Housing Bubble: Denial Turning To Fear
In another sign that expectations are changing every day, Chuck Jaffe at MarketWatch talks with several experts, who suddenly see a need to prepare.
Mr. Jaffe, "In real estate markets that tend to go through cycles of being super-heated and then cooling off, declines don't necessarily last for just a year or two. In those situations, past history shows that a housing-price decline can last a decade or more."
That could make planning for the future more difficult. "Some people have let the real estate market save for them, figuring their house would make enough money to put them over the top for retirement," says Lisette Smith "If selling at a certain price will make or break someone's retirement, then a decline in home prices means they may fall short of their goals."
Valerie Patterson of RealEstateJournal.com: "You haven't heard of people being underwater on their mortgage for a long time, but you are about to hear about it more and more, because it's going to be a real problem for a lot of homeowners."
18 Comments:
Ben
The rate at whihc people are talking about declining prices will bring the end faster than I thought , what do you think?
Good site. Keep it up. All of us(bears) can meet/have a party hopefully in 2006.
Anon,
As conversations are changing from "gee whiz" to "oh s***, many will rush to the exit. Financial mania are difficult that way; they seem entrenched right up to the point that they aren't. Yes, the number of cautious articles coming out of big media has to be an contributor to changing sentiment.
Thanks! I suggest a big party. Where shall we have it? Maybe San Francisco in my $50k house? Ha! Later..Ben
I wish this correction would happen all ready. I'm a stock market investor and I need to buy a house to live in. My life is in limbo while I wait for things to happen.
I'm really mad at Greenspan. I wish he'd crank up interest rates so that the fallout can happen and we could get on with a regular life. Why does he leave this go on ? A crash is inevitable and the sooner we get it over with the sooner the recovery can begin.
The whole country seems to be on pins and needles about oil prices, interest rates, inflation, housing and the stock market. What a stupid way to be living. All this tension because we've got a leader who speaks in "measured" words, can't see a bubble when it bursts on his nose and doesn't have the spine to stop supporting a disfunctional economy with artificially generated credit.
Anon,
The Fed is a one trick pony. I heard it said once that the Fed has the odd job of "controlling inflation" while singularly creating it. As to why they haven't acted, I can't say. Perhaps fear of the unknown.
Greenspan sux. I too am waiting for a post-bubble world where we can get on with life. Tension is a good word and it feels like Spring 2000 again. I just hope the economy doesn't tank.
Heres a Greenspan blog for you.
http://www.themessthatgreenspanmade.blogspot.com/
Tim is great. Hang in there!..Ben
What if it never busts ? What if Greenspan and his successor keep the accomodative enviroment going forever ?
Sure, inflation will rise and that surely means that interest rates will rise. But it will also JUSTIFY what the speculative buyers are doing.
Is it possible that the Fed can/will just keep printing money ad infinum to try to get out of this mess ?
Could the number of buyers keep growing for the foreseeable future ? Could the prices on the homes today be justifiable in a high inflation future ?
This would sure make those of us sitting on cash look silly.
First it was the dotcom bubble and now this. Why does it feel like I've lived the lsat 7 years of my life trying to justify being a financially conservative person ? What ever happened to the good ole days of saving and prudent investing ? How did our society ever get to the point where it rewards speculators versus regular people ? Who pays the bills in the end ?
Ben -
Interesting site.
Surely one of the signs of a bubble is when a kind of sub-critical mass of people emerges talking about it openly. I began to google "Housing Bubble" a couple of years back, and got almost nothing but hardcore Austrians and gold bugs. Now it's another story, and, as you've pointed out, moving into the mainstream. But I suspect the hysteria has legs yet - recall the cover of the Economist in (I think it was) May or June of 1999, a full year before the bottom fell out. They were implicitly calling a top, and a lot of other people were too, and lots of clever people got their asses handed to them trying to short the NASDAQ (which had only doubled from about 1500 to about 3000 in about 3 quarters at that point, and still had another 2000 points to go...up!) So I suspect that some of the price declines we are hearing about may be just a head-fake. This will end, and badly, but calling a top is really, really hard.
Taking a slightly longer view, we can see perhaps see the current mania as just one more installment in a super-bubble that has been inflating since the Fed handed the chips back to the losers in 1987. Since then there has been housing bubble(I), the Mexican crisis, the Asian crisis, the Russian crisis, LTCM, the NASDAQ/Dow debacle, and now... housing bubble(II), this one of global proportions and so one with a lot of legs.
I share anon's sense of despair, though - has it always been thus? Whenever someone starts babbling about the improved productivity and standard of living and so on that the last 40 years have brought I can pull out an interesting stat from where I live (an urban area in the Norheast), which is that in 1960 the median house price and median annual income *were the same*. Mind you, the houses were small - but then again, the point was that they were for *shelter*. It's only as currency has become systematically debased that the mass of people turned to speculation to get ahead. Or even to survive.
Has anyone noticed that the general media is in denial about the whole bubble situation ?
Our local listings for sale are way up by historical standards. I emailed a local newspaper about this fact and they told me that there was no proof anything was afoot. I suspect that their attitude has to do with the pages of ads from the numerous local builders that fill a whole section of their newspaper.
I hope this bubble bursts and I hope the repercussions are severe. I realize that I might be affected by those repercussions, but at least I won't be trying to figure out how to adapt to some other stupid phoney fad we all know is going to blow up at some point in time.
The only thing I prudently know to do at this time is rent and accumulate money in my bank account. When the housing bubble busts, I can't figure out how it is going to affect the economy and which stocks are going to grow and which ones are going to get wiped out.
I'm going to party for 3 days straight when the real estate bubble bursts. I'll probably have to do it by myself in my rental as all my neighbors will be crying the blues in their dramatically over priced houses.
I dare Greenspan to come out with a one time surprize 75 basis point hike and tell the housing sector they suffer from "irrational exuberence". If dreams were life, we'd all be happy...
It would be so nice just to have an economy that was real for once. No bubbles. No excessive debt. No government deficits. No trade deficits. No stupid stock valuations. No excessive inflation. No jobs moving offshore. No artificially low interest rates. Just have everything balanced FOR ONCE, everyone living within their means and earning their pay.
When was the last time we had a truly balanced and natural thriving economy ? 1994 ? I can't remember that far back !
Wow, I'm blown away at the comments because I realize folks like you and me, watching the bubble skeptically, share some common principles. I had never thought of the subject that way.
(What if it never busts? Why does it feel like I've lived the lsat 7 years of my life trying to justify being a financially conservative person?) I understand the emotion, and thats why I openly challenge the corruption behind these bubbles. I won't be afraid of holding principles. Thats what alot of the bubbleheads don't have and thats how the corruption spreads. This is a bubble and all bubbles eventually bust, spectacularly. Now Dan is right about wages, but real wages have been going down in the US since 1972, and a morally broke America doesn't seem about to change that.
(Who pays the bills in the end?)
We all will so lets not forget who brought this upon us.
(I suspect that some of the price declines we are hearing about may be just a head-fake...calling a top is really, really hard.)
England has been dithering at the top for months now. I fully expect we will see that and some markets make a leap for new highs, parabolic. I did go on the record a while back saying I think it will end up surprising us. Remember how the Dow peaked in Jan. 2000 and the Nasdaq headed up? And the "new economy" talk started, followed by the long fall of tech. Who saw that turn of events coming?
(the current mania as just one more installment in a super-bubble that has been inflating since the Fed handed the chips back to the losers in 1987.)
I couldn't agree more except to say it had its roots in closing the gold window in the early 70's. Can the Fed blow abubble after this one? Phew, I kinda doubt it. If they can't, we will be witnessing history.
(It would be so nice just to have an economy that was real for once. No bubbles. No excessive debt. No government deficits. No trade deficits. No stupid stock valuations. No excessive inflation. No jobs moving offshore. No artificially low interest rates. Just have everything balanced FOR ONCE, everyone living within their means and earning their pay.)
Better words have never been writen in this blog. I want to thank all of you for making me realize there are still alot of good folks out there. It makes all the work worth it...Ben
spiney,
( by selling debt to consumers, then repackaging that debt to sell to the financial markets.) thats what fannie mae does. but the margin is slim.
(This debt is viewed as just another investment. Because of this, I think some level of permanent debt has entered our culture.)
Money can only be created when it is borrowed in a fiat currency system so, yes it is interwoven.
(I think we have a lot of people who are perfectly willing to be owned by their debts)
that is a problem.
(it will come to an ugly end. it will be very difficult to guess when the games ends)
i agree on both counts. stay tuned and we'll figure it out. thanks for commenting..ben
Your comments remind me of the junk bond situation in the 80s. Same thing: people making money repackaging debt and other people getting addicted to it. Only now it is on the personal side rather than the corporate side. We all know how that turned out.
I don't understand 2 things:
1) How can the financial institutions have such a small spread between the Fed rate and the mortgages ? The spreads are miniscule. Are the risks really that small ? I understand Fannie et al back it up, but don't they have to diversify the risk ?
How much of the mortgage debt is ultimately held by foreign investors ?
Does Fannie issue bonds that are bought by foreigners ? Does the Fed back those bonds ?
What happens when the market starts collapsing ? Do the mortgages get written down ? Will home owners get their mortgages called if the mortgage outstanding is larger than the value of the property ?
Will the collapse have some effect on interest rates, like to drive them higher, because the failure rate must be accounted for ?
2) Why isn't the financial media screaming bloody murder over the impending correction ? Can't they see it ? Aren't they supposed to be knowledgeable about these things ? Isn't it getting obvious, just like dot com stocks were ?
This web site has really opened my eyes.
What is going to break the bubble ?
Greenspan increased the rate by 25 bp and the dollar jumped. Foreigners keep buying them. Banks keep giving buyers mortgages. Nobody seems worried about interest rates.
I agree there is a bubble, but I don't see an end to it for a long time. What is going to happen first ? Are banks going to stop giving people money ? Are foreigners going to stop buying the US dollar ? As long as people are given mortgages, they'll continue to buy at these stupid prices. They don't have the brains or the self control to stop buying.
I don't think that Greenspan will ever raise the interest rate. He doesn't have to spine to do so.
Even with inflation staring him in the face he hasn't said he will do anything about stopping it.
I don't understand why we don't have a debt crisis. Everyone has good net worth because their houses are worth a fortune, but thats only on paper.
The debt that the people hold is real though, right ? They owe it to a bank and if the paper money disappears when their house depreciates, aren't we broke ?
Why do countries keep buying our bonds ? Can't they figure this out ? Our government can't pay its bills without borrowing and nor can our citizens. The only thing we own that makes us look liquid is our houses and that is only on paper. Theoretically, we are broke.
So when is the debt crisis going to occur ? If people have 25% equity in their houses and the price drops 40%, they'll be under water, right ?
Isn't someone watching this ?
Aren't the banks fabricating money by lending to homeowners on an appreciated home ? Every time the value of the home goes up, it gets refinanced for more money (debt) and thus more money goes into circulation, but it is all owed against the house that is only worth more on paper.
Isn't this dangerous ?
Wow - the joint is jumpin' tonight - it's good to see that people are thinking and asking questions.
Thanks for the kind words Ben.
anon said,
(I don't understand why we don't have a debt crisis.)
we do. it isn't widely reported.
(How can the financial institutions have such a small spread between the Fed rate and the mortgages ? don't they have to diversify the risk?)
the balances are huge, so they make it up in volume; they do diversify, most of the mortgages are held by non-lenders.
(How much of the mortgage debt is ultimately held by foreign investors ?)
I don't know and if anyone does please post it to this blog.
(The debt that the people hold is real though, right?)
that concept may be tested in the days ahead.
(Aren't the banks fabricating money by lending to homeowners on an appreciated home?)
Yes, fabricating is a good term for it.
(Every time the value of the home goes up, it gets refinanced for more money (debt) and thus more money goes into circulation, but it is all owed against the house that is only worth more on paper. Isn't this dangerous?.)
yes.
Regarding how long can it go on... In the Midwest, I don't think a bubble can last past 2010. In 2007 Ford, GM, Delphi and Visteon will be negotiating hard with the UAW. All sides looks like they are preparing for a nasty confrontation. Should anyone of those 4 go bust, the other three will be on borrowed time.
As the companies go thru bankruptcy they will dump their medical coverage for retirees and hand their pension obligations to PBGC. (The average retiree age from the big three is in the mid fifties!) Retirees will get nailed with a double wammy: their medical coverage will dissappear and their pension checks will be cut in half. All of those four are overstaffed. Massive layoffs in blue and white collar will occur in reorganization. This will devastate real estate in south east Michigan (primary homes) and Coastal Michigan (vacation/retirement homes). Confronted with decreased income (layoffs & reduced retirement checks) of several hundred thousand people across Michigan, I can not see how housing prices can continue to increase there.
(I can not see how housing prices can continue to increase there.)
Unfortunately, it doesn't look like GM or Delphi will survive. See previous posts. Thanks for commenting!..Ben
People are under water on their car loans let alone their mortgage:
http://biz.yahoo.com/ap/050330/on_the_money.html
I read this blog everyday, but this is my first post. I just had to chime in on this thread because its the first time I've really seen people display the sort of emotion I've been going through during this bubble. This quote especially resonates with me.
First it was the dotcom bubble and now this. Why does it feel like I've lived the lsat 7 years of my life trying to justify being a financially conservative person ? What ever happened to the good ole days of saving and prudent investing ? How did our society ever get to the point where it rewards speculators versus regular people ?
Thanks for the blog, Ben. Hang in there everyone.
-Steve
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