Tuesday, April 26, 2005

Upside-Down In One Month?

They may be grasping the situation, however slowly. TheStreet, "The proposition that ever-rising home values will continue to provide broad-based support for the economy sounds more and more dodgy, especially on the same day as the Conference Board's consumer confidence figures fell for a third month in a row."

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?


At 3:35 PM, Blogger desi dude said...

if the new sales figures included the condo/coop sales, the price also includes the same???

is that the reason for the lower price??

At 4:23 PM, Blogger stockmania said...

Could mean a lot of things. The median price dropped 9.3%. The overall number of sales were up big, mainly in the midwest and south where houses are typically cheaper. This could have brought the median price down. Average prices were just down 3.9%. Again, this could have been brought down by cheaper houses in the midwest and south. It is a bubble after all, and I am not convinced the tide has turned yet.


At 4:28 PM, Anonymous cynicalkindofguy said...

Maybe the NAR and other housing bullsnorters will begin "massaging" the data so that we never truly get the picture about the real estate market until it's well on its' way to major tankage. First, they add condos to muddy the waters, then they'll begin ex-ing out falling markets or something.

Much like the way the BLS compiles the CPI. They eliminate energy---too volatile. They eliminate food---too volatile. They replace housing costs with renting costs---for no particular reason other than it lowers the CPI. They hedonically change other categories like computers. Now they're talking about changing healthcare hedonically: "Hey, healthcare's not getting more expensive, it's just getting better!"

It's the New Economic Math. Now why would the good ol' BLS monkey with the numbers? Gee, maybe it has something to do with the fact that govt entitlement programs, corporate pensions and union contracts are based on changes to the CPI. The less the CPI rises, the less the gov't and corp's have to pay out no matter what the "real" inflation rate is.

Nice work if you can get it. Watch for the real estate folks to do anything they can to pull the wool over the sheeple's eyes and keep them buying them homes and condos.

At 5:57 PM, Blogger John Law said...

my brother got job offers from whiting turner and kb homes. what do you guys think?

At 7:32 PM, Anonymous Anonymous said...


At 8:26 PM, Anonymous Anonymous said...

This boom/bubble still has legs folks. Its a bubble, but these things take years to play out. Panic buying setting in DC:


At 8:30 PM, Anonymous Anonymous said...

Yesterday on RoBTV, Robert Shiller said that "Vancouver was the most bubbly city in the world."

Imagine that! (I might add that I believe the Vancouver market peaked last May)

At 10:41 PM, Anonymous Anonymous said...

The CPI has become a joke,The Fed has argued that if a few items are excluded, the inflation number comes down sharply ,in the fixed income world that the PPI and CPI excluding everything is zero.

For one thing, the CPI would need to be a single number across the country. Second, the consumption base has not been revised for almost 20 years.

At 11:08 PM, Blogger goleta said...

A CPI without counting mortgage and property tax payments really means nothing. When people are paying multiples of mortgage and property tax on the same kind of houses people used to pay 5 years ago, they don't have much money left to save or spend. A recession or depression is the only logical outcome of this.

At 12:30 AM, Anonymous Anonymous said...

How about healthcare? It's not like that has gone up recently.

Is anyone else as disgusted as I am about consummers being cautious because of high oil prices? Sure, oil is higher, but the worst case is that consummers will pay $50 to $250 more per month. That's not a small amount, but compared to the increase in their mortgage payment on an interest-only ARM, when it resets, oil is the least of their worries.

How about the fact that home prices are really quite stagnant in many "hot spots" (like San Diego)? Compared to a year ago, prices are not up by that much. I think consummers are unable to tap into thier equity like they have been in the past. Yes, people have been using home equity to cover daily expenses which are not covered by thier stagnant/declining wages (contrary to what RE bulls think).

At 2:38 AM, Anonymous Anonymous said...

Here's a paragraph that was buried in a story today about Countrywide Financial's earnings:

Countrywide said its production of adjustable-rate mortgages rose 45% in the first quarter compared with a year earlier and constituted 53% of all loans. Among the company's more popular loans is the "pay-option" adjustable-rate mortgage, which represented 18% of all Countrywide loans produced in the first quarter. With such a loan, the borrower has several payment options every month, including paying interest only; paying less than the interest due, which causes the loan to be negatively amortized over its term; or paying principal and interest.

Scary! First of all, it doesn't make sense that at a time when interest rates are near historic lows, more than half of new mortgages are adjustable rate. It can't be that people expect rates to go lower, it must be that these borrowers can't afford to buy homes any other way. Which begs the question - what will happen to these borrowers if interest rates climb significantly?

Second, it's mind-boggling that 18% of Countrywide's mortgages in the first quarter were these "pay-option" loans! That means that nearly 1 in 5 borrowers are potentially experiencing negative amortization, counting on price appreciation to bail them out. But what if prices don't keep going up?

At 5:22 AM, Anonymous semper fubar said...

It can't be that people expect rates to go lower, it must be that these borrowers can't afford to buy homes any other way.

Or, they're not planning on holding onto the property long enough for increased rates to be a factor. If you're planning on selling the property within the next year or so, why pay the (even slightly) higher fixed rate?

At 6:21 AM, Anonymous Anonymous said...

From the NYTimes Business section...

Consumers Are Wary, but Housing Remains Hot

WASHINGTON, April 26 - Consumer confidence fell in April, but the nation's housing market seems hotter than ever.

Confounding most forecasters, who had expected home sales to decline last month, the government reported on Tuesday that sales of new homes rose sharply by 12.2 percent in March and hit a record annual pace of 1.43 million.

The unexpected surge came despite slightly higher mortgage rates last month, worries about slowing growth and an escalating debate about a "housing bubble" in at least some regions that many specialists argue might be on the verge of bursting.

Analysts cautioned that the estimate of home sales might be revised down slightly as new data becomes available, and they noted that consumer confidence had been shaken since March by higher gasoline prices, sluggish employment growth and this month's swoon in the stock markets.

But despite scattered signs pointing to slower growth, the strong pace of home-buying is expected to reinforce the Federal Reserve's intention to keep raising interest rates until they have reached a level that no longer serves as a stimulus for growth. The central bank is expected to raise short-term rates by another quarter point next Tuesday, to 3 percent, which would be the eighth rate increase since last June.

The Conference Board reported on Tuesday that its index of consumer confidence dropped to 97.7 in April, from 103 in March, and expectations about the next six months dropped to their lowest level in nearly two years.

The decline, steeper than forecasters had predicted, comes on the heels of signs of sluggish retail sales.

"Looking ahead, consumers do not anticipate an improvement in economic growth nor in their incomes," reported Lynn Franco, director of the Conference Board's Consumer Research Center. And many people expect it to be harder to find a job over the summer months, he said.

But Fed officials have paid relatively little heed to recent data suggesting an economic slowdown, suggesting that they are more concerned about the danger of rising inflation.

Surveys of consumer confidence provide an erratic guide at best to consumer spending, because the surveys often reflect the bad news that people have already heard rather than what they actually plan to do in the months ahead.

By contrast, analysts said the startling rise in new-home sales suggested that the real estate market might continue its expansion despite price increases of 20 percent and more over the last year in many parts of California, Florida and along the East Coast.

"It still appears that it doesn't take much to generate faster home sales," said Peter E. Kretzmer, a senior economist at Bank of America. Indeed, Mr. Kretzmer predicted that the housing market might actually gain strength because long-term interest rates have edged down a bit since March.

The relentless rise of the housing market is a growing puzzle for central bankers. The Fed fueled a housing boom after 2001 by slashing interest rates to their lowest levels since the 1950's, which caused prices to soar and allowed millions of people to cash out some of the new equity in their homes and spend it on everything from kitchens to cars.

But even though the Fed has been raising short-term rates steadily since last June, the long-term interest rates that determine mortgage rates are still about as low today as they were one year ago.

Alan Greenspan, the Fed's chairman, told House lawmakers in February that the continued low level of long-term interest rates was a "conundrum" that he could not fully explain. Several economists have suggested that huge inflows of foreign savings into the government bond and mortgage markets have also played a significant role in keeping interest rates low.

And while Fed officials have argued that there is little danger of a national housing bubble, they have acknowledged concerns that low interest rates may have encouraged speculative buying by people who have unrealistic expectations about future price increases.

"Low interest rates, in turn, have been a major force driving the phenomenal run-up in residential real estate prices over the past few years," Donald L. Kohn, a Fed governor, said in a speech last week. Though he discounted worries about a crash in real estate prices, Mr. Kohn said that prices had climbed high enough to "raise questions" about an increase in speculative buying and overvaluations.

Analysts said part of last month's rush to buy homes probably reflected a race by people to complete deals before mortgage rates start to climb higher. But a growing number of Wall Street economists are convinced that a housing bubble is under way, at least in many parts of the country.

Housing starts declined precipitously last month, which may have reflected an expectation among builders that higher interest rates would stifle demand later in the year. But sales of existing homes climbed 1 percent in March and have climbed 4.9 percent over the last year, according to the National Association of Realtors.

"We think there is a bubble, and we think the risks are higher that it will burst," said Sheryl King, a senior economist at Merrill Lynch. "Even if you adjust for population growth, you're seeing numbers that are bigger than any we have seen at this point in any previous economic cycle."


At 6:28 AM, Anonymous Anonymous said...

Was watching CNBC (aka bubblevision) this morning. A snappy-dressed, guest analyst sporting a pink tie was touting the perfect mix of historic low rates, declining dollar and cash-out refi boom as ‘good’ for the economy. Sees influx of foreign investment of US assets, etc (as if we aren’t leveraged enough to our foreign ‘friends’). Why not, it keeps the bubble-party going, right?

I imagine the bright young fella may not be old enough to recall a few 'rough patches' in our history that have corrected previous debt binges. While this all feels good at the moment, folks will somehow need to repay their debts; bankruptcy recently became a less viable option. Without massive wage inflation, it will not happen.

At 6:29 AM, Anonymous Anonymous said...

Another, off topic:

Milder Demand for Rental Apartments


This is in Westchester, NY: "This month, market forces prompted JPI Northeast, an apartment builder based in Irving, Tex., to shift gears at a nearly complete 281-unit project in White Plains. The development had been planned as rentals but was switched to condominiums. In addition, a number of new luxury rental complexes are offering incentives to would-be tenants, like two months of free rent, train passes and payment of the rental agent's fee. And rents in many places are negotiable."

At 6:36 AM, Anonymous Anonymous said...

I really do believe that this housing bubble is not going to burst before Greenspan steps down... Greenspan is a master... and he will continue to raise interest rates by just a 1/4-point, so he can make his exit, clean and free...

At 7:35 AM, Anonymous Anonymous said...

"Is anyone else as disgusted as I am about consummers being cautious because of high oil prices? Sure, oil is higher, but the worst case is that consummers will pay $50 to $250 more per month. That's not a small amount, but compared to the increase in their mortgage payment on an interest-only ARM, when it resets, oil is the least of their worries."

I am not disgusted about that. I am actually happy about it. Maybe it is time that the consumer was cautious about SOMETHING. I mean how much debt does the consumer have and when are they going to stop buying everything in sight and start paying down some of their debt and maybe even putting something into savings.

Here is something funny. Greenspan et al would like to see consumers put money into savings to help with the trade deficit. However, consumers have so much debt that they are going to be paying forever (literally) on their obligations before they even think about putting some into savings.

At 7:42 AM, Anonymous Anonymous said...

semper fubar said...
"If you're planning on selling the property within the next year or so, why pay the (even slightly) higher fixed rate?"

Because things happen, jobs are lost, illnesses occur, family members die. This type of short sighted thinking permeates the whole country. Taking these loans out is VERY risky, but consumers are assigning them zero risk. That "slightly higher" interest rate would be a godsend if you lost your job right before a rate adjustment.

At 8:08 AM, Anonymous Loren said...

If we had a free market economy the CPI wouldn't matter.

The CPI is just one big example of how central planning doesn't work. The government has no business price fixing the interest rate market.

At 8:58 AM, Anonymous Anonymous said...

"That "slightly higher" interest rate would be a godsend if you lost your job right before a rate adjustment."

Ahmen, brother !!!

Interest rates are at historic lows. Do people honestly expect them to last forever or go down ???? They must judging by their financing decisions.

I wonder what portion of RE is financed with terms less than 5 years ? I'll bet it is over 60%. I wonder how much is floating and how much is fixed ?

Talk about being poorly positioned for an interest rate adjustment !

At 8:10 AM, Anonymous busty said...

---This boom/bubble still has legs folks. Its a bubble, but these things take years to play out. Panic buying in DC----

I agree. These things take years to play out. But guess what, this has already been playing out for years (nearly seven so far). That's a couple years longer than the longest previous post-war housing boom. Panic buying is the last stage of a boom. That's where we are. In fact, in many markets, the boom ended last year even though people are just now "panicking".

Not only do booms take years to play out, so do housing busts. So we could be talking about "what happened to real estate?" for years to come.


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