"After The Housing Boom"; Baloney Alert
Sometimes I wonder why editorials like the Business Week bit in the title are done. That the story was published at all is proof the big media are being forced to admit there is a bubble, but this fluff piece jumps past that recognition into how swell things look going forward.
Rather than tearing apart the flimsy reasoning, lets pull a reality check out of the writers cloudy report. "The new ways that housing is financed..shift the risk of rate changes from banks to homeowners." Thats comforting, we wouldn't want the ones making the money to bear the risk. "Hiring at building sites has accounted for 16.6% of all new jobs in the past two years." So, the self-feeding frenzy will work in reverse, no?
"In a way we've outsourced building speculation," says Michael Carliner, an economist at the National Association of Home Builders. That means the individuals who bought those properties, and not companies, will bear the pain if price gains or demand don't meet expectations." Again, great news!
"Although housing wealth hit a record in the fourth quarter, the large amount of refis over the past half-decade means that equity as percent of real estate stood at just 56.1%. That's far less than the equity ratios of the 1980s and '90s. Boomers expecting to retire on the gains from their homes could face problems." Some people are sacking it away in this bubble, but in this report we can see who will be left holding the bag.
23 Comments:
Ben,
Nice dissection of the BW article. Again, there’s seemingly never any really hard questions asked about RE prices that only have relation to borrowing capacity and infinite leverage, not to income levels or rental cash-flow earning power.
An earlier posting by a fellow (IAC) with a $1M+ brownstone got me curious about other folks’ situations (see Las Vegas post). For one, I'm curious as to how he might realize his gains without selling his place and moving to a much cheaper place to live (presumably out of the NYC-area). Moving to another place in the same expensive locale would simply lead to tremendous transaction costs and almost certainly a worse-off personal balance sheet. This begs questions of those that believe they are going to retire on massive home equity as well.
More widely, I am curious about others’ situations. Personally, I am not one of the "jealous bears" simply because I did not get in on the housing market in a big way. My investments have actually done pretty darn well (commodities and related companies, largely foreign fixed-income, sin and foreign-currency exposure stocks, etc.) over the last 3-4 years during the heart of the RE mania. I try and look at the fundamentals. I do rent a nice one bedroom in a big Midwestern city for next to nothing (not much more than the taxes and condo assessments) and do not own. I did have exposure to a few RE investments over the last several years (REITs, one homebuilder, one LP, etc.), but have trimmed this way back to almost nothing over the last year or two.
I think the only renters left now are either the very poor/working class (and I would think that by this point, ditech.com has figured out how to wire even the very downtrodden a few hundred grand each) or people who think it's an overvalued asset class (which doesn't bode well for future demand). I know a few well-educated and what I think to be financially savvy people in this situation. Strong (often six-figure) incomes, street smart investors, and they RENT place that are cash-flow negative for their owners. How dare they turn their back on the Fannie/Freddie….errr….American dream? I put myself in this group. Household income's well into the $100K+ range and have over $300K in liquid investments that produce a good (and growing) income (thank you higher IRs!), all of which I can realize without calling my local realtor™ and packing up.
On the hand, I know of people who do maybe $50-$60K household and who have bought $350-400K places in the last year or so. I am not joking -- 7-10x multiples of income. This is not to ridicule people who are just starting their careers or are not big earners, it is draw attention to how far this bubble penetrates into society's income strata. My perception is that they see it as the only way they are ever going to be able to have net investments, because they can't save money (and with Greenspan’s fed funds rate, who would want to?) or for whatever reason (maybe a sluggish real economy?), they find it difficult to work on growing their incomes through their careers.
They think it’s the best of all worlds – building wealth through consumption and leverage. They also think it’s their last chance to buy a house given that assuredly all $300K 1000 sq. ft. condos will definitely be worth $1M a few years from now. You can bank on that.
So many perverse incentives are circulating through our economy these days it’s hard to believe. What are other people running into out there?
jj,
(people who think it's an overvalued asset class)
Thats me. I rent a beautiful home for less than the property taxes due on it.
(they see it as the only way they are ever going to be able to have net investments)
Its hard to blame them because it has gone on for so long. I know of a gardener and his wife in a really hot market in California; their income combined is in the mid $40k's, and they recently bought a $500k house with nothing down. What can you say?
..Ben
I/we rent too. Older, smaller house. Rent is cheap. We recently were told we could get a $600,000 mortgage and that was with "normal" interest rates.
I can't claim it was all planning. I started a business and I didn't have the time or money to buy a house a few years back.
BTW: We get "bugged" about renting all the time. I recently got into a very heated argument with some of our friends over whether or not real estate will "always go up". They had a real problem understanding things like "interest cost" and that sort of thing. Apparently rent is a total waste of money, but interest, taxes and realtor fees are not.
My father in law was on my case too until recently when his daughter is going to have to sell her home at a loss. (bad sentence, I know.)
One more thing. These friends are building a house right now. They were braggind how they could sell it before it was done for a profit. That was about a month ago. Since then the number of listings has skyrocketed.
Here is the 900 lb gorilla that no one wants to talk about...
...housing has as large an overall impact on the economy... the REAL economy like JOBS and ROOF OVER HEAD and FOOD IN BELLY... as does the automotive sector. Something like 10% of GDP or so... more on that here...
If you don't believe me walk a new job site and see all the STUFF coming and going... all the people coming and going. Then realize job sites like that are just the tip of the iceberg... they are the nexis for many, many 'value chains' heading off in all directions... mortgage origination, insurance, utilities, consumer goods like appliances, lawn & garden, electronics... services like lawn care and land scaping... on and on through out the economy.
Whole industries like 'window & doors', appliances, small gas engines... set 'housing starts' as one of their primary forcasting metrics... it is one of the better predictors of their future activity.
The scary thing about articles like the BWO article is they don't see nor anticipate nor report the serious potential ripple effects and how they might REALLY affect us if the housing crash is LARGE. It will affect far more than those who see their home values decline or even lose homes because they can't make payments... it will mean plant closings, layoffs, equity market declines, etc... it will not be a ripple but a potential economic tsunami...
anon,
(his daughter is going to have to sell her home at a loss)
What state is the house in?
(I recently got into a very heated argument with some of our friends over whether or not real estate will "always go up")
People get mad if you crash their paradigm. Don't expect them to lighten up when you are proved right.
(Since then the number of listings has skyrocketed.)
All first hand accounts from the field are needed; thank you for the post. Ben
One of the things I find interesting are the number of folks who rationalize the whole situation by simply saying: look, I'm locked in at 6% or whatever, and I can handle it, so where's the problem? If I lose some of my equity it's all on paper anyway, and I still have my house.
The problem of course is that someone else is on the other end of that loan. It doesn't matter that they're a big, impersonal bank - someone, somewhere has financed the loan to you by borrowing short and lending long, and they're going to be squeezed the other way.
So what we'll have is folks who are short on their mortgages going underwater, and institutions that are long also being squeezed a la "Savings And Loan" meltdown.
When I try to explain to people that a stable credit system, with stable banks is what is in the best interest of everyone they look at me like I'm speaking in tongues...
(All first hand accounts from the field are needed; thank you for the post. Ben)
I want to stay anonymous...
Our real estate hadn't jumped that much, maybe 60% overall since 2000 prices. I didn't think there was any bubble here, although I thought the new house prices were high. There aren't 6 people lined up to buy a new house here, but the building has been robust - maybe too robust.
Just this month the number of listings soared 40% over the previous record. Thus far the sales haven't soared beyond the long previous sales record. A glut is building. Prices haven't fallen yet, but it looks to be inevitible.
All first hand accounts from the field are needed; thank you for the post. Ben
My realtor sends out a monthy newsletter. We've always respected her in the past as she has always been even keeled about the market's direction. The last newletter was 100% rah-rah with no trace of pessimism.
I take this as a sign that we are near a top :).
Then again, I'm still shopping for a 'move-up' house. In the SF Bay that will set me back 1.5-1.8M
(When I try to explain to people that a stable credit system, with stable banks is what is in the best interest of everyone they look at me like I'm speaking in tongues)
Wait until this thing settles out, then it will make sense to them. I lived in the oil patch when the S&Ls tanked. This could be worse.
anon,
(Our real estate hadn't jumped that much, maybe 60% overall since 2000 prices)
See how normal the run up has become?
(Just this month the number of listings soared 40% over the previous record)
That pattern is showing up in spots all over the world.
dry fly,
(The scary thing about articles like the BWO article is they don't see nor anticipate nor report the serious potential ripple effects and how they might REALLY affect us if the housing crash is LARGE)
The way the media are covering this is a scandal. Washington should be in crisis meetings to organize a soft landing, rather than let mortgage brokers make the call. Thx for the link!
HHM,
(The last newletter was 100% rah-rah with no trace of pessimism. I take this as a sign that we are near a top)
The current excitement is a sign of a top.
(I'm still shopping for a 'move-up' house. In the SF Bay)
A lovely city. Enjoy!
People (MSNBC writers) are now beginning to think of their houses as "savings" and calling the governments definition of savings, ie a bank account as "screwy"
http://www.msnbc.msn.com/id/3403854/
When was the last time your piggy bank got deflated like a bubble er ballon ?
(Our real estate hadn't jumped that much, maybe 60% overall since 2000 prices)
See how normal the run up has become?
Trying to tell anyone around here that houses might be over priced is like saying soccer is a better sport than baseball. Everyone thinks you are absolutely nuts.
However, with inventory suddenly up 40%, I think we are well on our way to the start of a correction.
We keep hearing how:
"Plus, even though a record 69.1% of Americans owned their homes at the end of 2004, demand will still be supported by baby boomers and immigrants. Boomers, in particular, are driving the second-home market with an eye toward both investment and future retirement."
Isn't this like saying there was very strong demand in the late 90s for rapidly appreciating tech stocks, justify the raging bull market? At that time boomers were buying these growth stocks with "an eye toward both investment and future retirement."
Yet once the appreciation of those tech stocks evaporated so did the demand - why won't the exact same thing happen to housing? - especially second and third homes which lose money every year for the owners once prices stabilize. Why won't a slowdown in appreciation lead to plummetting demand and falling prices?
(why won't the exact same thing happen to housing? - especially second and third homes which lose money every year for the owners once prices stabilize)
I believe most are losing money now, unless they purchased before the boom.
(Why won't a slowdown in appreciation lead to plummetting demand and falling prices?)
It will, just give it time.
Thanks for taking the time to comment!..Ben
(When was the last time your piggy bank got deflated like a bubble er ballon ?)
Excellent point! Cash is king, baby!
(Trying to tell anyone around here that houses might be over priced)
Send to this blog, I'll try!
Thanks for commenting..Ben
I live in far northern California and our home has seen a 114% appreciation in three years.
I am a police officer and I work with intelligent, well educated individuals. It amazes me when I hear them telling one another that homes will continually increase in value. When I talk about the coming "catastrophe" regarding the housing bubble, they tell me that I am insane.
One young officer in my station just purchased a new home for 435K, and I overheard him telling his buddies that his home would surely double in price in the next couple of years.
I think its time that our educational system began teaching basic business finance and economics courses to the masses. Of course, then those of us who are in the "know" about the coming disaster, would not be able to capitalize on their ignorance (anyone wanna buy my "fixer upper" for 1.2 Million...it will surely double in price by this time next year...).
...incidently, for those who are interested in the "Credit Bubble" Doug Noland's weekly "Credit Bubble Bulletin" at www.prudentbear.com is must reading.
(I think its time that our educational system began teaching basic business finance and economics courses to the masses)
It is unlikely the system will take the blinders off, but the bust may do it for them. Thanks, good luck in N. CA.
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