Sunday, April 10, 2005

Schedule Note

This blog will resume updates Monday afternoon as I have an out-of-town writing assignment. For your information requirements, these housing bubble blogs should have what your need. Please check back!

Patrick's SF Site

Housing Crash

Professor Piggington

Vancouver Housing Blog

House Bubble

House Price Crash UK

28 Comments:

At 2:33 PM, Anonymous Anonymous said...

Thanks, Ben. This is a great blog. You deserve a break.

 
At 12:01 AM, Anonymous Home Bubble said...

I'll second that. Ben, thanks for the great job in covering the real estate bubble. I run another real estate blog, Home Bubble (www.homebubble.com), so I know just how time consuming it can be. But my feeling is that it's worth it. It keeps me informed and it helps others too.

The easy credit and loose lending standards that built the housing bubble is a major story and may become the defining economic event in many people's lives. 2005 will either be the year the bubble pops, or it will be the year the bubble grows to catastrophic proportions. Denial won't alter this fact. The more prepared and informed people are, the better they will be when the market turns course.

 
At 8:56 AM, Anonymous Anonymous said...

Housing bubble might continue because stocks are so bad:

http://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7B0839D6E6%2D8BF9%2D409B%2DB266%2DAF9B2019130D%7D

Then, when the housing bubble bursts we will have a crashed stock market and a crashed RE market. Yay !

 
At 9:06 AM, Anonymous Anonymous said...

Volker himself says US is skating on thin ice.

Lets go buy some highly leveraged real estate to see if we can make some speculative gains !

For those that don't know, Volker was Greenspan's predecessor.


http://www.washingtonpost.com/ac2/wp-dyn/A38725-2005Apr8?language=printer

An Economy On Thin Ice

By Paul A. Volcker
Sunday, April 10, 2005; Page B07

The U.S. expansion appears on track. Europe and Japan may lack exuberance, but their economies are at least on the plus side. China and India -- with close to 40 percent of the world's population -- have sustained growth at rates that not so long ago would have seemed, if not impossible, highly improbable.

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.

We sit here absorbed in a debate about how to maintain Social Security -- and, more important, Medicare -- when the baby boomers retire. But right now, those same boomers are spending like there's no tomorrow. If we can believe the numbers, personal savings in the United States have practically disappeared.


To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.


We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.


What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.


Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States?


More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.


It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.


And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.


The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.


I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.


It's not that it is so difficult intellectually to set out a scenario for a "soft landing" and sustained growth. There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand.


But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?


The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.


The clear lesson I draw is that there is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable.


What I am talking about really boils down to the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline. This is not a time for ideological intransigence and partisan posturing on the budget at the expense of the deficit rising still higher. Surely we would all be better off if other countries did their part. But their failures must not deflect us from what we can do, in our own self-interest.


A wise observer of the economic scene once commented that "what can be left to later, usually is -- and then, alas, it's too late." I don't want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large.

The writer was chairman of the Federal Reserve from 1979 to 1987. This article is adapted from a speech in February at an economic summit sponsored by the Stanford Institute for Economic Policy Research.

 
At 9:07 AM, Anonymous Anonymous said...

Worker's salaries are lagging inflation:

http://www.latimes.com/business/la-fi-wages11apr11,1,5776284.story?coll=la-headlines-business&ctrack=3&cset=true

Just another reason to drop $400K on a house !

 
At 9:11 AM, Anonymous Anonymous said...

Half of all over 25 yo have savings of less than $25,000 !

http://www.azcentral.com/arizonarepublic/business/articles/0411retirepoll11.html

 
At 9:31 AM, Anonymous Anonymous said...

I live in Irvine, Orange county, I see so many of my friends and people I know of who brought their houses with 0 down within this 2 years, I heard a couple of times they mentioned that the worst case for them is to go bankrupt, if they get luck they can become rich.
However, those of whose sold there houses in this 2 years are still sideline and waiting market to cool down.
My conclusion: The more cash that people have, the less likely they will buy a house now, and those with nothing to lose (except credibility) the more likely they will buy a house.
Is this very funny !

 
At 9:31 AM, Anonymous Anonymous said...

I live in Irvine, Orange county, I see so many of my friends and people I know of who brought their houses with 0 down within this 2 years, I heard a couple of times they mentioned that the worst case for them is to go bankrupt, if they get luck they can become rich.
However, those of whose sold there houses in this 2 years are still sideline and waiting market to cool down.
My conclusion: The more cash that people have, the less likely they will buy a house now, and those with nothing to lose (except credibility) the more likely they will buy a house.
Is this very funny !

 
At 9:47 AM, Anonymous Anonymous said...

That reminds me of a gambler going "double or nothing".

The only thing is that the owner might be able to walk away from his loss, but that will kill the bondholder's capital.

I just can't see a good ending to this situation and why it is allowed to continue. In effect, our whole country is being speculated away by the housing bulls, while the rest of us wait for the bottom to collapse.

 
At 10:23 AM, Anonymous Anonymous said...

Firends of mine (couple) lives in Bay area just sold their house and brought a $900,000 plus house with just 10 % down, all the money the made by selling their original house is going back to third county.

Now, the worst thing happened, they only lose $90,000. but they will still have a bunch of money in a third county.

I am wondering similiar things happened around the country now ?

BTW, they are planning move back to the country they are coming from in two years.

 
At 10:24 AM, Anonymous Anonymous said...

Firends of mine (couple) lives in Bay area just sold their house and brought a $900,000 plus house with just 10 % down, all the money the made by selling their original house is going back to third county.

Now, the worst thing happened, they only lose $90,000. but they will still have a bunch of money in a third county.

I am wondering similiar things happened around the country now ?

BTW, they are planning move back to the country they are coming from in two years.

 
At 10:36 AM, Anonymous Anonymous said...

Now... because some good, solid media/publications have come out and said that renting is better than buying, you are going to see the real morons write articles on how rents are quickly increasing... don't believe it... rents are very low now and will be for a very long time... i live in the new york city area and my wife and i used to rent an apartment for $1,800 per month 5 years ago... today, that very same apartment is going for $1,400 per month... and also... today, there are tons of apartments in my area that are not only cheaper but are also waiving the finder's fee... so... again... don't believe these idiots...

 
At 10:52 AM, Blogger John Law said...

if you're upside down on your mortgage to the tune of say 40K, you can't sell unless you can come up with the money? will the bank let you sell and you just pay the 40K back over time?

and what exactly is walking away from your house and what are the consequences?

 
At 10:54 AM, Anonymous Anonymous said...

also... this is the new realtors' line meant for the fense-sitters... "you might as well buy it now because the rental market is really starting to take-off and you'll be able to easily rent it out" ... again... you're going to see a ton of articles highlighting and including this notion... and when you do see it, take note of which publication it's coming from...

 
At 10:59 AM, Blogger John Law said...

I don't see rents going up with all the houses that are going to be on the market(or rented) when this bubble bursts.

 
At 11:00 AM, Blogger deb said...

I was a realtor during the last downturn '90-'95 in LA. The most common way people got out from under and upside down mortgage was to propose a "short sale" to their lender. The seller (homeowner) would enter into escrow with a buyer contigent upon the lender agreeing to accept less than the loan balance. Most often the lender would agree rather than foreclose. I would say during the worst of it, as many as 1/3 of all the sales would be short sales. They were unbelievably common.

It did have consequences for the homeowner though. If it was a "purchase money loan", meaning just the original money they borrowed when they bought, the lender had less recourse; but if it was a "cash out" refi the lender could pursue the borrow for the difference.

Many people found out the hard way that the lender is also supposed to 1099 for any debt relief that the borrower received. That made for some really painful taxes.

The borrower avoided being forclosed by doing the short sale.

 
At 11:07 AM, Anonymous Anonymous said...

neither do i... but that's another line that realtors are trying to use... i just heard it this past weekend... it's another bogus line that they're using to try and create urgency...

 
At 11:09 AM, Blogger John Law said...

so someone would have to pay rent and also have to pay off what was leftover from their original home loan. the lender gets stucks with unsecured debt but probably just wants at least some money so he agrees for the house to be sold. is this new loan at a higher interest rate since it's not secured by the home?

 
At 11:16 AM, Blogger deb said...

As a realtor, I didn't really know to what degree the borrowers were actually pursued after the close. It seemed in most cases the debt was forgiven. Most borrowers ran into the biggest problems with the 1099s that they got from the lender. Some people were having 100k or more wiped out, but then they were supposed to pay taxes on that money. Very hard to do when you are broke enough that the lender approves your short sale.

 
At 11:36 AM, Anonymous Anonymous said...

"The seller (homeowner) would enter into escrow with a buyer contigent upon the lender agreeing to accept less than the loan balance. Most often the lender would agree rather than foreclose."

I've got a question... does this loss get absorbed by the bank or it is passed on to someone else via a "guaranteed" investment vehicle, like the Fannie Mae "backed" ? bonds ? If so, how far back does the loss go ?

 
At 12:16 PM, Anonymous Anonymous said...

US and Japan to manipulate yen and dollar to keep US afloat:

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=42118

"In the short term, I envision an induced downturn by design. The US economy will slow, stocks will rise for distribution only to decline, layoffs will occur, demand for oil will wane, and domestic bondholders will be squeezed. In other words, the US will swallow a large dose of Japanese deflation."

"- enable finance-based US economic activity, including artificially low long-term rates, to be used to facilitate mortgage lending;"

If this is so, the reason nobody is calling the bubble a bubble is because they need it to keep going to sustain the economy.

 
At 12:27 PM, Anonymous Anonymous said...

"if you're upside down on your mortgage to the tune of say 40K, you can't sell unless you can come up with the money? will the bank let you sell and you just pay the 40K back over time?

and what exactly is walking away from your house and what are the consequences?"

If original mortgage is foreclosed, California protects debtor from deficiency. There are some conditions to be met but still. So, guy walks away with a foreclosure record and no liability. I do not think there will even be 1099 sent.
I think this law is really supporting the bubble.

 
At 12:58 PM, Anonymous Anonymous said...

This is pretty ominous. 50% of all debt is held by consumers as mortgage or credit card debt.

http://www.comstockfunds.com/html/TheBubble.htm

Thanks for the link.

 
At 1:16 PM, Anonymous Anonymous said...

"In summary, we believe that real estate will be the main catalyst for the deflationary environment we expect is inevitable. This is the result of the tremendous demand for RE since the mid 1990s driving valuations through the roof. The prime driver of the appreciation was the liberal lending policies of banks and mortgage institutions. The combination of the lax lending and the demand from homeowners to continue to borrow against the equity in their homes, have placed RE in a vulnerable position. The rising prices have moderated substantially, while until just recently the borrowing and lending continued at record levels. This dropped homeowners' equity to record lows. Since every valuation ratio of real estate is presently at record highs, if the slowdown in appreciation turns into an actual decline in values, the present economic recovery and stock market recovery could reverse and be potentially devastating to the financial environment."

 
At 3:12 PM, Anonymous Anonymous said...

People are starting to question that "homes always go up".

http://www.viewfromsiliconvalley.com/id144.html

 
At 3:27 PM, Anonymous Anonymous said...

People are starting to question that "homes always go up".

http://www.viewfromsiliconvalley.com/id144.html

 
At 6:47 PM, Anonymous Anonymous said...

The view from D.C. is that the rental rates being advertised are going up, but when you actually show up to look the owners are quick to offer a reduction or throw in utilities or some other teaser such as a free month etc. From a psychological perspective, this makes sense. The landlord (usually a young first time investment property owner) just paid a whopping $375k for a 700 square foot condo so to them its a hot property that should fetch quite a high rent (or say, one that would at least approximate their carrying costs). The truth is there just isn't that much demand for rental properties, most every one with a good enough income to afford a high rent has to a significant degree has already purchased (homeownership levels here are at an all time high), and construction has been rampant so there is quite a lot available. So they are advertising at a higher rental rate than market hoping to get it, but after a few weeks drag out with no rental income and the bills coming in, they are pretty quick to lower the asking rental rate.

A lot of the investment property owners are very young. Most look like they'd carry an average (high) credit card debt. I can see how the 20 somethings could easily fall for the "its a new economic paradigm" mantra: you know, the one that goes property values never fall and always exceed the rate of inflation (ha!). I fell for the new economy with the dot com bubble. The big difference being that I only lost what I put into it (i.e., not much) where as today, you can buy 100% on the margin.

Yale economist Shiller's thesis is that this bubble is driven by psychology and Lereah thinks its the baby boomers (most of whom, according to his logic, would seem to be buying vacations homes down the street). If there is a bubble, I for one think there is, this could have a long term effect on the 20 somethings who get burned by this. Real estate may forever remain a risky asset class for them, and with life time jobs out the window and where several moves may be in store over the course of a career, property ownership may just not seem that appealing.

 
At 5:34 AM, Anonymous Anonymous said...

Just some perspective into the northeast rental market... five years ago, my wife and i rented an apartment in hoboken, nj for $1,750 per month... today, according to a close friend in real estate, that very same apartment is renting for $1,400 per month...

 

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