Wednesday, May 18, 2005

Affordability vs. Recession: Who's Fault Is That?

A member of the Royal institution of Chartered Surveyors put his finger on one of the main dilemmas in the housing bubble. "RICS national spokesman Harvey Williams said the only way to bring house prices within reach of most young people was a reversal in market conditions."

"Mr Williams said: 'It would take a recession to get properties into the price range that first-time buyers can manage and nobody wants a recession because that isn't good for prosperity.'"

Williams has it backwards, in a way. It is clear that housing has propped up the major western economies and a recession will bring down home prices. Wouldn't a recession happen regardless of what anyone "wants"?

On the other hand, the situation that the easy money has created is that of overpriced housing. And when it reverts to fair value, that will probably spark a recession. People who want affordable housing aren't going to take any blame for that.

In a time of low interest rates, housing is still out of reach for many. Yet experts like Williams don't see any problem with facts like this? "Landlords are buying up more than 90 per cent of newly built flats in towns such as Leamington and Warwick. He said: 'Even with the increase in the amount of property available, first-time buyers are still struggling to make it onto the property ladder.'"

26 Comments:

At 8:46 AM, Anonymous Anonymous said...

This may take 10 years to work itself out, and it could be that prices drop very little in the short-term.

We could only have 5% drops for 5-10 years.

 
At 8:48 AM, Anonymous Anonymous said...

Ben, can you please email your blog address to Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University? He seems to think that the housing boom is "local, local, local." Even though he also stated that "Last year nationally home prices went up a little over 10 percent." So 10% a year is not a boom?

http://www.pbs.org/newshour/bb/economy/jan-june05/housing_5-17.html

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

Another report from your mole working at the mortgage warehouse (Division of a big bank that gives revolving lines of credit to mortgage brokers to fund the closings for loans they originate).

Mgmt today just asked me to query our database and find out what % of our outstanding loans are based on mortgages with an LTV >= 80. Apparently we'll be tightening our lending standards in the near future; I don't know what the cutoff is, but I'm guessing that we're going stop funding closings where the LTV is above 85-90.

To paraphrase the Dept. head "We don't want to have these loans on our lines when the market turns."

 
At 9:10 AM, Blogger Ben Jones said...

8:48 anon,
I listened to that interview this morning. The first part, where they talk about a carnival and new gold rush was interesting but I decided not to post it. The Retsinas bit was the same old story, so I didn't want to waste time with it. Did you hear the Tony Robbins line?

 
At 9:11 AM, Blogger Ben Jones said...

9:07 anon,
Thanks for the inside info. Please keep us updated! Can you tell us what the % was?

 
At 9:12 AM, Anonymous Anonymous said...

How do you reconcile the difference between so-called (un)affordability and record homeownership?

 
At 9:13 AM, Anonymous Anonymous said...

Some Random Thoughts:

See Howard Kunstler's Opinion on the Housing Bubble.
http://www.kunstler.com/mags_diary12.html
Also see:
http://www.endofsuburbia.com/
http://www.peakoil.net/

With the Coming of Peak Oil it will be particularly hard for Western Economies to grow. Real wages will stagnate. Lost of cheap money will only bid up the price of existing assets. The Housing Bubble and Suburbia in general has been a massive waste of capital that would have helped us to transfer away from an Oil dependent economy.

Worst as energy price soar as they will have to inorder to force conservation, dampen demand and inorder to make alternative energy sources economically atractive for development, lots of folks will be unable to afford to simply heat their suburban homes. If it is a McMansion forget about it, Natural Gas will be in increasing short supply and prices will sky-rocket. We will need to conserve Natural Gas for Agricultural purposes to make ammonium based fertilizer. With out Natural Gas for fertilizer creation there is no way this planet can feed more than 2-3 billion people without risking famines.

Natural Gas will be forbidden
for Electrical Generation and for home heating it will be phased out. That means
no Natural Gas peaker plants to help the
Southwestern run air conditioning on 110 degree days. Good-bye Las Vegas. Good-Bye
Pheonix. People will be forced to Drywall over their prized vaulted Ceiling and convert McMansions into multi-family homes.
Think that is crazy. Well come visit neighborhoods in Chicago and I will show you where in the last RE bubble in the 1920, 6 flats were turned into 12 flats and large townhomes into 3 flats. It will happen again.

Also forget about the commuting everyday long distances from the suburbs.

Massive Bankruptcy will be a necessary evil because it will force a massive realinement of misalocated capital.

 
At 9:16 AM, Anonymous Anonymous said...

"This may take 10 years to work itself out, and it could be that prices drop very little in the short-term.

We could only have 5% drops for 5-10 years."

Except in this case the recent 25% annual increases have been funded by creative loans (easy money). If that dries up then no one can afford to buy or hold a money loser and prices must fall.

Speculators will cut their losses quickly, so it's probably more likely to drop a little then stagnate, or drop quite sharply. Maybe a stair-step down over a few years as the IO ARMs expire in bunches? Same curve down as we saw going up?

 
At 9:18 AM, Anonymous Anonymous said...

"Thanks for the inside info. Please keep us updated! Can you tell us what the % was?"

54% of outstanding loans currently on our lines had LTV's > 80.

(!)

 
At 9:36 AM, Anonymous Anonymous said...

"With the Coming of Peak Oil it will be particularly hard for Western Economies to grow. Real wages will stagnate. Lost of cheap money will only bid up the price of existing assets."

Why do these peak oil analyses always read like religious prophecies? "There shall be a plague of frogs..." I can see numerous upsides to doing away with the car culture.

1. Enormous time savings
2. Quality of life improvements
3. New suburban neighborhood (village) jobs to replace lost auto-related jobs
4. Investment opportunities in alternative energy

People lived in Las Vegas long before air conditioning was common.

 
At 9:58 AM, Blogger Ben Jones said...

9:18 anon,
Thanks.

 
At 10:15 AM, Anonymous Loren said...

Affordability # question:

Most current homeowners bought when prices were lower.

Most new homeowners are using "nonstandard" financing.

Affordability calcualtions are based on "standard" financing.

The problem comes later because "nonstandard" financing is non standard for a reason.

 
At 10:16 AM, Anonymous Anonymous said...

Yeah, the peak oil thing is a little overblown. North America has one of the largest reseviors of coal, and technology to liquify coal is already in development. The environment will take a beating here but we will keep our cars for our lifetimes (sorry, wish it wasn't so!)

 
At 10:21 AM, Anonymous downunder said...

---

I saw that PBS interview with Nicolas Retsinas too. What a maroon. And Harvard, no less. I'm pretty sure he had marbles in his mouth. While I didn't expect him to scream, "It's a bubble! Run for your lives!", he didn't really say anything at all. Totally worthless interview. IMO, he seemed confused by the current market and has no idea what is going on.

I can almost understand his confusion. Although I've seen booms and busts in California before, I've never seen a sustained bubble like this before. And a national and global one, to boot. It's almost as if it's too scary to contemplate what may occur following this mania. Too many people are caught up in it. So people like Retsinas, who have been following the market for years, say things like, "Well, it sure looks as if real estate is popular right now." Crap like that.

I've been following the Australian situation with interest as it could be a roapmap to our immediate future. Things have definitely turned down under.

Here's a quote from another message board. This guy posts frequently about economic conditions in Australia:

"The question the current batch of "flippers" in OZ are asking at the moment is: 'Where's the effing bubble???' These flippers are now 'long term' investors...this is what it looks like on the other side....yawning great gaps that can't possibly be filled....houses around the $500k to $600k mark seem to be the greatest traps,very quickly dropping about $150k almost overnight leaving the hapless flippers stranded,assuming they don't go broke.
I have been watching what I call "frivilous" type shops in OZ for signs that the consumer is tapped...ie scrapbooking shops,candle shops ,personal trainers etc,but it appears to be more mainstream shops that are struggling...in recent weeks a large Sporting goods chain has warned,so has a major jean/clothing chain and a major book chain went bust. Virgin Blue airlines warned ,as did a major Travel chain...not so surprising."

 
At 10:26 AM, Anonymous Anonymous said...

"Why do these peak oil analyses always read like religious prophecies? "There shall be a plague of frogs..." I can see numerous upsides to doing away with the car culture."

maybe cause the results could be of biblical proportions..

"People lived in Las Vegas long before air conditioning was common."

not in the type of housing currently constructed. they are uninhabitable without aircon. how do you get water there for that population?


"Yeah, the peak oil thing is a little overblown. North America has one of the largest reseviors of coal, and technology to liquify coal is already in development. The environment will take a beating here but we will keep our cars for our lifetimes (sorry, wish it wasn't so!)"

how do you get the coal out of the ground without oil?

 
At 10:30 AM, Anonymous pipedreams said...

(People lived in Las Vegas long before air conditioning was common.)

Yes, they were known as Anastazi---a Native American tribe.

Get real. Without A/C and cheap electricity, LV would fold up like a cheap tent. But I don't anticipate that happening anytime soon. Too much money to be made. Down the road, the real problem is Vegas will be water supply. The southern Nevada supply is mostly swiped from Arizona. The northern Nevada supply competes with Calif. It's going to be a battle royale someday. My guess is that, way down the road, we will see water pipelines from N. Canada and Alaska, much as we see oil and natgas pipelines today. But I can imagine they will cost a few $$.

 
At 10:57 AM, Anonymous Anonymous said...

"how do you get the coal out of the ground without oil?"

Uhhhhh...how about with COAL? Use manual labor to build one coal powered shovel and truck. Use those machines to dig more coal...

 
At 11:00 AM, Anonymous Anonymous said...

"(People lived in Las Vegas long before air conditioning was common.)

Yes, they were known as Anastazi---a Native American tribe.

Get real. Without A/C and cheap electricity, LV would fold up like a cheap tent"

Take a trip to Africa or the Middle East this week and observe local housing, temperatures, etc.

Las Vegas would surely shrink if other options are available, but desert lifestyles are still common worldwide.

 
At 11:09 AM, Anonymous Anonymous said...

"Uhhhhh...how about with COAL? Use manual labor to build one coal powered shovel and truck. Use those machines to dig more coal..."

i think the arguement with the peak oil crowd is not if alternative fuels are possible in such applications. the point they try to make is that the point of an orderly transition to new tech is now past. the speed of consumption of oil will overtake our ability to build a coal powered tractor.

 
At 11:24 AM, Anonymous Anonymous said...

Liquifying Coal, Tar Sand or Oil Shale takes huge volumes of water and causes massive pollution. The Canadians already have shown this in the Tar Sands project in Alberta. Still it only produces 250,000 barrels of oil a day. The US needs 20 million+ barrels a day. What I am saying is that it is not possible to scale this sort of production and still have Western State agriculture and cities. Anyway, what the Peak Oil theorists are saying is that these technologies combined will never scale beyond 5 - 10% of our liquid fuel needs. Even then that means wiping out development in Salt Lake, Las Vegas and Phoenix.....

The two more probable liquid fuels are Bio
Diesel and Hydrated Ethanol(90-95% ethanol
5-10% water). These can be made from agricutural waste, praire grass crops, popular trees. Long term They would have to be combined with Fuel Cells and hybrid electric car technology. Even then the most optimistic folks think that total production will only be a quarter of our current yearly needs. Anyway you slice our society will in 50 years need to use at least no more liquid fuel than the average European today. That means getting by using one quarter of what we do today.

The bulk of our remaining Natural Gas and Oil will be needed for Agriculture, Manufacturing, fuel Cell and Solar Panel require oil to make them and other critical needs. You will not be able to
have a natural gas furnance, burn natural gas for electricity, or use oil for driving a car 30-50 miles to work each day.

Just read the links I have been posting, Folks. Suburban RE will tank in the next decade. You will be more likely to see companies that recycle McMansions into Urban Townhomes or Farm Houses than you will have Real Estate Agents and Morgage Brokers trying to sell them.

 
At 11:30 AM, Anonymous Anonymous said...

"People lived in Las Vegas long before air conditioning was common."

not many...

Population of LV in 1940 .... 16,414
source: http://www.co.clark.nv.us/ASSESSOR/Census.htm

and w/o ac, that's about what the pop would go back to

 
At 11:59 AM, Blogger Ben Jones said...

downunder,
Thanks for updating us on the AU situation. I do try to get stories on your market, but it seems the RE reporting has dried up in recent weeks. If you come across any info, please post here or email to me.

thehousingbubble@gmail.com

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

"Population of LV in 1940 .... 16,414
source: http://www.co.clark.nv.us/ASSESSOR/Census.htm

and w/o ac, that's about what the pop would go back to"

Now go back and run those numbers for LA, NYC, or almost any other major city in the country (except Detroit).

 
At 1:40 AM, Anonymous Anonymous said...

Ben,

I am not "Downunder", but I do live in Australia. I presume your invitation for Oz material is open to anyone.

For technical reasons I can't get an identity yet, and most of the time (I.e. when I check this amazing site after work) I can't even respond. When I DO respond it's about 4:00am your time, which is less than helpful, and so far I have only had one reply (from Deb about a week ago) to my posts.

As it happens "The Australian" newspaper has a Property section every Thursday, which I am about to read. If there's anything interesting I'll Email it to you.

AJH

 
At 12:29 PM, Anonymous Anonymous said...

RE: 10:30 AM,

Yes, they were known as Anastazi---a Native American tribe.

Keep in mind that the Anasazi were found to have died violent deaths, as the strong came in and wiped out the weak when the going got tough. Recent finds suggest widespread cannibalism as well.
I just flew out of Vegas last night- Green grass lawns and McMansions are a recipe for disaster, but just wait until the new crop of skyscraper condos comes on line. Ever had to go down 50 stories of stairs in a power outage/terror attack?

 
At 2:22 PM, Anonymous david said...

Concerning first time buyers
amid this: I think a lot of
situation is driven by generational
tension than is being stated in
the press. Because a large
number of houses are sold to
people who already have some
equity in the market, it is
possible for this situation of
having a rate drop which pushes
up prices by exactly the amount
to keep the monthly payment
the same as before a rate drop.
But for the first timer to
get in with the new higher price,
is harder than the person who
bought ages ago. Now the first
timer is not buying the same
size house as they tradeup, but
the problem is the firsttimer
house has been dragged along to
the price increase party so so
far up the scale that their
short supply has made the smaller
houses really hard to chase.
I don't know how far rent
has to fall for people to
prefer renting to buying. My
suspicion, though, is that greed
is keeping the rents high enough
that this is not quite
happening enough. If it were,
the cycle could be partly broken
on the low end of the price
spectrum. But only partly, since
older boomers have a lot invested
in the idea of a rate drop equals
a paper price gain that keeps
the monthly payments flat. Now
that there is no further for the
easy credit to go, the low
end of housing will have to shut
the door on the party, as I said,
by rents falling far enough. That
can only happen if the landlords
aren't themselves leveraged to
the hilt and greedy. But of course
they are. So now what's next?

 

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