sell their houses which means more foreclosures which means...
Problems in the nation's mortgage and housing markets are feeding off each other and creating a "vicious cycle," analysts at Stifel Nicolaus & Co. said Monday.
"The rapidly increasing scope and depth of the problems in the mortgage market suggest that the entire sector has plunged into a downward spiral similar to the subprime woes whereby each negative development feeds further deterioration," wrote analysts Chris Brendler and Michael Widner in a research note.
[. . .] Underscoring the shaky conditions in housing, Stifel Nicolaus said its earlier forecast calling for home-price deprecation between 10% and 15% may prove optimistic.
The analysts see a worsening tailspin as housing prices fall harder, leading to more credit deterioration.
August 9, 2007
I am on vacation, driving around Michigan. There are For Sale signs everywhere. Three per block in many areas. It is very unusual to pass two blocks without seeing a For Sale sign. And the real problem hasn't even started to hit yet. The "resetting" of adjustable mortgages has only just started, and the credit crunch - making it harder to get a mortgage - is only a few weeks old. And, of course, prices have not even barely started to fall to where the average person can afford to buy an average house. They will, because they have to. The next couple of years will be very hard for many people.
Some of the stories in the news: Slowdown Restricts Access to Home Loans,
The dream of owning a home is fading away for many Americans with less than stellar credit.Mortgage seekers caught in squeeze,
A growing credit crisis is prompting lenders across Massachusetts to cut back suddenly on new loans, making it difficult for even creditworthy borrowers to get mortgages and causing some home sales to fall through at a time when the housing market is already slumping.Major bank stops approving home equity loans, credit lines
Ripples from the subprime mortgage meltdown are spreading, affecting even borrowers with stellar credit and making popular home equity loans tougher to find.
The latest example: A major national lender stopped approving new home equity loans Monday.
More and more lenders are yanking away loan programs and changing borrowing guidelines as they struggle to please bond market investors, who indirectly provide financing for the nation's mortgages.
July 30, 2007
Early in June I wrote about a house down the street marked as 'Coming Soon'. I just thought I would mention that the house now has a "Price Reduced" sign on it.
And in other housing-bubble news, Signs of contagion in the U.S. housing downturn
By the end of last week, any lingering hope that the housing downturn in the United States would be contained had vanished. As this week begins, signs of contagion seem to be everywhere.American Home Mortgage tumbles on liquidity issues,
Unnerved by mounting losses in mortgage-related investments, investors have started to shun tens of billions of dollars in corporate debt offers as well - and seem likely to go on doing so for months to come. That would stanch the flow of easy money that has fueled the leveraged buyout boom, which would, in turn, expose the extent to which stocks have also come to depend on cheap credit.
Stocks took a dive last week because debt-driven buyouts had long boosted the share prices of targeted companies. Stocks have also benefited directly from easy money because public companies have borrowed heavily to buy back their own stock, a ploy to drive up earnings per share.
American Home Mortgage Investment Corp shares fell sharply Monday after the company delayed its quarterly dividend, announced “major” write-downs, and said lenders were demanding it put up more cash.Continues...
... American Home specializes in prime and near-prime loans. It has, however, made many loans that allow borrowers to produce little documentation of income or assets. American Home, organized as a real estate investment trust, recently commanded a roughly 2.5 percent share of the U.S. mortgage market.
“Bankruptcy is not out of the question,” said Matt Howlett, an analyst at Fox-Pitt Kelton Inc. in New York. “It needs to find a partner with alternative funding and hope the market turns around. It's going to be tough.”
He added, “It's clear now we're in a liquidity crisis. Any loans that aren't pure prime are falling in value.”
GMAC Financial Services, the finance company formerly controlled by General Motors Corp., said Monday continued losses from its home lending operations caused second-quarter profit to fall sharply.http://www.forbes.com/feeds/ap/2007/07/30/ap3967119.htmlSector Snap: Mortgage REITs Dive
Shares of mortgage real estate investment trusts plummeted Monday after the New York Stock Exchange halted trading of shares of American Home Mortgage Investment Corp. pending an announcement from the troubled mortgage lender.U.S. mortgage woes claim first German victim,
The move spooked already jittery investors, deepening worries that the subprime mortgage market fallout is far from over.
The U.S. sub-prime mortgage crisis claimed lender IKB as a first victim in Germany on Monday, triggering sharp falls in other German bank shares on fears that they, too, could face sudden problems.
... But IKB's exposure to complicated U.S. mortgage investments was the first time the sub-prime spectre had loomed in Europe's biggest economy. It scared investors, fuelling worries that other German banks could be affected in the same way.
July 26, 2007
Following today's terrible stock market, more mortgage-backed news:
Bear Stearns Cos. said late Thursday that it seized assets from its High-Grade Structured Credit Strategies Fund after the hedge fund suffered huge losses in mortgage-backed securities and structured-finance markets.
UPDATE 2-Wells Fargo shuts subprime mortgage unit,cuts jobs|Funds News|Reuters.com
Wells Fargo & Co., the second-largest U.S. mortgage lender, said on Thursday it will close its subprime wholesale lending business, which processes and funds loans for third-party brokers, citing turmoil in the market for riskier home loans.Foreclosure rates could soar,
The company will shut operations in Baton Rouge, Louisiana, causing a loss of 170 jobs, and in Des Moines, Iowa, where it will seek other jobs for 67 workers. Wells Fargo also cut 444 subprime jobs last winter.
The already poor performance of many mortgage loans will worsen substantially through the rest of the year, according to an analysis released Thursday by Moody's Economy.com.
The company predicts that 2.5 million first mortgages will default this year, with little chance for improvement soon - Economy.com expects delinquencies to peak in the summer of 2008 at 3.6 percent of all outstanding mortgage debt, up from 2.9 percent during the first three months of 2007.
The next and biggest wave of problem loans could come as monthly payments soar for both prime and subprime borrowers who took out adjustable-rate loans with little or no documentation, or who used so-called piggyback loans on top of their first mortgages to make up for small down payments, analysts said.
Sales of new homes fell in June by the largest amount in five months as the housing industry continued to struggle with its worst downturn in 16 years. The median home price also fell.An important note about that median price - we have a bifurcated economy where the rich are richer. So houses at the top of the market are selling well. This means that the median price reflects that high price point at the top. REGULAR housing prices are falling much more than this indicates.
... Sales are now 22.3 percent below the level of a year ago.
The median price of a new home sold last month dropped to $237,900, down by 2.2 percent from a year ago.
Prices Update - I want to emphasize what I said about prices. If the only houses selling at all are at the top, this will raise the median price.
Another factor that distorts prices is "incentives." If a homebuilder is selling a house for $400K but throws in a new $60,000 Mercedes as and "incentive" to buy the house, the sales is reported as a $400K sale. And all across the country homebuilders are offering these incentives.
Prices are falling, it's just that the reporting methods do not reflect what is happening. We are just coming out of a bubble -- just like stocks did. Do not think about the price of a house in relation to where it was priced during the bubble. If you did that with Enron stock, you thought you were getting a bargain. Think about where the price will be, not where it was.
Look at it this way. We have house prices way higher than anyone can afford. We have the highest inventory of unsold houses in a long time - ever? We have the lenders tightening credit so fewer people can buy houses. We know prices are falling. We have a huge number of people falling behind on their payments and huge numbers of houses going into foreclosure. And it is just starting.
Anyone buying a house right now is an idiot. Prices are probably about double where they should be. Like I said earlier, remember Enron stock and think about where the price will be, not where it was.
July 24, 2007
Countrywide said payments were at least 30 days late at the end of second quarter on 4.56% of prime home-equity loans serviced by the company, up from 1.77% a year earlier.A huge jump from 1.77% to 4.56% of prime mortgages with late payments, and from 15.33% to 23.71% of sub-prime. And housing prices haven't even really started falling yet.
Payments were late on 23.71% of sub-prime mortgage loans, up from 15.33% at the end of the same period in 2006, the company said.
But they will.
July 12, 2007
Mortgage foreclosures in the U.S. jumped to a record in the first half as rising interest rates and falling home prices battered homeowners.
[. . .] In June, defaults surged 87 percent to 164,644 from a year ago, said RealtyTrac, a seller of foreclosure data, in the statement today. Last month's total was 7 percent lower than in May. California, Florida, Ohio and Michigan accounted for half the national total in June.
[. . .] California had the second-highest rate, with one filing per 315 households, and the most filings overall, 38,801, for the sixth month in a row. Foreclosures in California, the most populous state, increased almost three-fold over a year ago.
June 25, 2007
Slow sales, prices keep dropping.
Reflecting further housing troubles, sales of existing homes fell in May to the lowest level in four years while the median home price dropped for a record 10th consecutive month.I noticed this weekend that MANY more "For Sale" signs are out in the Bay Area than before.
... The median price of a home sold last month dropped to $223,700, down 2.1 percent from a year ago. It marked the 10th straight price decline compared with a year ago, the longest stretch of weakness on record.
Update - My observation is confirmed: Housing inventory piling up: Inventory of homes for sale hits 15-year high,
The inventory of previously owned homes up for sale in May rose to the highest level in relation to sales in 15 years, a real-estate trade group said Monday.
... Inventories of homes on the market rose by 5% to a record 4.43 million, representing an 8.9-month supply at the May sales pace. That's the biggest overhang of inventory since June 1992, at the tail end of the last housing bust.
The inventory figure compared with 8.4 months in April and 7.4 months in March.
June 21, 2007
Will today be a really bad day for the stock market? (Or worse?) There are signs that the ripples from the housing bubble's pop are starting to spread.
Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.The REAL value of these instruments? Who knows? And who owns them?
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
Here's the thing - this is the money market. This is YOUR money-market fund. Find out if YOUR money-market funds are FDIC insured!
June 14, 2007
The number of Americans who may lose their homes because of late mortgage payments rose to a record in the first quarter, led by subprime borrowers pinched by an economy that grew at the slowest pace in four years.Also, "More pain" - the "subprime" problems are rippling out:
... Falling home prices hurt homeowners who fall behind on their payments, as they find it more difficult to sell the property or refinance into another loan, said Doug Duncan, chief economist for the Washington-based bankers' group.
Goldman Chief Financial Officer David Viniar said in a conference call Thursday that the subprime sector's woes are not over and to expect "more pain" before the problem is purged.
June 7, 2007
Something new in my area: There are a lot of houses for sale but recently many of the "For Sale" signs have "Coming Soon" written across the top. Coming soon, like not for sale yet? One house a few doors down the street has had a "Coming Soon" banner for about a month now. But it isn't for sale yet, I guess.
Is this a scam to avoid having to list a high number of days that the house has sat without being sold?
Other news, no bailouts soon for people with mortgage troubles: Mortgage Reform Unlikely This Year, Lawmakers And Regulators Say Market Is Showing Signs Of Self-Correcting,
Homeowners unable to pay monthly mortgage bills and facing foreclosure shouldn't count on help from Washington this year.
Regulators and lawmakers seem to be taking a wait-and-see approach as they confront the fallout from several years of lenders making too many home loans to people with inadequate credit.
... The National Association of Realtors said Wednesday it expects sales of existing homes to drop 4.6 percent this year to 6.2 million while the median home price is expected to fall 1.3 percent to $219,000. It would be the first annual drop since the trade group began keeping records in the 1960s.
The foreclosure rate nationwide is rising at an annual rate double that of two years ago. Nearly 2 million adjustable-rate mortgages are forecast to reset at higher rates over the next two years, suggesting the foreclosure rate has not peaked.
May 25, 2007
Sales of existing homes fell by a larger-than-expected amount in April while the median price of a home sold during the month fell for a ninth straight month as the troubles in the subprime mortgage market acted as a further drag on housing.And the news is only going to get worse:
The National Association of Realtors reported Friday that sales of existing homes fell by 2.6 percent last month to a seasonally adjusted annual rate of 5.99 million units. That was the slowest sales pace since June 2003.
... Sales were weak in all parts of the country. The Northeast experienced the biggest decline, a fall of 8.8 percent in April from the March sales pace.
The drop in sales was accompanied by a big jump in the number of unsold homes left on the market.
May 24, 2007
The headline masks the real story: Home sales soar by record amount. But in the story, this:
However, the median price of a new home sold last month fell to $229,100, a record 11.1 percent decline from the previous month. The big price decline indicated that builders are slashing prices in an effort to move a huge overhang of unsold homes.ELEVEN PERCENT PRICE DROP IN A MONTH???
The drop in median prices in April compared to March was a record one-month decline. If the April sales price was compared to the sales price a year ago, the decline was 10.9 percent, the biggest year-over-year drop since 1970.So is it a good idea to buy a house when prices are ropping eleven percent a month?
So where should prices be before you think about buying? Well, take the price before the bubble - maybe 1999 or 2000 - add in inflation, and there you are. In other words, they have to fall at least 50%, more in many areas.
May 7, 2007
I haven't done a housing bubble post for a while, so here is a roundup.
Lenders have "tightened up" on their requirements to qualify for a loan, so fewer buyers are qualifying: As mortgage lending tightens, house hunters with weak credit get shut out,
Rising interest rates and dropping home prices have squeezed a market that had been propped up by risky loans and easy credit during the housing boom. As mortgage bills came due, foreclosures rose, and the easy credit dried up for families like the Shields.So there are fewer buyers.
[. . .] This year, the volume of subprime mortgages is expected to drop by about 30 percent, said...
Meanwhile, foreclosures are up, which means more houses for sale with special deals. So just as there are fewer buyers, there are more sellers.
Stories like these, around the country: National: Brace for wave of foreclosures,
More than 1.1 million homeowners will lose their homes to foreclosure by 2014 because they can't afford the rising payments on their adjustable-rate mortgages, according to a researcher.Kansas: Foreclosures up as loan rates adjust,
"We're just in the first wave of anniversaries now," Hermes said. "There will be a second, third and maybe a fourth wave of foreclosures. Then, all the people who are getting subprime loans now -- they'll start to kick in."Sacramento: Foreclosures Hurting Local Property Values: Many Homeowners Forced To Take Loss
West Michigan: Foreclosures on a sharp rise
Minneapolis: Foreclosures take a toll on North Minneapolis
Here's one that will make us all weep - maybe even send a donation. Second home sales plunge,
The National Association of Realtors said Monday that sales of second homes for investment fell by 28.9 percent in 2006 to 1.65 million. That was down from an all-time high of 2.32 million investment homes sold in 2005, at the peak of the five-year housing boom.But don't cry too hard, because Vacation home sales set record.
Where will this lead? There are too many houses for sale, at the highest prices ever, with fewer buyers. So prices will fall. Especially as the foreclosures come up for sale, because those sellers aren't holding out, thinking there is still a huge inflated bubble - they are being sold by banks that just want enough cash to cover what they are owed...
The only question is how far will prices fall? And how any people will be wiped out?
Remember - check if you have funds in a :money market account" and whether it is government insured, because these "mortgage instruments" are all over the place now, and might no tbe worth the paper they are printed on.
April 27, 2007
A warning, and not just on housing: All the World's a Bubble,
Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.Yes, ouch. Watch your backs. And, maybe buy some gold.
Everything is in bubble territory, he says.
[. . .] And it becomes self-sustaining. "The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you."
[. . .] "The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."
April 24, 2007
The tightening of mortgage lending standards is beginning - just beginning - to have an effect.
Home sales posted their sharpest drop in 18 years in March, a real estate group said Tuesday, as problems in the subprime mortgage sector pushed sales well below what economists had forecast.It's also beginning - just beginning - to affect prices,
Sales of existing homes fell 8.4 percent to an annual rate of 6.12 million in March from February's 6.68 million rate, the National Association of Realtors said. It was the biggest one-month drop since January 1989. Economists surveyed by Briefing.com had forecast sales would fall to an annual rate of 6.45 million in March.
At the same time, prices also dropped. The median price of an existing single-family home decreased 0.9 percent last month, to $215,300, compared with a year earlier.And it will get worse,
The realtors’ association report reflected a housing market that is becoming increasingly unfriendly to anyone looking to sell their home. While the number of unsold existing homes for sale fell 1.6 percent in March, to 3,745,000, the time it took to sell a home increased. There was a 7.3-month supply of unsold properties on the market last month, up from a 6.8-month supply in February.All of this could add up : Poor housing data raise fears for US economy
Economists said that if home prices continued to fall, potential buyers would be discouraged from acting while they waited for the bottom of the market to hit.
March 29, 2007
It's not just "subprimes" that are in trouble. See Mortgage crisis hits million-dollar homes, page 2
"Everyone's looking at subprime. The rock they aren't looking under are the adjustable rate mortgages and teaser rates and low money-down loans," said Mark Kiesel, a portfolio manager for Pacific Investment Management Co., the world's biggest bond manager. "It's going to affect prime as well."In fact, it's everywhere. Subprimes are the tip -- now the iceberg is coming into view.
Josh Rosner, managing director at investment research firm Graham Fisher & Co., says the growing numbers of foreclosures outside the subprime market is just the start.
"To define the problem as a subprime problem is short-sighted," Rosner said. "It's really seeing the tip of the iceberg as the iceberg."
March 26, 2007
Here's the thing. Last week lenders tightened requirements for getting a loan. This means that fewer people can get loans now for buying houses. So demand for houses is about to drop -- a lot. The drop in sales reflects the month before this tightening so things can only get worse.
We have an increase in supply and a big decrease in demand. That can only -- ONLY -- mean a drop in housing prices is coming. BUT WAIT, THERE'S MORE!
Remember that we're also in a subprime mortgage crisis -- people who could not afford to buy a house were given loans they could not afford, and now it's turning out that they can't afford them and they are losing their houses to foreclosure. (And the lenders are going bankrupt.) But with today's news about lower sales and higher inventories, this will push even more into foreclosure because they won't be able to sell their houses before it is too late. And THAT puts even MORE houses on the market.
This could turn into an accelerating downward spiral. This could get really bad - worse than the "S&L Crisis" of the 1980s and early 90s.
Here's the (next) thing -- as I said above, lenders are going bankrupt. If you are lucky enough to have savings instead of debt you should check whether you have money in any "money market" accounts, and whether those accounts are FDIC insured. If they are NOT FDIC insured you can lose some or all of your money.
March 23, 2007
Headline sounds great, no? Home Sales Rise Unexpectedly in Feb. But what about the story?
The increase pushed sales up to a seasonally adjusted annual rate of 6.69 million units, still 3.6 percent lower than a year ago. Sales fell by 8.5 percent for all of last year as housing hit a sharp slowdown after setting sales records for five straight years.So the real story is year-over-year sales are down 3.6 percent and EVERYONE expects things to get worse.
... "Sales cannot be sustained at this level, which is way above the pace implied by mortgage applications," said Ian Shepherdson, chief economist at High Frequency Economics.
The price of a median home sold last month dropped to $212,800, down by 1.3 percent from the same month in 2006. It marked a record seven straight months that the median home prime has fallen compared to the same period a year ago.
... "Our view is that the tightening in the subprime market will have a negative impact on home sales," Lereah said. "It probably won't postpone the recovery (in housing) but it will slow it." [emphasis added]
Nice headline, though.
March 15, 2007
Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.Duh! You take away a big percentage of buyers by tightening the rules about who can get a mortgage at the very same time as inventory is rising, and OF COURSE prices have to fall. DUH!
Speaking to the Futures Industry Association, Greenspan conceded it was "hard to find any such evidence" about spillover from housing yet, but added: "You can't take 10 percent out of mortgage originations without some impact."
He said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.And the good news?
Default rates in the subprime segment of the U.S. mortgage market have jumped in recent months as the housing industry slowed and prices fell.
At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories at high interest rates, have gone out of business as a result.
The crisis has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy.
He also noted the problem would be quickly resolved if the housing sector regained its footing and prices moved up by 10 percent.Right. Prices at the highest ever, fewer buyers, high inventory, and things will be fine IF prices go up. OF COURSE they'll be fine if prices go up. But at the top of a bubble it's ALWAYS fine if prices go up. But they won't.
The situation in Iraq would be fine if Shiites and Sunnis gave each other a big hug, too. But they won't.
March 13, 2007
"Subprime" is a name given to loans that are riskier than regular loans, so they carry a higher interest rate. They are called "subprime" because they are less than ("sub") prime. People who would not normally qualify for a big mortgage receive these special loans. They were marketed as "affordability" instruments, meaning they "enabled" people to buy houses that cost more than they could afford. These loans had "teaser" low initial rates, also called "qualifier" rates, which would go up after a period of time, most even rising beyond the point that the borrow can "afford." Some of these loans even allowed borrowers to qualify for the loan using "stated income," meaning they would use whatever the borrower SAID their income was to see if they could afford the loan. (For some reason, these became known as "liar loans.")
Why is "more than they can afford" a consideration in giving a loan? It is possible that this term is used because the payments on such loans are "more" than the borrower can "afford" - meaning that the borrower will not be able to make the payments after the initial low-interest-rate period ends. When a borrower can't make the payments, it is called "defaulting" which means they "default." Which also means they can't pay back the loan, lose the house, and face financial ruin for the rest of their lives. And the lender is stuck with a "bad loan" meaning they are not going to be paid back.
When a lending company has enough "bad loans" on their books, THEY are also in trouble and can go bankrupt, which is happening. After enough of these go bankrupt the companies that loaned money to them also start to go bankrupt. This ripples through the economy. (Hint - if you have any money in "money market funds" see if the account can "lose principal" which means if it turns out the money-market "instruments" that generate the income are from companies with mortgage-based loans out there, or loans to companies with mortgage-based loans, these "instruments" can go bad your money enters a highly technical state known as "going away.")
ONE way this ripples through the economy is that lenders are forced to "tighten up" their requirements - meaning they STOP giving loans to people who cannot "afford" the loans. This reduces the number of people who are looking to buy a house (demand) at exactly the same time as the market is flooded with homes for sale because the owners cannot make the payments on their loans (supply). So there is a combination of high supply and low demand, which must force prices to drop. A lot.
And here we are today, as it turns out that the borrowers who could not "afford" the loans actually could not "afford" the loans - they can't make the payments, which in plain English means they "can't make the payments." And the lenders are starting to go bankrupt, one by one. And it will ripple through the economy.
Short version of all this -- it's a big damn mess.Update - This story JUST hit the wires:
New foreclosures at record high
Mortgage delinquencies rise across the board in fourth quarter,
Many more U.S. homeowners were unable to keep up with their mortgage payments in the fourth quarter, the Mortgage Bankers Association said Tuesday, with the rate of homes entering the foreclosure process hitting a record 0.54% and the delinquency rate on U.S. home loans leaping to 4.95% from 4.67% three months earlier.
... The rise was led by subprime mortgages, where delinquencies increased to a seasonally adjusted 13.33% from 12.56%, and FHA loans, which saw a record-high delinquency rate of 13.46%. Trouble in subprime mortgages, made to borrowers with the riskiest credit, has roiled lenders and the stock market in recent days.
March 4, 2007
At the Drum Major Institute's blog: Sub-Prime Mortgages Come Home to Roost,
"During the housing boom that ended in 2005," the Times reported, "money was poured with abandon into exotic home loans that let people buy homes with little down or without verifying their incomes. Now, lenders, financiers and buyers of mortgages are pulling back...The move comes as default rates are rising, smaller lenders are starting to fail and investors are shunning bonds backed by mortgages."Also take a look at Homeownership: The Fast Path to Poverty?,
Duh! Where have they been? For more years now advocates have been denouncing sub-prime loans and "exotic" mortgages - adjustable rate loans, "no doc" loans, interest only loans, etc. - as often abusive and predatory, and a leading contributor to mortgage defaults and financial instability among working and middle class people. Meanwhile sub-prime lenders have been losing profits, downsizing and going out of business because their loan porfolios are crumbling under the poor or non existent underwriting criteria.
[. . .] The question remains: When will law makers and regulators finally step in and clean up the sub-prime market?
This single-minded promotion of homeownership is now proving to have disastrous consequences for many moderate income families that bought homes at the peak of the bubble. Many of these families will end up losing their homes and whatever savings they had used to buy a home. Their credit record may be permanently damaged and possibly their aspirations as well.
February 20, 2007
It was not particularly surprising to most housing market observers that January starts fell from their December levels. But what did have the market abuzz was the magnitude of the drop. With a 14.3% decline to a seasonally adjusted rate of just 1.408 million units -- versus December's revision to 1.643 million units -- the housing activity level for the first month of 2007 was the lowest in nearly a decade.Other news:
Not since August 1997 has construction been begun on fewer haciendas in the United States. Indeed, the magnitude of the drop-off has more than a few observers questioning whether the nation's current housing slump actually will last longer than recently has been anticipated.
Blake cautioned, however, that the company does not expect a dramatic turnaround in the housing market this year and said the company would give its financial outlook at next week's analyst meeting.New-home sales dipped 29 percent in California in 2006
[. . .] Existing U.S. home sales fell 8 percent in 2006, their biggest drop since 1989. Housing starts fell 13 percent last year, their biggest tumble in 15 years. Home sales and construction are key drivers of home improvement sales.
A booming market in rentals as home sales sag is leading to rent increases throughout most of the Hartford area in 2007.(Buffalo) Area home sales hit 7-year low in January,
The local housing market got off to a slow start in January, with home sales sliding to a 7-year low for the month, while the median sale prices of those homes dropped by 4.6 percent, a local real estate group reported.
February 8, 2007
The U.S. housing market has not reached bottom and will likely not begin to recover until the middle of this year, three housing economists said this week.Yep, good times are "just around the corner." Unless, of course, you look at the long-term median prices, run-up charts, affordability, default rates, foreclosures, etc.
The weakness will extend to existing-home and new-home sales and housing starts as well as to home prices, which are likely to show their first full-year decline nationally since records have been kept, the economists told home builders at their annual convention here.
"I don't think we've seen the bottom," said David Berson, chief economist for Fannie Mae. "We're going to see a much bigger drop in investor demand this year. But by the second half of the year the market will stabilize, if investors pull out quickly."
In other news, HSBC warns over US mortgage bad debt,
HSBC, Europe’s biggest bank, last night gave warning that bad debts in its troubled US mortgage lending business would be 20 per cent higher than forecast.And more bad news, see Home Lenders Plunge as More Subprime Mortgages Sour and Subprime meltdown ...
The bank blamed the impact of slowing house price growth, which it said is being reflected in accelerated delinquency trends across the US sub-prime mortgage market. It said that the level of loan impairment provisions for 2006 for its mortgage services operations will be higher than is reflected in current market estimates.
February 1, 2007
In the year since Ben Bernanke became chairman of the Federal Reserve, the nation's central bank has led a push by regulators, including the Comptroller of the Currency and the Office of Thrift Supervision, to raise mortgage lending standards, making it tougher for borrowers ... to get a loan. Reducing the number of people who can secure a mortgage also may threaten the recovery of the U.S. housing market that the National Association of Realtors is predicting for the end of 2007.Other news:
[. . .] U.S. foreclosures begun on sub-prime adjustable-rate mortgages, or ARMs, rose to a four-year high of 2.19 percent in the third quarter as borrowers struggled to pay mortgage bills while interest rates increased, the Mortgage Bankers Association reported. During the five-year boom in housing prices, homeowners who fell behind on mortgage payments could sell their homes and pay off their loans or get better refinancing terms based on the higher value of their property.
[. . .]``There's a monster beneath the surface of the financial markets,'' Shaughnessy said. ``No one knows when or where the credit crisis is going to rear its ugly head.'' [emphasis added]
Nearly half of all consumers (47 percent) say they think a housing bubble and collapse of housing prices is very likely (16 percent) or somewhat likely (31 percent) in their local residential real-estate market within the next three years, according to an Experian-Gallup survey.Risky mortgage lending practices bring backlash,
... Fears of a potential housing price collapse are greatest in the West (52 percent) and the East (49 percent) but lower in the Midwest (41 percent) and the South (44 percent).
... "Housing market conditions may not have reached bottom at this point, with 57 percent of renters thinking there is the potential for a price collapse in their local areas over the next few years and 18 percent of all Americans expecting prices to decline during the year ahead," says Ty Taylor, president of Experian Consumer Direct.
California lawmakers are considering new restrictions on unorthodox mortgage lending.
The loans have let hundreds of thousands of residents with shaky credit or lower incomes snap up homes using features like no money down, variable interest rates and interest-only loans.
About half of all new loans in California are nontraditional. They offer riskier borrowers low introductory payments in exchange for higher monthly bills that in many cases will begin kicking in this year.
January 10, 2007
Americans struggle to afford housing,
An annual income of about $85,000 is needed to afford median-priced homes; salaries have not seen modest gains, according to a study.
U.S. home prices may have dipped over the past year, but many American workers would still struggle to afford a median-priced home in major cities, a new study said Wednesday.
"American workers are really not gaining ground and they're so far behind in the first place," said Barbara Lipman, research director for the nonprofit Center for Housing Policy, which conducted the study.
While the median home price in the 202 largest metropolitan areas declined 2 percent from a year ago to $248,000 in the third quarter of 2006, mortgage rates rose enough over the year that homes actually became less affordable as pay did not keep pace.And other news:
January 9, 2007
People still buy real estate that will be underwater in a few decades. Think about that.
The reason we don't take global warming seriously in America is because ExxonMobil has been spending millions and millions of dollars funding a PR campaign designed to shift our attention away from the problem. This has been very good for business for them, but it has caused each and every one of us to behave in ways that are counter to our OWN and society's interests.
One day this will change. One day the consequences of global warming will become too serious to ignore. One day ExxonMobil will stop paying the Competitive Enterprise Institute and the Center for Defense of Free Enterprise and Citizens for a Sound Economy and the American Enterprise Institute and the Frontiers of Freedom Institute and the Heritage Foundation and the Hoover Institution and the National Center for Policy Analysis and the hundreds of other right-wing "think tanks" they pay to tell us global warming is a hoax (read the report), and then the fog will start to lift and we will start to see the world as it is -- the "reality-based" world we live in rather than the one we see on TV.
How is this a "Today's Housing Bubble Post?" Think about what will happen to real estate prices in coastal areas when we do start taking global warming seriously. How much will people pay for real estate that is going to be under water in a few decades?
January 8, 2007
But those who think that the worst may be over for the housing market should take another look at the data, economists say. For the figures on new-home sales have a strange wrinkle that, in the current environment, may lead the government to overstate sales (and to understate inventory) by up to 20 percent. “The market is weaker than the data say,” said Mark Zandi, chief economist at Moody’s/Economy.com.Other news:
... But here’s the rub: If a contract to buy a home, signed in November, is canceled in December, the Census Bureau does not subtract the failed transaction from the number of sales, or add the house back to its inventory total. In the last year, as the housing market has cooled, the volume of cancellations has risen to epidemic proportions. [emphasis added]
... Just as the rising tide of cancellations leads the Census Bureau to overreport sales in the short term, it leads the government to underreport inventories. New homes on which contracts are not consummated are not added back into the inventory figure.
T wo weeks ago, I wrote that many Americans might lose their homes because they would not be able to make the mortgage payments.Foreclosures Peak in 2006 in Some States, Continued Growth Expected for 2007
It is worse than I expected. On Dec. 16, the Center for Responsible Lending held a telephone press conference to announce the finding of a new CRL study of sub-prime mortgages.
According to the study, 2.2 million American families with sub-prime mortgages could lose their homes. The problem is escalating and 1 in 5 of this year's sub-prime mortgages may fail. Foreclosures may cost $164 billion.
You can download the study from Responsible Lending's Web site, www.responsiblelending. org. Foreclosure rates were estimated using housing appreciation forecasts developed by Moody's www.economy.com.
Several factors contributed to the year's increasingly high foreclosure rates. Most prominent was the especially high number of subprime mortgages granted over the last several years as well as the sudden increase in energy costs. Also contributing were slowing home sales and rate adjustments.Maine: Foreclosures expected to surge
North Carolina: N.C. foreclosure rates soar in '06
Rosen sees home prices dropping by about 8 percent in the San Francisco Bay Area and 11 percent in Miami over the next few years. NAR predicts increases in home prices next year. Some think we've already hit bottom; others think we haven't hit bottom yet.That's not much help. Heh.
Here's a great headline: HIGH PRICES BLAMED FOR HOUSING SLUMP. D'ya THINK?
December 18, 2006
U.S. home builders were a bit more pessimistic about the housing market in December, but they're growing more hopeful that home sales could perk up in six months, the National Association of Home Builders reported Monday.It has been affecting Home Depot: Weathering The Housing Storm,
... Economists had expected the index, which measures builder sentiment, to improve to 34 in December, according to a poll conducted by MarketWatch.
A reading of 50 shows that half the builders surveyed think the market is good and half think it's poor.
The index had fallen to a decade-low of 30 in September, the sharpest decline in the index's 20-year history. The index stood at 57 a year ago and peaked at 72 in June 2005.
The recent slowdown in the housing market shouldn't scare off investors in Home Depot.Opportunities in China?
...While the tough environment is projected to slow Home Depot's sales growth to 2.8% this year, following a five-year run that saw the company average 11% growth, Trott points to a growing supply business and promising opportunities in China as big reasons for optimism.
December 14, 2006
Remember the stock market bubble and all the talk of a "new economy" that meant stocks would just keep going higher? With that in mind, read this: Housing, auto slumps may defy usual role as recession harbingers,
New home construction is plummeting. Car sales are weakening. Investors have driven long-term interest rates well below the short-term rates set by the Federal Reserve. All these factors are present today, and all have been precursors of past recessions.Ah, the stock market bubble? And what happened to the "new economy?" What happened to stocks? What always happens to speculative financial bubbles?
But the U.S. central bank and much of Wall Street are now betting that the old rules don't apply, and that a recession next year, while possible, is unlikely.
Whenever you start hearing that "the old rules don't apply" that's the signal to sell while you still can. Another warning sign is when you hear that "this time" things will be different.
"This time will be different," Ed Leamer, who heads the forecasting center at the University of California at Los Angeles's Anderson School of Management, predicts in a report. "This time the problems in housing will stay in housing." It's a prediction, he admits, that "keeps us up at night."So, will it be different this time? We'll see.
Many Fed officials and private economists believe home builders and auto makers are curbing production to trim excess inventories as a temporary response to a drop-off in demand that was unsustainable -- not because climbing interest rates are eroding affordability. If the optimists are right, the industries' troubles wouldn't be signs of broader forces tipping the entire economy into recession. Meanwhile, U.S. exports are benefiting from strong growth among U.S. trading partners, especially in Europe.
December 10, 2006
This post also welcomes the new Bonddad Blog.
There's much more over at Bondad Blog so go read. In summary, we're seeing some very bad indicators that major financial trouble is on the horizon. The old saying, "If something is unsustainable it can't be sustained" is starting to come true.Tuesday, Ownit Mortgage Solutions of California shut down, citing "the unfavorable conditions of the mortgage industry." That's a euphemism for subprime home borrowers getting into trouble and defaulting on loans at unprecedented speed. ...Here’s a brief overview of the mortgage market. When you get a home loan from a bank, the bank doesn’t keep the loan on its books. Instead, it sells the loan to a larger institution. These mortgages usually end up with Fannie Mae or Freddie Mac. Freddie and Fannie take similar mortgages (mortgages that have the same interest rate, maturity etc…) and “pool them”, or puts them together in one giant mortgage bond. Then, these institutions sell the mortgages to pension funds, mutual funds and other investment companies. When people state that Fannie and Freddie have added liquidity to the mortgage market, the above-mentioned process is what they are talking about.
November 28, 2006
Nationwide existing home sales rebounded last month but the median sales price took its biggest year-over-year decline in nearly four decades, according to real estate figures released today.
\... The modest rebound in sales may indicate that the nationwide housing slow down might be bottoming out — but any noticeable relief for sellers probably won't come until next year, according to some housing observers.
... But other economists say a turnaround is still far away, with many signs pointing to a buyer's market for some time to come. For example, the inventory of unsold homes, increased 1.9% in October to 3.85 million existing homes.
November 20, 2006
Episode 1: The First Flip
November 19, 2006
The way information spreads ... You and I follow the news, or you wouldn't be reading this. But most people get their information in different ways.
For example, many people are only now finding out that house prices have stopped rising, and are falling. Like this one:
Sagging sales, appreciation proof housing boom over,Over the summer, John Toole put his Woodland Hills home on the market for $1,695,000 and waited for a rush of prospective buyers.
And waited, and waited and waited.
So he offered a 15-day Hawaiian Islands cruise for two to the agent representing the buyer to stimulate some interest. And Toole waited some more.
He eventually slashed his asking price by $100,000. Nothing changed.
"It didn't bring anybody around. Nothing. The market is absolutely dead," Toole said. "I was amazed." This story goes on to talk about the last price drop,
Starting in March 1992, the median price fell on an annual basis for 37 consecutive months. In November 1995, it dipped to $155,000, the low point in that down market, 36.7 percent below the old record high.
Bubbles are followed by crashes. Prices adjust. It always happens. The 1990 housing price drop adjusted back to the mean. It took time - three years of falling prices. But that's a "normal" real estate fluctuation. This is different. This is the biggest housing bubble in history. So economics would say that we have to see the biggest drop in history.
So the question is, how do we plan for where this must go? How does government help people out of it if we have a housing Katrina?
November 17, 2006
Housing construction plunged to the lowest level in more than six years in October as the nation's once-booming housing market slowed further.Dollar falls after talk of hedge fund trouble
The Commerce Department reported on Friday that construction of new single-family homes and apartments dropped to an annual rate of 1.486 million units last month, down a sharp 14.6 percent from the September level.
The decline, bigger than had been expected, was the largest percentage decline in 19 months and pushed total activity down to the lowest level since July 2000.
Housing Construction Plunges in October,
The report signaled that the months ahead could be equally bleak: The number of building permits that were issued fell for the ninth straight month, reaching its lowest level since 1997. Those figures, too, are seasonally adjusted.
November 15, 2006
Newsweek: The Worrying Housing Bust,
With fewer buyers, home construction, sales and prices have weakened. In August, housing starts were 20 percent lower than a year earlier. Last year, sales of new and existing homes totaled almost 8.4 million; next year the NAR expects 7.4 million. Construction workers, real estate agents and mortgage bankers will lose jobs. Consumer spending (computers, cars, vacations) will also suffer, as the borrowing and buying against rising real-estate values subsides. Indeed, the end of the cheap credit that fed the boom means that many borrowers will face higher monthly payments.Housing slide may deepen - The Boston Globe,
The housing downturn in Massachusetts will last longer, and prices will fall further than first projected, according to an economic forecast released yesterday.And others:
Housing prices will slide by as much as 10 percent from their 2005 peak before hitting bottom in early 2008, according to the forecast by the New England Economic Partnership. They should stay flat through 2009, before beginning to climb gradually.
A year ago the nonprofit research group forecast prices would decline less than 3 percent, bottom at the end of 2006, and regain their peaks in early 2008.
First, Americans quit buying homes. Now, they may have stopped fixing and furnishing them too.
Home Depot Inc. reported a 3-per-cent drop in profit in the three months that ended in October, amid mounting evidence that the U.S. housing slump is getting worse.
“I don't think we've seen the bottom yet, and I don't see anything that says it's going to get significantly better in 2007,” said Bob Nardelli, Home Depot's chairman and chief executive officer.
... Problems in the housing sector have also begun to affect how consumers spend their money. In October, U.S. retail sales fell at an annual rate of 0.2 per cent — the third consecutive monthly decline, according to a U.S. Commerce Department report Tuesday.
The decline was heavily influenced by lower gasoline prices, which resulted in less revenue for gas stations.
But there were also sharp declines in building materials (down 0.3 per cent), furniture (down 0.7 per cent) and department store sales (down 0.7 per cent). Over the past three months, sales of building materials have plunged at an annual rate of 10.6 per cent.
“The housing slowdown left its grimy fingerprints all over this report,” BMO Nesbitt Burns economist Douglas Porter said in a note to clients.
November 14, 2006
Home Depot on Tuesday warned that the US do-it-yourself market had entered a sharp slowdown because of weakening in the housing market and broader economy.But wait, there's more!
Countrywide CEO says housing slump has a year to go,
The slowdown of the U.S. housing market will last through 2007 as inventories are pared enough to prompt a change in consumer psychology, the chief executive officer of the nation's biggest mortgage lender said on Tuesday.And more: Dim housing market could prove pessimists right,
Mortgage lending has slowed as rising inventories in the housing market led to a "hard landing" for the industry after a decade of strong growth, Countrywide Financial Corp. CEO Angelo Mozilo said at a Merrill Lynch & Co. conference in New York.
"We have another year of adjustment, or transition" in the industry until consumers believe home prices won't decline, Mozilo said. "Various events will make the change take place and one of them is" a decline in available homes, he said.
There is, of course, a reason for the gloominess and it can be summed up in one word: housing. The housing market has been severely battered. In October, housing prices were almost 10 percent lower on average than they were a year ago, the largest yearly decrease since 1970. The prices of new homes have taken the worst beating, plunging 33 percent just since April.
More people are having trouble meeting their mortgage payments. Foreclosures were up nationwide. The foreclosure rate was 43 percent higher than at this time last year. Building permits for new-home construction have tumbled about 30 percent. According to reports, a growing number of housing developments are completely empty. An economic report from a leading bank calls the housing problem "the biggest residential construction bust for fifty years."
November 8, 2006
No good news: Housing slump deepens - The Boston Globe,
Home builders Toll Brothers Inc. and Beazer Homes USA Inc. said orders for new homes declined and customer cancellations rose as the US housing slump deepened.Business week: How Deep Housing's Decline?
Toll, the largest US luxury home builder, said fiscal fourth-quarter home-building revenue fell 10 percent and orders tumbled 58 percent. Beazer Homes, the seventh-largest home builder by revenue, said orders dropped 58 percent.
"We continue to look for signs that a recovery is imminent but can't say that one is in sight," Toll chief executive Robert Toll said yesterday on a conference call. Buyers have lost confidence in the home market and are delaying purchases, convinced that prices will continue to fall, he said.
With 30-year mortgage rates down to 6.1% from a July high of 6.8%, unemployment benign, and lending rates stable, the luxury home builder's CEO, Bob Toll, expressed surprise Tuesday that he's seeing no sign of a bottom in the market.
November 1, 2006
A number of stories just out:
The U.S. housing market's slump is taking a toll on the U.S. economy and should continue to slow economic growth well into 2007.
U.S. construction spending fell an 0.3 percent in September, with private residential building dropping for a sixth straight month, the U.S. Commerce Department said on Wednesday.
"We expect the housing market correction has a ways to go, and should continue to detract from economic growth all the way through the end of next year," said Gina Martin, financial economist at Wachovia Corp. in Charlotte, North Carolina.
Weakness in the U.S. housing market could be turning the hoped-for soft landing for the economy into something a bit harder to deal with. Data released on Wednesday showed conditions in the housing market deteriorated in September, extending a slide that began early this year.
... The U.S. Commerce Department said housing starts fell for the sixth month in a row in September, and spending on all types of construction declined 0.3% following a flat August. Private home construction dropped 1.1% in September after falling 1.6% in August.
Why is Sonders worried now? Just look at the chart. Over the past year, the NAHB housing index plummeted 54 percent. Were stocks to follow suit, the S&P - 1400 in late October - would be trading below 700 this time next year.Sixth decline in housing pushes overall U.S. construction down,
U.S. manufacturing expanded at the slowest pace in more than three years, and construction spending declined as housing continued to suffer through its longest stretch of weakness since 1995.Denver: Housing market remains in a slump,
Two reports released Wednesday depicted an economy beginning to feel the impact of the sharp slump in the once-booming housing sector.
A sluggish market led to a dip in Denver metro-area housing starts during the third quarter of 2006, according to a report by Metrostudy's Denver division.
Denver area third-quarter housing starts fell 22 percent from the same period last year, from 4,889 new homes to 3,830. The year-to-date rate through the third quarter declined 3 percent, from 19,568 in 2005 to 18,908 in 2006.
October 30, 2006
September sales of existing homes totaled 6.16 million, down from 6.3 million in August, and down from 7.2 million in September 2005.So, is blood running in the streets yet? After a small trickle of bad news in the biggest runup of privces in history? With prices STILL more than double where they hould be? With the "creative financing" mortgages starting to come due next year? I think not.
The inventory of unsold homes hit 7.3 million units in September, up from 4.6 million homes listed for sale in the same month a year ago. (And there might be many more sellers waiting in the wings, who plan to list their home when the market "recovers.")
Prices are falling, too. The National Association of Realtors reported the biggest drop in home prices since it began tracking the data in 1968. The median sale price slipped 2.2 percent to $220,000 in September following a 2.2 percent decline in August. These two declines are the first time median home prices have fallen since 1995.
... So, is it time to buy? The smart money says it's time to buy when everyone wants to sell, or as they put it on Wall Street: when blood is running in the streets.
... But while analysts and economic eminences see a trough, data reports point to more gloom ahead. In the third quarter, the biggest drop in homebuilding investment since 1991 slowed economic growth to its worst pace in more than three years, an Oct. 27 report showed. New home sales rose in September, but the median price of a new home fell by nearly 10% in the biggest one-year drop since 1970, according to the Census Bureau on Oct. 26.
... While the housing slowdown may not wind up crippling the economy the way some pundits feared, many analysts say its effects aren't finished just yet.
October 27, 2006
Lots of stories in the news today:
Economic growth slowed to a crawl in the third quarter, advancing at a pace of just 1.6 percent, the worst in more than three years.Bloomberg: U.S. Growth Slows to 1.6% Rate as Homebuilding Slumps,
The latest snapshot of the economy, released by the Commerce Department on Friday, showed that the slumping housing market figured prominently in the economy's dramatic loss of momentum. Investment in homebuilding was cut by the biggest amount since early 1991.
.. "The housing bubble burst and that really knocked down growth," said Joel Naroff, president of Naroff Economic Advisors.
The U.S. economy grew at a less-than- forecast 1.6 percent annual rate last quarter, the slowest pace in more than three years, as housing slumped and the trade deficit widened.But wait, there's more!
... Homebuilding declined by the most in 15 years. ... Residential housing construction fell at a 17.4 percent annual rate last quarter, the biggest decline since the first quarter of 1991, after shrinking 11.1 percent in the previous three months. The decline in homebuilding subtracted 1.12 percentage points from third-quarter growth, the most in almost 25 years.
Signs it will get worse - much worse. Chicago Tribune: Adjustable rates may deepen housing trough,
Existing-home sales will decline 9 percent this year, drop 8 percent in 2007, and increase less than the inflation rate in 2008, Mortgage Bankers Association economist Doug Duncan said in Chicago this week.And how's this one? Housing prices plunge in U.S. as builders fret
Duncan, who has a reputation for solid predictions, notes that housing downturns take time to work their way out because of what he calls "the smarter neighbor theory." One neighbor looks at a neighbor who recently sold a home for $400,000 and thinks he's smarter and can sell his for $425,000. He puts it up for sale, but once curious neighbors trek through the house, it takes him about three months to accept that buyers aren't interested. At that point, he lowers the price. But the house sits. Several months later he decides he's getting nowhere and perhaps takes it off the market.
When many people reach that point, and start removing their homes from the market, the cycle begins to mend. But Duncan notes that so many people are listing homes, there is a hefty eight-month supply on the market; six months is considered healthier.
Analysts fear deep discounting on homes may scare off buyers, making spiral worse,
Faced with a growing glut of unsold homes, U.S. builders are resorting to unusually deep discounts that some analysts fear could turn off potential home buyers, feeding an even steeper downward price spiral.So the builders can't sell their homes, they lower prices, buyers realize that prices are dropping, so they wait. This is a classic crash scenario - a spiral down. Just like the stock market did. When does it stop? When prices reach the point they SHOULD be at in the first place - when you look at the VALUE of the house, not some idea of what it will be worth if prices rise! With stocks, prices had to fall until the stock was a good investment again - based on the value of the company, not some idea of making a quick buck by holding the stock for a few weeks and then selling it.
"Falling prices deter buyers," warned economist Ian Shepherdson of High Frequency Economics.
"When the new home market goes south, the early buyers can get hurt," agreed Walter Molony of the U.S. National Association of Realtors (NAR).
That's because buyers may be reluctant to lock in at today's prices if they believe homes will be significantly cheaper in a month or two. [emphasis added]
October 26, 2006
NOW it's starting - but only starting. This kind of news will shake up sellers and wake up buyers. Home price drop is largest in 35 years,
The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.OK, think about this. You read that prices are now falling at about 10% a year nationally. Who would be dumb enough to borrow $150,000 or so to buy a house that will be worth, on average, $20,000 less a year from now? Right.
The Commerce Department reported that the median price for a new home sold in September was $217,100, a drop of 9.7 percent from September 2005.
... The weakness in new home prices was even sharper than a 2.5 percent fall in the price of existing homes last month, which had been the biggest drop on record. [emphasis added]
If you own a house in the SF Bay Area you just lost, on average, maybe $60,000. If you are thinking about buying a house here you are thinking about borrowing half a million dollars or more to buy in a market where you face $60,000 yearly losses. Nope, not gonna do it.
So you can see what is about to happen. Buyers are going to wait. (Well, the smarter ones are...) And sellers are going to worry that they'd better drop prices enough to sell before it gets even worse.
And then there's all the people with "creative" mortgages with payments that are about to double.
October 17, 2006
Bay Area housing prices are finally falling, declining last month for the first time in more than four years.This means that every buyer desparately trying to "get into something" before prices go up even further is going to take a new look around. It means that every seller holding out for that offer "over asking" is going to realize they need to get out.
Even more, it means that all the speculators will understand the party is over, and it's time to bail. And, finally, the landlords with "negative cash flow" but thinking they're making up for it with appreciation have to face it that they're really just losing money. Not to mention all the people who are "over their heads" with mortgage payments they can't keep up with.
In addition, prices for new homes tend to correct more quickly than those for resales, because home builders would rather drop prices than hold onto excess inventory.But wait, there's more!
... New homes, whose sales made up 12 percent of the county's overall total, saw a median price decline last month of 9.4 percent, to $591,000.
Sales volume for all types of homes was down 30.6 percent in the county, in keeping with the trend seen throughout 2006.
The housing slowdown has turned some parts of the Phoenix and Las Vegas metropolitan areas into "ghost towns," where many unsold homes stand empty, Janet Yellen, president of the San Francisco Federal Reserve Bank, said Monday.Empty houses means sellers holding out... That's a dam that's really going to burst...
Yellen said that she heard the ominous description from a "major home builder," who told her that the share of unsold homes in some subdivisions around the two Southwestern cities has topped 80%.
October 8, 2006
We are at the endgame for housing. Until recently, our national motto has been "in real estate we trust." Just last week, the Census Bureau reported that median home prices after inflation rose 32 percent from 2000 to 2005. In some places, the gains were huge: 127 percent in San Diego, 110 percent in Los Angeles and 79 percent in New York. But real estate—which has acted as a national piggy bank, with homeowners borrowing and spending against rising house prices—no longer looks so trustworthy. On this, more than falling oil prices or a record Dow, hangs the economy's immediate fate.Fox News: Real Estate: House of Cards or Dose of Reality?
[. . .] Construction workers, real estate agents and mortgage bankers will lose jobs. Consumer spending (computers, cars, vacations) will also suffer, as the borrowing and buying against rising real-estate values subsides. Indeed, the end of the cheap credit that fed the boom means that many borrowers will face higher monthly payments.
The Reagans are experiencing the wrenching consequences of being home sellers at the wrong time. They've had several buyers fall through, and have been forced to pull out from buying their own new dream home. They've packed and unpacked, explained to their children why they had to call off a move, and spent many a sleepless night talking about money.Why the Fed is dead wrong on US housing slump?,
[. . .] Though in a different price zone, Stephen and Dianne Greenstein can relate to Reagan's deflated spirits. The couple's four-story waterfront home, on Nahant's craggy coast, has been on the market for nearly a year. It boasts sweeping views of the Atlantic, several seaside decks, and three fireplaces. But for all of its amenities, the three-bedroom contemporary home has yet to sell -- despite a drop of $326,000 in the asking price. [ephasis added]
The housing market slump has just begun. The market is far weaker than it feels. The builders are nervous like never before. Most importantly many people have started defaulting on their mortgage loans especially the investors.Minnesota: The housing glut
Normally a bubble like this takes at least a 50% retracement in price before any bottom is over.
... Here is the problem. The real estate market in US in a 70 year cycle. For seventy years the market went up. Baby boomers caused it to happen. Population demographics is always behind any dramatic move in real estate market. However, the cycle down in real estate markets are normally sharp again based on demographics. Unless massive immigration reform takes place in US, the real estate market is destined to accelerate downwards for at least thirty years.
Wallkill NY: Cool housing market drives hot incentives,
Sure, the Orange County housing market is cooling down, but few would ever have thought it would come to this: a free vacation as an incentive for buying a home.Yep, that's right, get a feww vacatin. You'll need it because you're paying $160,000 for a house that will be "worth" $100,000 next year -- but you will still OWE $160,000!
October 4, 2006
It hasn't even started yet, and they use the 'D'-word: Housing Prices to Drop, Report Says,
Housing prices, slumping after a five-year boom, are projected to decline in more than 100 of the nation's metropolitan areas...This forecast is widely reported, which means that it will be seen by buyers and sellers, and will cause them to adjust their expectations.
... The ... firm projects that the median sales price for an existing home will decline in 2007 by 3.6%, which would be the first nationwide decline for an entire year in home prices since the Great Depression of the 1930s. [emphasis added]
Along those lines, a warning to UK investors: US housing market 'in danger zone',
British investors who own property in the United States should take a long-term view on the market and focus on maximising rental income as the US teeters on the brink of a housing market price reversal, says Assetz.Think UK investors will be showing up to pick up some of that excess inventory and bail us out? Me, neither.
... Stuart Law, managing director of Assetz, said: "The U.S. is definitely in the danger zone but we are not currently certain how severe the downturn will be. Holiday home buyers who are getting regular use out of their property are unlikely to be affected in the long term, but investors who were hoping to sell their property on quickly are no longer set to gain and are likely to face losses if they sell now.
t's not just homeowners and homebuilders that have a lot to lose if tremors roiling the real estate market turn into a full-scale quake.Arkansas: Housing market slowdown has ripple effect on economy
Manufacturers of everything from drywall to the kitchen sink are also vulnerable to stagnant or declining sales as fewer houses change hands.
"Do a mental walk around your house and look at appliances and fixtures," to see what companies are exposed to the housing market, said Sam Stovall, chief investment strategist for Standard & Poor's.
Florida: Housing permits down 61 percent
September 30, 2006
The slowdown in the housing market is already affecting the sales of pickup trucks. Housing slowdown brakes pickup sales | Chicago Tribune,
General Motors Corp., Toyota Motor Corp. and Ford Motor Co., the world's three largest automakers, are discovering that a housing slump can do what record fuel prices couldn't: cripple demand for pickup trucks.
From 1995-2005, sales of full-size pickups surged 46 percent as home builders bought them for work-related projects and consumers followed suit.
But sales are down 14 percent this year, hurt by a housing slowdown that caused existing-home prices to drop for the first time in 11 years last month.
Like I have been saying, we are only now BEGINNING to see the bubble pop and the ripples that will follow across the economy. Here, just from the first signs of a slowdown we see pickup truck sales way off. There are layoffs in the mortgage industry, and certainly realtors are cutting back. What sectors will be affected as sales slow further and prices drop? Home Depot comes to mind...
Remember what happened to the stock market? Like stocks, housing has a certain value that you can calculate. Housing prices MUST revert to the mean, and the mean is less than half of current prices. So I think that there is a lot more pain to come.
September 26, 2006
The long-predicted correction in U.S. housing prices has apparently begun.But wait, there's more!
The median selling price fell for the first time in 11 years last month, on an annual basis, pushed lower by the largest glut of unsold homes since 1993, and some economists fear the worst may lie ahead.
The price fall comes amid concerns that the U.S. housing slump could quickly spread to other areas of the economy as consumers react to the falling value of their nest eggs. In recent years, homeowners have used the equity built up in their homes to finance their lifestyles. A U.S. downturn now could also spill over into dependent economies, including Canada's.
The year-over-year drop in median sales prices represented a dramatic turnaround in fortunes for the once high-flying housing market, which last year was posting double-digit price gains.Stats show dramatic slowdown in California housing market,
"Pop goes the housing bubble," said Joel Naroff, chief economist at Naroff Economic Advisors. He predicted prices will fall further as home sellers struggle with a record glut of unsold homes.
Fresh evidence poured in Monday that the national and Bay Area housing markets are declining sharply.Sometimes, just the headlines say it all - that's all most people see anyway:
The California Association of Realtors reported that statewide home sales year to year fell 30.1 percent in August, the greatest decline since the housing market was facing double-digit interest rates in the early 1980s.
September 25, 2006
Here it comes. After this news buyers will start demanding price reductions. This can only accellerate -- this bubble could "unwind" very rapidly. Where IS the bottom? Just remember what happened when the stock market bubble popped. Existing-home prices fall for 1st time in 11 years,
Median sales prices of existing homes fell from year-ago levels in August for the first time in 11 years and just the sixth time in the past 38 years, the National Association of Realtors said Monday.And the ripple effects are beginning to spread with mortgage companies and realtors starting to lay off employees:
Sales of existing homes fell 0.5% in August to a seasonally adjusted annual rate of 6.30 million, the industry group said.
Countrywide Financial Corp., the country's largest mortgage lender with about 5,700 workers in Simi Valley, Thousand Oaks and Westlake Village, instituted a 60-day hiring freeze and plans to reduce staffing in several areas, Dave Sambol, president and chief operating officer, said in a memo obtained by The Star.Jump ship or pink slip for some realtors,
They are jumping ship or receiving the pink slip. America's real estate agents and mortgage lenders, that is.
Now that the glory days of the most recent U.S. housing market are over, its deterioration is taking a toll on employees who profited from its record-breaking five-year run.
With home sales slumping and loan demand diminishing, layoff announcements and resignations have become increasingly common, evidence that the sector's slump is broad.
September 22, 2006
I recommend you look at this graphical description of what is probably coming as the housing bubble bursts. Lots of charts, including this chart:
It's over at Daily Kos: Housing: A Picture is Worth 1000 Words UPDATE
And WOW go look at the last chart in the post.
One economist calls the popping bubble "the house of horrors." Use caution when trying to counter housing downturn
Merrill Lynch economist David Rosenberg calls it "the House of Horrors."Other stories:
He's referring to his fear that a plunging housing market could turn even uglier, taking the breath out of the economy and the stock market.
... He was fretting about foreclosures nationwide surging 53 percent year-on-year in August. He was pointing out that while many adjustable-rate mortgages have yet to move upward, already the Homeownership Preservation Foundation is receiving a record number of calls from borrowers seeking help.
Whether the housing downturn will still allow a so-called soft landing for the economy or yank the shopping instinct out of the American consumer remains to be seen.
On Wednesday, the United States Federal Reserve chose to keep its target interest rate unchanged at five-point-two-five percent. The Federal Open Market Committee said a main reason for its decision was the slowing housing market.
[. . .] As fewer new homes are being built, existing homes are going unsold for longer periods of time. The government reports that the number of existing homes remaining on the market has increased by almost forty percent in the last twelve months.
... Most experts expect declining home sales to slow the economy in the near future.
And a call to lower prices: Economist says builders should take lead in housing correction,To bring the housing market into balance, Phoenix area home builders need shrink their inventory and home sellers need to realize they won't get top dollar for their homes.A Silent Crash In Home Prices
... Resales are controlling the market, he said, as many sellers continue to seek top dollar for their homes as they did during the housing boom of late 2004 and all of 2005. As a result, Brown said, fewer houses are selling.
That combined with large home builder inventories, has slowed the market. "We need to achieve a more realistic balance between supply and demand," Brown said.
September 20, 2006
Housing construction plunged in August, falling to the lowest level in more than three years as the industry showed further signs of a dramatic slowdown.
The Commerce Department reported yesterday that construction of new homes and apartments fell by 6 percent, the third consecutive decline and a much bigger setback than analysts had been forecasting.
Will the economy be dragged down by the slowdown in housing, or will it hum along, virtually unaffected?
Economists are split.
Housing starts have declined for six of the last seven months and August starts, reported Tuesday, dropped to the lowest level in three years. The decline in August was double what economists had expected.
September 18, 2006
No good news in today's housing story:
Housing Slump in U.S. May Lead to First Drop Since Depression ,
The sharpest slowdown in U.S. home-price growth in three decades is trapping owners with mortgages they can't afford, pushing unsold homes to a record 4.42 million and gutting profits for builders such as Lennar Corp. and Toll Brothers Inc. The U.S. median home price next year may fall for the first time since the Great Depression, says Gabriel Stein, chief international economist with Lombard Street Research in London.
The confidence of U.S. home builders fell for the eighth straight month in September, dropping to the lowest level since February 1991, the National Association of Home Builders said Monday. The NAHB/Wells Fargo housing market index dropped by three points in September to 30 from a revised 33 in August, indicating that most builders think the housing market is poor. Economists expected the index to fall to 31. A year ago, the index was at 65. A reading of 50 would indicate builder sentiment was balanced between good and poor.And more bad news:
Ripple effects: US consumer expectations to decline due to weakening housing market,
Analysts at ING Financial Markets say that US consumer expectations are likely to decline again on account of the weakening housing market.Fannie Mae could be hit hard by housing bust: Berg - Mortgage giant could lose $29 bln, long-term bear argues in investor letter,
We are not sure the folks running the show fully embrace the risk of declining house prices," Berg wrote in the letter, a copy of which was obtained by MarketWatch. If the housing market continues to decline "a major portion of Fannie Mae's value could be wiped out." He declined to comment for this story.And, knowing the Bush administration's record, possibly the worst sign of all: US treasury secretary dismisses housing dip,U
S treasury secretary Henry Paulson, making his debut at a meeting of Group of Seven (G-7) economy chiefs on Saturday, told them they need not worry about a housing-led collapse of the world’s largest economy.With their record this means we ALL need to worry about just that.
September 17, 2006
This week's housing news is not expected to be good. Housing starts expected to tumble again,
The fragile U.S. housing market probably weakened further in August and early September, economists said, looking ahead to the coming week's economic data.Hree's a story about a buyer who understands that prices are dropping, encountering sellers who do not yet get it. Standoff in a soft housing market: Bargain-hunters find negotiations tough as prices grudgingly fall,
Home builders have turned very sour on their industry as inventories of unsold houses soar, canceled orders pile up and prices sink.
The week's calendar will offer two views of the home builders: what they do and what they say. In both cases, the story's the same: grim.
"When I went to renegotiate . . . they wouldn't budge at all," Murgia said.But wait, there's more...
Indeed, only now, months into a soft market, are home sellers finally beginning to concede on prices -- but only so much.
From the Detrot Free Press, U.S. housing slowdown could have global reach,
The slowdown in the U.S. housing market could be sharper than expected, which would hurt the U.S. economy, global growth and financial markets, an official from the International Monetary Fund said last week.From The Housing Bubble blog, It’s Common To See Price Reduced Signs’ In California
September 16, 2006
There's a good summary of the week's bad housing news at Daily Kos: This Week's Housing News -- More Cause for Concern.
Adjustable rate mortgages may be beginning to indicate symptoms of rate shock. All types of ARMs had higher delinquency rates than in the first quarter of this year while fixed rate mortgage loans were either unchanged or showed a lower rate of delinquency.This is good: US Housing Crash Continues - San Francisco Bay Area Hit Hard, "When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay."
Other headlines: National Delinquency Study Is Just A Bit Disquieting
During periods of bubbly exuberance, prices can shoot up 20 percent or more a year. It's like every homeowner is a lottery winner, drunk on dumb luck. Gimmicky instruments such as interest-only loans allow speculators to feed in a frenzy. Houses get flipped as fast as In-N-Out burgers during lunch hour.Land investors seek fortunes in the desert - Get-rich-quick dreams spur nearly $16 million in real estate sales in Southern California's Newberry Springs
Then, just like that, the mood changes from bubbly to flat. The flippers worry they'll get caught upside down, owing more than their houses are worth. Buyers stand back, worried they'll plunge in as the market heads south.
That appears to be about where we are now. In a leery standoff between buyers and sellers.
September 14, 2006
San Diego County's residential real estate market continued to cool last month, with overall prices down 2.2 percent from August 2005.An example of the ripple effect is beginning -- fewer rail cars are transporting lumber. Housing slowdown hits RailAmerica August carloads,
It was the third straight month of year-over-year price declines, the research firm DataQuick Information Systems reported yesterday. It also was the slowest August in terms of sales volume since 1997.
RailAmerica said lumber and forest products carloads were affected by the continued slowdown in the housing market.Mortgage delinquencies ticking upward,
Faced with higher mortgage rates and deteriorating housing markets, more Americans are having trouble paying off their mortgages this year, according to the latest quarterly report on delinquencies from the Mortgage Bankers Association released Wednesday.And the bulk of the ARMs don't start "hitting" - the payment increases when the "initial rate" goes away - until later this year and next year.
The report examined the delinquency rate - the proportion of borrowers at least 30 days late with a payment - for all mortgages held on residential properties of one to four units.
It revealed that though the overall rate in the second quarter ticked up only slightly, the picture was worse for adjustable rate mortgages, which constitute about 25 percent of all loans.
The delinquency rate for ARMs, climbed 0.51 percentage points compared with the second quarter of 2005, to 2.70 percent. That represents an increase of 23 percent in the number of borrowers in this category who are falling behind.
Those easy-mortgage chickens are coming home to roost.A wave of housing foreclosures set for this fall,With the housing market cooling off from just about every conceivable consumer angle, so rests the hundreds of thousands of risky loans that sprang up in the last four years as housing prices crept up.
This fall the adjustable-rate mortgages (ARMs) that millions of Americans took out during the recent housing boom will be reset, and many homeowners will see their monthly mortgage payments shoot up by as much as 20%.
September 12, 2006
The slowdown in the US housing market is a key threat to global growth.Housing numbers out today,
This is according to the International Monetary Fund (IMF) in its half-yearly Global Financial Stability Report.
Real estate experts expect to see slowing sales and price gains and increased inventory, but nothing resembling a bursting bubble, when the Northwest Multiple Listing Service releases its August numbers today.Heh. We'll see. More later.
September 10, 2006
Here's the kind of headline that is starting to reach home buyers: House hunters' tip: Prices may fall, a first in 13 years. This news that people should expect falling prices is only starting to sink in out there. Changing people's expectations is a slow process. But when it does sink in -- that is when we will start seeing real drops in prices. Right now we're still in a housing bubble and buyers think they are seeing "bargains" while sellers are holding out with unrealistic expectations. Once it really sinks in that prices are falling - and falling fast - the buyers will start expecting ever lower prices, and the sellers will either take their homes off the market or dump them before prices fall further.
Prices will likely revert to the mean. This June chart from The Economist -- "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops" -- shows where prices were in relation to the mean (100 on the chart) back in 2005, and shows what happened when Japan's smaller bubble popped.
From the Economist story,
Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. [emphasis added]
And more housing bubble news: Housing slump harsher than predicted,
For years, real estate brokers and home builders promised that the soaring property market eventually would glide to a soft landing. These optimists predicted that home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5 percent or 6 percent a year.Builders Brace for a Housing Downturn,
It isn't working out that way. The rapid deterioration of the market over the past 12 months has caught many homeowners and builders off guard. Some are being forced to cut prices far below what their homes could have fetched a year ago.
...The market may be weaker than the Realtors' widely followed monthly reports suggest. The group's data don't reflect the latest transactions.
The housing market is looking sicker by the day. On Sept. 7, the perpetually optimistic National Association of Realtors acknowledged for the first time that housing prices are likely to fall on a year-over-year basis, at least for a time.
September 8, 2006
Calculated Risk: Housing: Difference a Year Makes, has a great chart of year-to-year changes in the housing market. Keep in mind that the real news of a downturn in housing is only recently hitting the press in a way that will penetrate to average people. These numbers are what is causing that news - and NOT from people reacting to that news. Things will really start happening when people start reacting, and start understanding that their house will be worth less next year, and start thinking about taking a profit - or just getting out - now.
Recent data quantify housing cooldown (year-over-year changes).Go see the whole chart.
Builders’ sentiment down 52.2%
New-home sales down 21.6%
Purchase-mortgage applications down 20.9%
Building permits down 20.8%
National home prices are likely to fall below where they were in late 2005, the chief economist for the National Association of Realtors said Thursday.U.S. Home Prices May Fall for First Time in 13 Years,
The same trend could occur in the Bay Area, local experts said, reflecting a broad-based market shift in which homes for sale generally outnumber eager buyers.
``I wouldn't be surprised if we saw a drop in prices of 10 or 15 percent by the end of the year, from the peak,'' said Edwin Resuello, president of the Santa Clara County Association of Realtors, referring to home prices countywide.
U.S. home prices may fall for the first time since 1993 as a record number of homes for sale gives buyers the upper hand in negotiations, the National Association of Realtors said.Housing decline: How 'temporary'?
You know the boom is over when even the brokers start predicting lower prices. That was true of the stock-market bubble in 2001, and it's true now, as the air comes out of housing.
... Other forecasters are less sanguine than the Realtors. Global Insight, the economics firm with offices in Eddystone, found prices falling even in parts of the country where housing has been relatively tame.
In Michigan, Ohio and Indiana - some of the flattest real estate markets in the country - "modest gains have given way to losses as mortgage rates rise and economic conditions soften," the Global Insight team reported.
September 7, 2006
The cooling housing market and a softening of capital spending will bring a slowdown in U.S. manufacturing activity next year, according to a study released by an industry trade group on Thursday.U.S. Stocks Fall as Housing Slump Deepens,
... "The housing market has turned, it's going to be down this year and even down more sharply next year," Dan Meckstroth, chief economist of the Arlington, Virginia-based trade group, told Reuters.
U.S. stocks dropped for a second day after two homebuilders cut their earnings forecasts, fueling concern that the housing slump may curb economic growth.
A U.S. housing sector downturn may last for years because of excess supply and faltering consumer confidence stemming from worry over U.S. foreign policy and federal government competence, the head of nation's largest builder of luxury homes said on Wednesday.NAR says housing prices will fall,
... "This isn't a soft landing, it's harder than a soft landing," Toll told Reuters in an interview. But he denied the market was headed for a more dramatic decline in prices as some observers fear. "We are not crashing," he said.
The National Association of Realtors has lowered its forecast for home sales this year, and says housing prices will probably fall below year-ago levels in the short term.Economic Outlook: Housing market weaker still
September 6, 2006
...But the peak has passed, and the consequences of the deflating bubble are buffeting the housing market, in Washington and across the United States.
What sold in a weekend here last year is taking months to unload. And increasingly nervous home sellers are slashing prices to get rid of properties before their value sinks even further. One buyer recently threatened to walk away from a signed contract on a $1.6-million house unless the seller took $100,000 off the price to reflect the drop in value since the deal was struck. The seller quickly buckled, fearing the house might be worth even less if put back on the market today.
"Look how fast prices were going up. The same thing is happening on the way down," observed Ms. Gaus, who's been selling homes in Potomac for 16 years.
The U.S. housing crash may prove to be the economic equivalent of the canary in the coal mine -- a warning of impending danger in an economy that has surged too far, too fast. Many experts are now openly speculating about a possible U.S. recession next year, brought on by consumers reacting to the shrinking value of their nest egg. If they're right, the fallout could prove to be far nastier than the collapse of the technology bubble at the start of the decade.There's more, go read. Then go read Home prices show huge slowdown and Home Prices Fall in Nearly One-Fourth of Metropolitan Regions,
"It could throw the economy into recession if consumers go into a shell," worried economist Peter Morici, a business professor at the University of Maryland. "I don't see anything out there to compensate."
Price declines are spreading to more parts of the country. The 89 areas affected in the second quarter compares to 66 metropolitan areas where prices fell in the first three months of the year. In the fourth quarter last year, only 29 areas reported such declines.If you know anyone thinking of buying a house, suggest they offer 25% less than the asking price just to see what happens. They might find themselves owning a house -- that they still paid way too much for.
'The Wheels Are Coming Off' - a terrifying roundup of the problems battering housing, including a reference to Bloomberg yesterday, U.S. Home-Price Gains Slow as Housing Slump Deepens,
U.S. home-price growth slowed during the second quarter from a year earlier in the sharpest three- month plunge on record, according to a government report issued today that indicates this year's housing slump is deepening.Keep in mind, this is only the very start of the popping of the housing bubble. It's only just hitting the news in a way that spreads out to the broad public. It is only after it becomes generally understood that housing prices are not going up anymore and people take price appreciation out of their buying calculation that we will start to see real changes. Prices have a long way to fall before things get back to normal.
"The wheels are coming off the housing market,'' said Scott Anderson, an economist at Wells Fargo & Co. in Minneapolis. [emphasis added]
And, always, everything at The Housing Bubble blog.
September 5, 2006
"These data are a strong indication that the housing market is cooling in a very significant way," said James Lockhart, OFHEO director. "Indeed, the deceleration appears in almost every region of the country."And in other housing news:
It's the fastest deceleration in the index in its three-decade history, OFHEO said.
... Prices fell in the second quarter in four states: Michigan, Massachusetts, Ohio and Indiana.
Prices in Hawaii, Maryland, Virginia, Nevada, New Jersey, the District of Columbia, and California cooled to less than 0% annualized growth in the second quarter. [emphasis added]
The housing stock nearly has quintupled and prices are virtually flat when compared to last year's levels. Home sale time-frames now are measured in months, not days.US Aug layoffs surge, housing slowdown cited,
"Yeah, we miss those times," Darrell Muhammed, a local agent, said of last year's market.
While average prices have yet to tumble, concern mounts that an ever-increasing housing inventory, coupled with coming hikes for variable rate mortgage holders, could send the market south in a hurry.
Planned U.S. layoffs surged 76 percent in August compared with the previous month amid signs that a slowdown in housing was starting to have an impact on employment, an independent report showed on Tuesday.
... "Job-cutting in real estate this year is nearly double last year. However, we have not as yet seen a major uptick in job cuts in the sectors we might expect during a significant slowdown. The housing slowdown has not had a major impact on the job market, yet."[emphasis added]
September 3, 2006
All eyes will be looking at Tuesday's release of the Office of Housing Enterprise Oversight home price index, which will cover April-June. Home price data takes center stage this week,
Home values are critical to the economic outlook. Economists disagree about how the housing slowdown will impact consumer spending.Estimates are that it will show a slowing in the rise of prices.
The rise in home prices has been an important driver of consumer spending. Many consumers have been refinancing their mortgages based on the higher home values and using the cash to finance purchases.
... On a national average basis, home sales have not fallen in any year since the late 1940s, said Berson. There have been some quarterly declines, and prices have been down annually in some regions.
September 2, 2006
This month's figures prove that the so-called "housing bubble" is not only real, but that its cratering faster than anyone had realized. As the UK Guardian reported a couple of days ago, “the orderly housing slowdown predicted by the Federal Reserve will (soon) become a full-blown crash.”Madison - Housing bubble has burst; prices will tell you why
To hear the real estate agents tell it, the housing market has "lost steam."
What they really mean, of course, is that it's hit a wall - though you won't get them to admit that publicly. And from all indications it's not going to improve any time soon.
Five and a half years ago the equity bubble popped. Within six months, the US economy went into mild recession, and the global economy was quick to follow. Today, America’s housing bubble is finally bursting. Is the die cast for another bubble-induced downturn in the US and global economy?Pending Home Sales Index Points To Easing Market ,
Home sales should be leveling out in the months ahead at a lower pace, according to an index based on pending home sales, a leading indicator for the housing market published by the National Association of Realtors®.On housing front, it's beginning to get ugly,
The Pending Home Sales Index,* based on contracts signed in July, is down 7.0 percent to a level of 105.6 from a downwardly revised reading of 113.5 in June, and is 16.0 percent lower than July 2005.
.... Lereah said psychological factors account for much of the decline in July home sales. “We’ve never seen a general decline in the housing market against a healthy economic backdrop where jobs are being created, the economy in growing and interest rates are favorable,” he said.
File this under car wreck, as in, you don't really want to see it, but you cannot look away. I'm talking about the latest batch of housing numbers. They all show pretty much the same thing: sales slacking off, inventories rising.(Those last two found through Housing Bubble and House Prices Tracker)
If and when certain markets collapse 20% to 30%, it should not be deemed a bubble. It will happen in some markets and has happened in over-built condo markets. But these units will be absorbed in the next few years. The greatest pain will be felt by the biggest speculators and the most overzealous people participating in unorthodox loan programs.
August 31, 2006
Housing headlines are dominating the news these days in the same way the Nasdaq did in the late 1990s.
And no wonder. Successive years of sizzling sales and spectacular price appreciation have given way to falling sales and starts, record inventories of unsold homes (new and existing), a plunge in housing affordability and a flattening out of prices on a nationwide basis. The residential real estate market may never match the Nasdaq's vertiginous 78 percent decline from the 2000 top to the 2002 bottom, but it is captivating potential sellers, late-to-the-party speculative buyers and analysts looking to assess the impact on the overall economy.
... One area that has received next to no attention is the risk to the banking system, which, like everyone else, got caught up in the housing-market froth, extending credit seemingly without much due diligence. [emphasis added]
Over the next year or so, as the real estate market begins to soften, where will home prices remain highest? Potential buyers should look for more than beachfront location, nearby golf courses, or even good schools to determine whether their investment will be a smart one. The best thing to find? A strong local economy.Don't blame interest rates for housing slowdown,
Nationwide, July's sales of new homes were down more than 21 percent from a year earlier and the inventory of unsold new homes hit an all-time high.
Residential building permits are down nearly everywhere. So far this year in the 11-county Twin Cities metro area, permits are down 18 percent. Comparing this July with July 2005, they are down 37 percent.
Sales of existing homes are slowing as well, according to the National Association of Realtors and other sources. For the nation as a whole, sales are at a 2½-year low and the inventory of unsold homes is at a record high.
So sales and construction clearly are down. Some interest rates clearly are up. The Federal Reserve started to constrict growth of the money supply two years ago, forcing its short-term target rate up by 4.25 percentage points since then. The prime lending rate is up about the same amount. Even so, mortgage rates — especially for fixed-rate loans — haven't climbed as much.
Yes, these rates were a percentage point or so lower a year ago. They currently are at the upper end of a narrow band in which they have hovered for four years. They remain very low by historic standards and in comparison to inflation.
... So if mortgage rates are not all that high when compared with long-run averages and adjusted for inflation, what is going on in housing?
... The most important factor, however, is that real estate and construction were in an unsustainable boom. Many people were building and buying houses with the primary objective of selling them for a profit.
Such booms are self-propagating for a while but must eventually die out even if interest rates do not rise. Irrational exuberance is fun while it lasts. When it abates, there is a frenzied rush for the door and someone always gets trampled.
August 30, 2006
US economic growth slowed to an annual pace of 2.9 per cent in the second quarter as housing starts fell more than initially believed, the government said Wednesday.House price crash could dwarf the 'dot-com' collapse
"Things do seem to be getting worse very quickly. Free-fall is a strong word, but I think it's the right one to use here," says Paul Ashworth, chief US economist at Capital Economics.
But most Americans look into the future, see a weakening property market, and fear not. They have been told that soft housing prices pose no problems for the rest of the economy. They have no reason to doubt that it is true; no reason to squint and try to see further. They dread neither slump nor boom, neither war nor peace. Everything will be managed by the authorities so as to do no great damage to the homeland, they believe.
But you typically don’t lose money or make it when things happen as expected. No one plans on losing his life savings. It comes as a surprise – along with sudden death, financial crashes, and other crises.
August 28, 2006
Just after posting below I came across this: Stephen Roach: Bursting Housing Bubble A Very Big Deal ,
If the US consumer slows, the demand expectations that typically drive capital spending will also weaken. So, too, will the growth dynamic of America’s export-led trading partners -- thereby undermining support for US exports, as well. In short, for a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal.
It is also likely to be a big deal for an unbalanced global economy. In 2000, when the equity bubble burst, the gap between current account surpluses and deficits was less than 4% of world GDP. This year, as the housing bubble bursts, that same gap is likely to be around 6% of world GDP. The disparity between current account surpluses and deficits -- and the added point that the US accounts for about 70% of all the deficits in the world -- underscores the increased dependence of the rest of the world on the US. For that reason, alone, a bursting of the property bubble poses equally serious risks for America’s key trading partners and for the rest of an increasingly integrated global economy.
When the air is expanding inside a speculative balloon, stretching the film of credibility that contains it to an ever-more improbable thinness, you can always find someone to explain why this time it’s different — why technological/demographic/astrological factors justify valuations today that have always proved historically unsupportable.So what might happen next?
Until the bubble actually starts to deflate or burst, there’s just enough doubt about whether prices really will revert to their historical mean to keep us all guessing. Even the most convinced sceptic can never say with any certainty when a bubble will collapse, and so the science of identifying bubbles is an inherently retrospective activity.
But it looks now as though we can say with some confidence that the long American housing bubble is over.
In previous periods of weakness in property markets there have been huge institutional collapses. The savings and loans debacle of the early 1990s is the most recent example. Today, again thanks to increased financial efficiency, the risk of such a massacre seems smaller. The securitisation of the nation’s mortgage market has spread the geographical and sectoral risks to the broader economy.And another from the UK, through Taiwan, US housing slump feeds fears of crash,
But there will still be many financial institutions with significantly impaired balance sheets as the value of their mortgage-backed securities declines sharply over the next year. All in all, even on the most optimistic assumptions, post-bubble conditions in the housing market would be highly uncomfortable for America and could seriously sap demand in the world.
The downturn in the US housing market will force businesses to slash 73,000 jobs a month in the new year and could be more damaging to the world economy than the dotcom crash, economists have warned.From Canada, Downturn leads to higher risk of U.S. recession,
After official figures last week showed that the number of new homes sold last month was 22 percent lower than a year earlier, while prices were almost flat, fears are mounting that the "orderly" housing slowdown predicted by the US Federal Reserve will become a full-blown crash.
"Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it's the right one to use here," said Paul Ashworth, chief US economist at Capital Economics.
Mounting evidence of a slowdown in the U.S. housing market has led some forecasters to increase the chances that the world's largest economy will be limping into a recession next year.
"We have decided to raise the odds of a U.S. hard landing to 40 per cent from 25 per cent," National Bank Financial economists Clément Gignac and Stéfane Marion said in a note yesterday.
August 27, 2006
All of a sudden, lots of bad news. Except that some of us have been talking about what's coming for some time now. The signs were all there.
How much of the seeming prosperity of recent years was based on borrowed money? People were refinancing their houses as prices rose, and using the money to buy SUVs, etc. But now we have the opposite situation - these people now owe that money yet prices are falling. And with prices falling few new people will be refinancing. Meanwhile the government has borrowed massive amounts of money and pumped it into the economy - something usually done only to get us out of downturns - so if there is a downturn they won't be able to borrow money to pump into the economy. Bush has used up that trick during the good times when we should have been paying off debt. (Clinton paid off debt, which is what allowed Bush to borrow so much...)
Here are a few of today's stories:
The news has been universally bad: inventories are rising to 10-year high levels, buyers are already saddled with massive amounts of debt, homebuilders are cutting profit projections and overall investment is negative. And here is more from Nouriel Roubini: housing is already in free fall and will cause a recession by the summer of 2007.
...last week was one big series of uh-ohs.Housing Numbers Dampen Investors’ Outlook,
[. . .]So where is the market headed? Nobody can be certain; much depends on whether the number of unsold homes continues to rise. Last week, doom-and-gloomers, emboldened by the new data, were citing reasons to believe that the latest bulge in inventories is just a taste of things to come. Plenty of new homes remain under construction. Speculators who haven't yet unloaded their properties will do so for fear that things will get even worse. And then there are the hordes of recent buyers who, having assumed adjustable-rate mortgages that are becoming increasingly unaffordable as interest rates rise, may be forced to sell.
Stocks declined last week as investors worried that rising energy costs and a slowdown in the housing market could send the economy into a slump.And the theme is sinking in around the country -- Heartland Housing Market in Buyers Favor,
It can be a nightmare...as you wait and wait and wait for that house to sell. The bad news, it seems the housing boom is over.
August 26, 2006
It's too early to say whether the slowdown will turn into a crash presaging a recession, as happened in the late 1970s and '80s, although the economy's other fundamentals remain healthier now than then. But it's worth bearing in mind which homeowners are most likely to be affected by a possible downturn and which ones can lay off the antacids.
... A separate point of anxiety is the prospect of higher interest rates for buyers with adjustable-rate mortgages. The Federal Reserve recently took a break from its prolonged increasing of short-term rates, but lingering risks of inflation could push borrowing costs, and therefore adjustable mortgages, back up. Owners who can't afford the higher payments might be forced to sell their homes at a loss.
The AP story is in most newspapers, Housing, fuel strain shoppers,
Fresh evidence shows high energy prices and sagging home values are pinching the main driver of the U.S. economy: Average Joe's wallet.OK, look. There are a huge number of interest-ony and adjustable rate mortgages out there. The negative effects of most of these do not hit until next year, when people's monthly payments will suddenly go way up - forcing many to sell. So this thing hasn't even started yet. Combine this with the number of people who bought for speculation and never had any intention of holding on to the property for very long. Then combine those factors with the higher fuel costs that are straining everyone's budgets. And finally add in the federal government's massive borrowing that is pushing up interest rates AND rising inflation rising which also puts pressure on interest rates. This has all the makings of something much worse than a recession.
Retailers and economists say many Americans are waiting to buy big-ticket items and cutting back on frills.
Homeowners are shelving plans to remodel kitchens. Families are dining out less and tightening their budgets.
August 25, 2006
It's becomming "the story." This has to go on for a while, for the news to filter out to "the masses." In a few weeks it will be generally understaood that housing prices are heading down. Next will be stories about how fast prices are dropping, and then about people being hurt by this. Each will feed the next phase.
How do you know how to price your house? Fletcher says, "Look at what other similar houses in the neighborhood are selling for and then set your price at 10 percent under the market.If you want the house to sell, price it lower than the last one that sold. This is necessary - if you want to or have to sell - but feeds the drop.
Washington Post: New-Home Numbers Add to Housing Woes
New-home sales fell more steeply in July than economists forecast, and the number of unsold houses climbed to a record, deepening a slump in an industry that fueled economic growth for five years.
New York Times: Housing Reports Reveal a Slowing Market
A backlog of unsold new homes continues to pile up. Last month there were 568,000 new homes on the market — enough that it would take 6.5 months to sell them all at the current sales rate. That is the most in more than a decade.
Business Week: Housing: The Roof Won't Collapse On The U.S. Economy,
All of this is not to downplay what is essentially a recession in housing. Housing starts sank further in July. Permits to begin new construction plunged close to a four-year low, and an industry measure of builders' sentiment sank to a 15-year low. Forward-looking indicators from declining mortgage applications to depressed attitudes of potential home buyers to moribund buyer traffic in model homes indicate more weakness to come.Chicago: Midwest July new home sales drop 21%,
Sales of new homes dropped in July while the inventory of unsold homes climbed to a record high.US News & World Report: New-home sales swoon,
Economists said the market for new homes may be in worse shape than the government's figures show because they don't take into account rising cancellations reported by many home builders in recent weeks. "This was probably an even weaker month than it looks," says Michael Carliner, an economist with the National Association of Home Builders.Richmond: Home sales are cooling further
Krugman - all you need is the headline: Housing Gets Ugly, but I'll quote just a bit:
Why the sudden crackup? When prices were rising rapidly, some people bought houses purely as investments, betting that prices would keep going up. Other people rushed to buy houses, or stretched themselves to buy houses they couldn't really afford, because they feared that prices would rise out of reach if they waited. And all this speculative demand pushed prices even higher. In other words, there was a market bubble.
But eventually prices reached a level beyond what even optimistic potential buyers were willing to pay, especially after interest rates rose a bit. (They're still low by historical standards.) As demand fell short of supply, double-digit price increases declined into the low single digits, then went negative everywhere except in the South.
And with prices falling in many areas, the speculative demand for houses has gone into reverse, as people try to get out with a profit while they still can. There's now a rapidly growing glut of unsold houses. This is a recipe for a major bust, not a soft landing.
August 24, 2006
The price drop begins. Sales have been slowing down and inventory has been building up, but prices were not dropping yet. Now we're starting to see the first signs that "real estate always goes up" isn't a law of physics. Home prices in Mass. fall 3.5 percent in July - The Boston Globe,
Home prices in Massachusetts fell 3.5 percent in July, the largest decline in 13 years, as the slowdown in the real estate market finally led sellers to cut their prices.What does this mean? Yesterday I talked about how news of dropping prices will change everything.
... Sales of single-family homes began dropping last fall, but prices were slow to respond to the weakening demand.
... Massachusetts is not alone, though the sales slowdown began here before spreading to the rest of the country.
Here's the thing. Sales slowing and rising inventories necessarily mean that prices will start to drop soon. And just wait until THAT starts hitting the news. That's the tipping point. That's when people's expectations change. Once people stop seeing house prices rising, everything will change. And when they realize that prices are dropping, everything will really change.So as of now people understand that this is a market to get out or stay out of or you will lose money. From the article,
But Newton agent Rona Fischman said many are ``still in denial." The steep drop in July sales ``tells me we're in the first year of the price declines," said Fischman, who is with Buyer Brokerage Realty. ``Sellers who really have to sell are waking up and smelling the coffee. There's more coffee coming."
... ``It's possible we're standing at the edge of a cliff, and if we wait the bottom will drop out" of the market, Wagner said about predictions prices will fall further. [emphasis added]
August 23, 2006
This is the beginning of the housing crash. It is JUST starting to hit the mailstream news that sales are slowing. Sure, it's old news to you and me but "regular people" are only now going to start hearing about it.
Since it's early in the cycle, we're still hearing that buyers are "waiting on the sidelines to jump in." These are people who still think that "real estate always goes up." (Remember the people who believed that stocks always go up?) When those last few "always goes up" people are shaken out of the market things will really start happening.
And, since it's just the beginning of the downturn, we're now hearing comforting, calm words about a "soft landing" and that "this is a healthy thing," etc.
Here's the thing. Sales slowing and rising inventories necessarily mean that prices will start to drop soon. And just wait until THAT starts hitting the news. That's the tipping point. That's when people's expectations change. Once people stop seeing house prices rising, everything will change. And when they realize that prices are dropping, everything will really change.
Right now, people are willing to pay these high prices because they believe that prices will be even higher next year. They see housing as an investment, rather than just as a place to live. People are willing to pay mortgage payments that are much, much higher than rents because they believe that prices will be higher next year. But what will happen when people start realizing that prices will be lower next year? Everything changes.
First, people who are overextended will start being forced to sell. When people have to sell, they will drop the price until the house sells. And as each month's housing price report tells people that prices are dropping, people who have to sell will be willing to lower the price even more.
After that starts, people will wait to buy. And with people waiting to buy, prices will have to start dropping even faster.
As with all bubbles, the unwinding of unrealistically high prices will accelerate.
So how low will prices fall? They will fall to the place they should be, which is the place where demand and supply meet, and return on investment makes sense, without the unrealistic expectation that "prices always go up" involved in the equation. In other words, prices will not reflect an expectation of future price appreciation. There has been a lot of new housing build, reducing demand, and prices are incredibly high, so they could fall QUITE a lot. It is possible that this bubble could unwind as seriously as the stock market bubble did.
Update - Mary has more at The Left Coaster.
August 16, 2006
Kevin Drum says he thinks housing prices in Southern California will drop 10-20%, bottoming out in 2008.
Here in Northern California housing prices have more than tripled during the housing bubble. They average around $750K for a 3BR in my area. So how much might we expect them to fall now that the bubble is popping? Let me try a calculation based on getting a return on investment for a rental property.
Suppose rents are $2000 a month for a 3-bedroom house. Subtract from that repairs, maintenance, etc., and let's say you are clearing $1800. Instead of trying to calculate property taxes let's just say $400 per month - which is lower than what they would be ($650) if purchased now but you'll get my point in a minute.
So you're clearing about $16,800 a year from your investment. Let's say you are shooting for a 7% return. That means the house SHOULD be priced at about $240K, approx 1/3 of current pricing. (Except that those property taxes are now too high for this purchase price, but you're starting to get my point.) This happens to be about what prices were before the bubble, plus a bit for inflation. EXCEPT for a few things -- the bubble provided incentive for a LOT of new homes to be built, so demand will be weaker. AND a lot of people are going to be wiped out financially so overall ability to purchase will be lower. AND, with all those houses on the market, rents are likely to fall. So these are some of the factors that could contribute to prices going lower than about $240K around here. But you get my point.
Prices have a LONG way to fall, and when they do there are a lot of factors which could make them take much longer than usual to recover.
July 29, 2006
Calculated Risk: New Home Sales and Recessions. Look at the chart, showing the correlation between drops in new home sales and recessions, and see where we are now.
or consumer led recessions (all but the most recent recession in 2001), New Home Sales were falling prior to the onset of the recession. It appears that New Home Sales peaked last year.Then go look at this post and its charts to see the likelihood of people being able to sustain a good rate of new home sales.
This doesn't imply a cause and effect relationship, but it is something to watch. If New Home Sales can stay above 1.1 million or so that probably increases the probabilities of a soft landing (just slower growth), as opposed to a hard landing (a recession).
I report, you decide.
July 22, 2006
“Such a sharp decline in home sales has sellers in the area frustrated, and the number of additional homes coming on the market is only making matters worse. In June, another 19,300 homes received for sale signs in their front yards. With less than 9,000 homes selling last month, you can see what sellers are up against.”
... “‘I’m not buying your overpriced place on some silly discount. I’m buying at 2002 or earlier prices. If not from you, then from your bank when you forclose.’ Maryann Haggerty: ‘Who is sounding a little, well, smug and condescending now’?'
[. . .] ‘Things were tooling along beautifully for like the last 10, 15 years. Then all of a sudden, business dried up.”
“This is the kind of lull that often follows a boom, Waukesha developer Bryce Styza said. ‘We had a terrific 3, 4 years,’ Styza said. ‘It was naïve to say, ‘This will go on forever.’” [emphasis added]
April 8, 2006
At least one conservative business analyst is warning his political compatriots that their middle class base may melt away when homeowners begin to experience the coming housing crash. Andrew LaPerriere sounds the alarm in the most recent Weekly Standard...
. . . Has the housing crash started? And will it bring down the whole economy? LaPerriere travels ground we covered here last summer—skyrocketing home prices that make purchases unaffordable for a growing number of families, the staggering differential between rental prices and purchase prices that signal over-heated speculation, and what happens when $2 trillion of adjustable-rate and interest-only mortgages (one quarter of all mortgages in the US) are reset in the next two years. But he adds a political analysis that is amazingly candid. Calling his fellow conservatives “strangely silent” on the problem and consequently vulnerable to the political fallout when conservatives across the country discover that no one in Washington was watching out for them.
February 27, 2006
The backlog of unsold new homes reached a record level last month, as sales slipped despite the warmest January in more than 100 years.
The Commerce Department reported Monday that sales of new single-family homes dropped by 5 percent to a seasonally adjusted annual rate of 1.233 million units last month.
That was the slowest pace since January 2005 and left the number of unsold homes at a record high of 528,000.
February 22, 2006
Santa Cruz housing prices have already fallen from $785,000 to $729,500 since June!
February 13, 2006
Today's housing bubble post is over at Angry Bear,
And that is the question: will the debt binge end with a "bang" or a "whimper". Will the US economy see slower growth or will it slide into a recession? Or will some new engine of economic growth emerge to replace the debt fueled growth of recent years.
January 29, 2006
80% of us Pacific Coast residents think there's a housing bubble. Almost as many of us expect it to burst within a year, or sooner. Around 50% of us would advise a young person to "rent until the market slows or drops".
... I wonder: who is still buying, and why?
January 26, 2006
The five-year housing boom is showing increased signs of cooling, and that's likely to mean slower growth for the entire national economy. The big question now is whether home prices will come crashing to earth with even more severe consequences.
November 28, 2005
Sales of existing homes fell a bigger-than-expected 2.7 percent in October, a fresh sign that the red-hot housing market is cooling. The decline would have been worse without increased demand from displaced hurricane victims.
November 6, 2005
Here's a list of Housing Bubble blogs:
Bloggers Blog: Housing Bubble Blogs and Resources (lists regional housing bubble blogs, too)
November 2, 2005
There are several good posts on blogs today about the housing market slowing down.
BOPNews has Housing Slowdown Continues,
Housing is the engine of the current US economy. A conservative reading of the last 4 years of job gains indicates it is responsible for roughly 40% of job creation.
[. . .] In summation,
1.) Sales of existing and new homes are slowing
2.) Inventories available for sale are increasing,
3.) Rental vacancies are high,
4.) The median and average home prices dropped last month,
5.) Consumer’s confidence is lower and their debt level is high, and
6.) The Federal Reserve is raising interest rates.
It appears all the pieces are now in place for a continued slowdown in housing.
Calculated Risk has MBA: Mortgage Activity Continues to Fall,
First we saw rising inventories, now it appears we are seeing more signs of falling activity. Next I would expect to see prices flatten out or even start to decline.And USA Today: Overheated housing market is cooling off.
October 3, 2005
The Alonsos' story is about just one family in one property development, singling out one homebuilder and one abusive financial scheme. There are undoubtedly many, many variations on this theme, and the full story won't be written until the housing bubble really unwinds -- much as we didn't find out about Enron, WorldCom, and those assorted problems until the tide went out on the stock mania.
September 10, 2005
"As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China." -- Paul Krugman (NY Times, login may be required)
August 26, 2005
August 23, 2005
Any minute now:
U.S. housing sector shows signs of slowing ahead
The boom may be cooling
Is The Housing Market About to Bubble Over?
Wall St. Waits to See What Will Be Repaid
Homebuilders' Shares Hit by Home-Sales Drop
Housing bubble ready to burst
Economist Predicts Housing Bubble Bust
Housing bubble within popping distance
What if housing bubble bursts?
Preparing For A Housing Bubble Burst
Caught this article the other day, discussing a new study released by the Public Policy Institute of California, entitled: California's Newest Homeowners: Affording the Unaffordable.
News article pull quote: "Californians are increasingly affording the unaffordable by sinking more than half their incomes into mortgage payments, taking on enormous debt, forgoing downpayments and signing interest-only or adjustable-rate mortgages".
Executive summary pull quote: "The share of income spent on housing is higher for homeowners in California than in any other state."
August 15, 2005
Real estate investors are just walking away from residential property and lenders are getting stuck. Some lenders do not want to take title to the worthless property and the city has started a campaign called the "shaming sign" - placing signs on abandoned property with the names of the lenders' executives. This has induced some lenders to take title and either fix up or demolish the abandoned homes.It's starting, folks. And I predict it will be worse this time than it has been in the past.
This is a story from the Great Depression ... except it is happening right now in Dayton, Ohio.
Suppose you borrowed $500,000 with no down payment, and pay only interest, and your payments are higher than you can really afford, and you see that prices are not going up and maybe even starting down, what reason do you have to stay in that house? Why not just walk away, give the keys to the bank, and move somewhere you can afford? You really have very little to lose.
But the bank, that's another story. The bank now has a house instead of a %500,000 loan on their books. So they have to turn that house into cash. They understand that they aren't going to get $500,000 for the house and they're going to put it on the market and take what they can get. So prices are now $450,000 in your neighborhood.
Meanwhile your neighbors have a $500,000 mortgage with no down payment and the monthly payment is more they they can afford. Some walk away and give the house to the bank, others just sell. Soon one of every five houses is for sale, but the buyers see prices going down so they're holding out.
There is another element here -- the speculators. People who purchased houses or condos intending to "flip" them for a higher price in a short time. They're really on the spot here and really have to "unload" fast. And they keep a close eye on the market. So they'll "dump" and soon. Now even more properties are on the market.
Desperate sellers lower prices. They need that money, and they are afraid prices will go even lower in a hurry. So they'll make deals to sell their property. Others will see that the ones holding out for any decent price are losing their shirts, and lower their prices even faster.
Do you see where this goes? It's called a "panic."
Prices will get down to where they should be, probably in a hurry. Borrowers and lenders will be hurting. And most of the jobs created in the country in the last few years depended on mortgage lending and home construction. Do you see where this goes?
Start reading about the Savings and Loan Crisis. The amounts involved (and the corruption) will be much greater this time.
You and I will pay for it.
August 12, 2005
"So now we can see exactly 'How Far Is Down' for any particular rental property. In this case I should expect to see my current rental house drop in value from $550,000 to $220,000 based on historical mean reversion characteristics."
"The real problem lies not in the fact that the rental house I live in will only be valued at $220,000 but rather how fast it falls and what happens when the landlord decides to sell."
June 21, 2005
The L.A. Times linked to an interesting site Sunday. I've read DQ News on occasion, but never noticed their Zip Code Housing Charts on the left side of the page. The Times carried the May Sales for Los Angeles County.
I've taken out the Sales Count and Condo Prices. These are the median prices, percentage increase from May 2004 and price per square foot of the top and bottom of the L.A. Housing Market:
Beverly Hills 90210 $2,550 30.8% $744
Beverly Hills 90211 $1,450 35.5% $852
Beverly Hills 90212 $2,000 83.3% $943
Pacific Palisades 90272 $1,757 33.6% $825
Compton 90220 $310 41.6% $263
Compton 90221 $327 48.6% $299
Compton 90222 $290 41.1% $280
And why some people in L.A. Commute 3-4 hours in each direction to and from work:
Lancaster 93534 $246 31.6% $184
Lancaster 93535 $265 40.7% $181
Lancaster 93536 $320 22.1% $186
Mark Hitlzak had an interesting article Giving In to Bubble Pressure: To paraphrase Mark Twain, everybody talks about the housing bubble, but nobody does anything about it. Well, Mark A.R. Kleiman did something about it. Read about a UCLA professor who cashed out and moved to the sidelines.
Kleiman was looking at the dilemma facing a lot of folks. How do you cope with the housing bubble and where do you find a safe investment for the lurking economic disaster? He didn't have the problem facing many readers of Seeing the Forest, who are married to women with irrational emotional attachments to their home, children and husbands.
It's worth noting that Kleiman has more flexibility to convert his home into liquid capital than many Southland families. He's unmarried and childless, so he didn't have to replace his Mulholland home with one of commensurate size in a suitable school district.
That said, he knows he's making a sacrifice. "I love this house. I went through a lot of heartache getting it redone." He'll miss the quiet, and his new apartment won't have the space for his extensive collection of African art and sculpture.
Before deciding to sell, he investigated a few conventional hedging possibilities, including HedgeStreet, a website that allows individuals to speculate on economic events, and another venture that has brought together Yale University economist Robert Shiller and the Chicago Mercantile Exchange to develop derivatives in housing and other asset classes. But the trading market at HedgeStreet is still thin, and the CME project hasn't yet gotten off the ground.
Last, and certainly not least, the cover story from the Economist, After The Fall: Soaring house prices have given a huge boost to the world economy. What happens when they drop?
Excellent related articles and a reminder that this is a global economic problem:
This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history (see article). The bigger the boom, the bigger the eventual bust.
Throughout history, financial bubbles—whether in houses, equities or tulip bulbs—have continued to inflate for longer than rational folk believed possible. In many countries around the globe, house prices are already at record levels in relation to rents and incomes. But, as demonstrated by dotcom shares at the end of the 1990s, some prices could yet rise even higher. It is impossible to predict when prices will turn. Yet turn they will. Prices are already sliding in Australia and Britain. America's housing market may be a year or so behind.
June 14, 2005
Help! Any ideas, comments welcome.My answer? Sell now, take the $85,000 loss, before things get worse. (Update - Oops, they're out the $85,000 PLUS the closing costs from buying PLUS the costs of selling, which can be quite high -- realtor commissions, appraisals, inspections, repairs, etc.)
My partner and I are in a mess with a brand new house in Las Vegas. Here are the details.
1. AUG 2004, we paid $445,000 for a Pulte model in the community of Aliante, North Las Vegas.
2. 100% financed and still owe roughly the same.
2. Payment is $3000/month.
3. Currently could only sell for about $360,000.
4. Finally found tenants to lease out for $1100/month in APR to reduce neg cash flow to $1900/month.
We are running out of cash quickly. We desperately need some ideas on how to get out of this house immediately.
June 7, 2005
It occurs to me that risky loans make other loans more risky. Here's what I mean. When a bank gives a loan to someone who is on the borderline of making the payments, they take the risk of ending up with a default. And right now, at least around here, housing loans are no-down-payment, interest-only, adjustable-rate mortgages made to 21-year-olds who have been employed for three months on their first job. So there is a very, very high risk of defaults. Very.
Foreclosures often sell for a lower price. And housing prices are determined by the price of neighboring houses. Because so MANY mortgages are this kind of loan now, the lower price on the foreclosed house likely as not means that the house next door is now "underwater" -- worth less than the amount still owed on the loan that bought it.
At some point, seeing what's coming, that homeowner puts the house up for sale and takes what they can get. Now the whole neighborhood is panicking and prices are cascading down. ALL the houses are underwater. So ALL the risky loans are even riskier.
This is what I mean by risky loans making other loans even riskier. They almost guarantee a certain number of foreclosures, which means distress sales, which puts the other risky loans underwater. So these banks making these loans are blowing it for all the other lenders. This is a situation crying out for the government to do something, and soon.
It is just so sad
when good loans go bad.
June 1, 2005
Eric Janszen, has a great (and scary) post on the housing bubble.
Dancing, Booze, and Overpriced Houses
The housing bubble is reaching absurd, bacchanalian heights, which can only mean one thing: it's getting ready to collapse.
There are times when I write this column that I feel like a Bible-thumping Evangelist of Doom, tromping back and forth across the blogosphere with an "End Is Near" placard strapped to my virtual ass. Never thought I'd see the day that I'd preach the evils of alcohol, dancing, and music to round out the role, but in the current instance, parties for condo sales are getting my attention. They signal that something is ready to happen, and it's not the Second Coming. Seven years of bubble-watching and research suggest that boozy condo celebrations mark the beginning of the end of the housing bubble.
Go look at the graphs he posts... he says (and I can't help but agree with him) "If you're not feeling at least a little queasy after looking at these pictures, then maybe you're numb from the booze and the dancing." The numbers are moving in a hugely anomalous way compared to historical trends -- scary stuff. Makes me glad I'm a renter (although that won't help me when the economy is taken out along with the housing market).
May 24, 2005
Just go read everything here. Terrifying.
May 16, 2005
The bubble is having another effect. Many people are finding their property taxes astronically high.
May 4, 2005
Just look. What else is there to say? (And it's right near Santa Cruz, too...) (P.S. the specifics translate to no power, no water, no sewer...)
Thanks to The Housing Bubble blog.
May 3, 2005
And when the dollar bubble finally bursts . . oh man. If you’ve ever heard the joke about the pig, the monkey and the cork, you have some idea what to expect. Which is why hopeful talk about a “soft landing” or a “smooth adjustment” makes me laugh. By now it should be obvious: We’re not going to stop until somebody or something makes us stop – just as a jumbo jet in vertical descent doesn’t stop until the ground makes it stop.Oh, the joke? Well, it's the kind of joke Laura Bush might tell at a correspondent's dinner, but certainly not appropriate for Seeing the Forest.
April 28, 2005
The warning signs are everywhere that a mortgage/housing fiasco is unfolding and the silence is deafening. Except for newcomers like Cramer, the media isn't covering this debacle or the Doral matter. The home builders having their head handed to them after record existing and new sales, plus record earnings, should put the media on notice that we have a problem.
Perhaps asking the media to quit cheerleading and look at the housing crisis objectively is too much. What of our representatives in Washington? The congress had better be meeting to figure out what the heck they are going to do instead of debating who is more responsible for Fannie.
April 26, 2005
You probably saw the news today, New Home Sales Hit Record High in March. But did you see this, buried in the story?
The median price of a new home sold in March actually declined to $212,300, a 9.3 percent drop from the February level of $234,000.The Housing Bubble blog asks the important question,
Here is the question of the day; if new home prices fell 9% in March, does that mean those who bought in February are already underwater?"Underwater" means the house is already worth less than they paid for it. Remember, everyone is depending on the price of houses continually rising to justify the enormous payments they are making on the loans they are taking out.
April 19, 2005
April 18, 2005
Opened up the copy of Parade Magazine packed in with my Sunday paper... this little gem caught my eye:
Housing prices aren't just skyrocketing in the U.S. In the years 2001-2004, they've risen by $20 trillion in developed countries worldwide.
Here's the full article - their source is The Economist, in a report published near the end of 2004 (so it doesn't take this year's craziness into account).
Here's what the Economist has to say in an article dated March 3rd, 2005, entitled "Still want to buy?".
[...]if rents continue to rise at their current annual pace of 2.5%, house prices would need to remain flat for over ten years to bring America's ratio of house prices to rents back to its long-term norm. There is a clear risk prices might fall. [My emphasis. -TL]
Here's how that article ends (talking about SF Bay Area real estate valuations):
To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.
Want to see something frightening? Type "economist housing prices" into Google. What comes up? How about an economics column in the Christian Science Monitor with this lead:
Economist Dean Baker was so worried about a housing bubble that he sold his Washington, D.C., condominium, at three times the price he paid for it, and rented an apartment instead.
Note: this same economist declared that there was a stock market bubble in 1997. Three years early. He sold his condo two years ago.
A year ago, the Washington Monthly ran an article entitled "There Goes the Neighborhood: Why home prices are about to plummet--and take the recovery with them." Here's a quote from it:
Virtually every housing economist is concerned that prices may be unstable, and growing numbers are becoming outright alarmed.
I lived through the dot.com bubble... all I have to say is that, if I owned a house today, I'd sell it. Unfortunately, I'm now a renter (sold my house a year ago), so I can't capitalize on this bubble... at least not yet. :/
On the other hand, long long term, I have to be bullish - California is going to have to pack in millions more people over the next few decades, and given that there is a fixed supply of land in the state, the laws of economics make the ultimate result pretty obvious: price increases. That said, it can take quite a while for prices to recover after a crash (as the NASDAQ and the SF Bay Area tech job market demonstrate).
April 17, 2005
But now the question comes up more and more: How long can this last?It will be a hard fall -- when it happens.
"It feels like we're on the tip of the razor blade right now," said real estate agent Eric Stewart at Llewellyn Realtors in Rockville. "And we can't remain at the edge of this blade very long."
April 15, 2005
Also, how about that stock market?
April 12, 2005
Everyone should read James Wolcott: We Can't Say We Weren't Warned even though it doesn't mention housing.
There's a pattern here. As with Peak Oil, global warming, the real estate bubble, and the various US deficits, there's a general awareness of Trouble Coming and yet no sense of urgency or battle plan. It isn't that the media, the political class, and the media are paralyzed by fear or overwhelmed by alternative solutions, it's as if everyone is assuming that we can sleepwalk through the next crisis and muddle through as we always have with only minor hiccups, if any, in our lifestyles.
April 5, 2005
Bush to Back Curbs on Fannie, Freddie. This could have a dramatic effect on housing prices. Here's why. Much of the reason for the frenzy in home-buying is that banks are making incredibly risky loans. A no-down-payment, interest-only, adjustable loan enables people who don't make a lot of money to qualify for the monthly payment on a very expensive house. No down payment means that buyers have very little incentive to stay in the house (and keep making those monthly payments) if something goes wrong - they have literally nothing invested. Paying only the interest for the first five years means that their payments will go up dramatically in year six when principal payments are added. Adjustable means that if interest rates rise (and they will) the monthly payments will go up. Meanwhile the whole point of these loans is they make the house purchase possible for people who can't afford higher payments. The bet is that the price of the house will go up dramatically, so the buyer can sell the house before the end of the five year low-payment period. These are loans that are guaranteed to fail. The only question is when.
So why do the banks and other lenders make such loans? Because they can turn around and sell the loans to "Freddie Mac" and "Fannie Mae." From There Goes the Neighborhood: Why home prices are about to plummet--and take the recovery with them, in April's Washington Monthly,
Getting a home loan used to be a particularly nerve-wracking and unpleasant process. A stern loan officer behind a big mahogany desk would pore over your income and credit, suspiciously probing your portfolio for weaknesses. And sensibly enough: The bank that lent you the money would have to collect on the mortgage for the next 30 years and had to make sure you were really good for it. It hired independent appraisers to make sure the price was in line. [. . .] The one exception to this general process was mortgages sold on the secondary market. In the 1930s, Congress created the Federal National Mortgage Corporation (Fannie Mae) to encourage banks to make loans to low-income Americans by agreeing to purchase those mortgages from the banks. In 1970, Congress created a second agency, the Federal Home Loan Mortgage Corporation (Freddie Mac), to do much the same thing. By the late 1980s, these two entities, which belong to the category known as Government Sponsored Entities (GSEs), were buying up and reselling 30 percent of new mortgages and packaging the mortgages to be sold as securities.So the risk is off the banks and on these "GSEs." They used to buy 30% of mortgages, but now they buy 70%.
Fannie and Freddie's market share was limited by their ability to attract investment capital. But in 1989, Congress instituted some modest-seeming technical changes that made Freddie and Fannie much more attractive to investors, and able to draw much more capital. Under the new rules, for instance, they were allowed to customize securities at different levels of risk and return to meet more precisely the demands of different sectors of the capital market. Then, too, bank regulators let pension funds and mutual funds class Fannie's debt as low-risk. As a consequence, during the 1990s, investors practically threw money at Fannie Mae and Freddie Mac, which became enormously, steadily profitable. The GSEs used the new capital to buy up every mortgage they could, and banks were only too happy to sell off the mortgage paper. The price cap on the mortgages Fannie and Freddie could insure was raised. As a result of all these changes, Fannie and Freddie went from buying mostly mortgages for low-end homes to those of the middle- and upper-middle class. And the share of the nation's conventional mortgage debt which they insure has swelled, to more than 70 percent today, double its share in 1990.
Once banks knew they could automatically hand off the mortgages they wrote to Fannie and Freddie with basically no risk, the old incentive system dissolved. "Banks and other mortgage lenders are not watching home prices carefully because they rarely hold onto the mortgage paper they create--they just sell it upstream to mortgage investors," John R. Talbott, a housing researcher at UCLA's Anderson School of Business, has argued. "It is a dangerous situation indeed when neither home buyers nor the institutions that finance them are concerned with the ultimate price being paid for the housing asset."With the risk off the banks, why should they care if these loans fail? See if you can guess who the risk is on now - who will pay if these loans can't be paid off by the house buyers?
Those who understand that the entire financial system now rests on these loans supporting housing prices are trying to make behind-the-scenes changes to shore up the problem. But this would make loans harder to get, which would pop the housing bubble.
And, of course, Realtors oppose new test in GSE reform bill:
"The 'bright-line' test could inhibit innovations associated with Fannie Mae's and Freddie Mac's automated underwriting systems and result in higher loan costs and decreased access to mortgage credit that would make it more difficult to buy a home," said NAR [National Association of Realtors] President Al Mansell.Requiring reasonable credit checks before making $700,000 loans? No, realtors don't like that at all!