Tuesday, May 24, 2005

Crowd Gathers To Watch Economic Train-Wreck

The home price increase has caused another economist to change his opinion on the housing bubble. "In a real estate seminar in January, I stated that housing price increases reflected underlying conditions of reduced costs to finance homes. What has changed my thinking about the housing bubble is what is happening in the financing of housing."

"Are home buyers not being smart? No. Lenders are being foolish. Some lenders believe that rising housing prices will soon justify whatever loan they offer the home buyer."

Mr. Donald Ratajczak of Georgia State University is joining the crowd of horrified by-standers. "Pundits, economists, and, yes, Warren Buffett have been rushing to get on the record saying that real estate has maxed out. The top may not be here yet, they argue, but it’s close."

"Paul Kasriel, chief economist at Northern Trust Corporation, "constructed a price-to-earnings ratio for housing. In 2004, that P/E ratio 'the highest since 1952, when the time series starts.' And we all know what happens when P/E ratios reach 50-year highs."

"David Rosenberg, Merrill Lynch’s chief North American economist, "We get nervous when we see things move parabolically north, because no asset class at any time ever failed to mean-revert after such an upside move."

30 Comments:

At 8:33 AM, Anonymous Anonymous said...

Ben:

There are quite a few economists and others issuing CYA mea culpas.

As the din of agreement on a housing bubble grows, Do you anticipate that the discourse on your blog to be degraded as housing bulls become more and more desperate to find a greater fool.

Man this is gonna be a train wreck... Bad, but you can't stop watching.

 
At 8:36 AM, Anonymous Anonymous said...

That train keeps on going...Treasuries are down again...and as far as Warren Buffet, big portion of his Berkshire Hathaways is HomeSolutions...he has a big stake in real estate.

 
At 8:38 AM, Anonymous Anonymous said...

You have got to see this video.....5 minute interview with the CEO of Caldwell Bankers.

Not a hint that what is going on is unsustainable.

Says that "bubblewatchers" are a bunch of renters

Says that first time buyers should not be scared, they could miss out on 20, 30, 40 percent appreciation in two years if they don't buy.

http://www.marketwatch.com/tvradio/playerFull.asp?siteid=yhoo&guid=%7B7BFC3727%2D7EF3%2D496F%2DAF12%2DE1B3F7D6FFC0%7D

 
At 8:53 AM, Blogger JLP said...

A major difference I see between the housing bubble and the internet bubble is that real estate always has some value to it, whereas most of the internet companies that went bankrupt weren't worth squat.

What is scary about this housing bubble is all the debt that is financing it.

JLP

AllThingsFinancial

 
At 8:54 AM, Anonymous Anonymous said...

you guys, it is looking pretty clear that this time it IS different.

our nation's prosperity is unchallenged in the world, and everyone from all around the planet wants to move here.

in japan they have 100 year mortgages, or even "generational" mortgages that your children are required to pay off.

you can absolutely bet on it that our country will do the same before prices ever start declining.

face it- real estate is simply the best investment in the history of mankind. that's why over 60% of bank loans nationwide are invested in residential real estate.

nowhere to go but up, but you morons don't seem to understand it.

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

anon 8:54

stop being a dumbass and wake up.

On to more important things:

Did you guys see Lereah's statement today?

http://moneycentral.msn.com/content/CNBCTV/Articles/Dispatches/P119088.asp

"Fifteen percent price appreciation is too much, even for me," David Lereah, chief economist at the National Association of Realtors, told CNBC's "Morning Call." "The real estate market is taking on a life of its own right now and we need to get a handle on it."

WOW!!! How the cheerleader-in-chief has changed his tune. It's getting too sickening even for him.

 
At 9:02 AM, Anonymous Anonymous said...

Is Berkshire Hathaway's HomeSolutions a real estate brokerage business or an owner of property? If the former, BH would seem to have little risk to speak of -- the agents are not on salary, are they? If it owns property, what type, where and how? Warren has consistently been a RE bear recently.
Chip

 
At 9:02 AM, Blogger John Law said...

(A major difference I see between the housing bubble and the internet bubble)

the bubble hit most stocks though.

 
At 9:03 AM, Anonymous Anonymous said...

Closehaul to 8:54,

8:54, Please go out and buy some more property.

100 year mortgages didn't stop Japan's housing market deflation.

 
At 9:03 AM, Anonymous Anonymous said...

I must compliment the *:54 anon Nice salting of the discussion, not quite a troll but certainly inflammatory without any facts.

I have to agree, this time it is different it is much worse than ever before.

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

[in japan they have 100 year mortgages, or even "generational" mortgages that your children are required to pay off.

you can absolutely bet on it that our country will do the same before prices ever start declining.]

Talk about ignorant! That move was made at the peak of the Japanese real estate bubble and was followed by 14 straight years of price declines!!!! Bring on the 100 year mortgage!

 
At 9:15 AM, Anonymous numbersguy said...

(in japan they have 100 year mortgages, or even "generational" mortgages that your children are required to pay off.)

I know this was a troll contribution, but it's worth pointing out that lengthening mortgage duration has a minimal impact on monthly costs. I'm not sure why Japan went to 100yr mortgages because it really doesn't change much.

Here's a quickie look at what the monthly payment would be for a variety of durations ($500K mortgage at 6% fixed):

30yr---$2,997
40yr---$2,751 (8% less than 30yr)
50yr---$2,632 (4.5% less than 40yr)
100yr---$2,506 (4.8% less than 50yr)

So by increasing the duration from 30 to 100 years, you only lower monthly costs by 16%, not enough IMO to saddle your children and grandchildren with debt.

 
At 9:17 AM, Anonymous Anonymous said...

this is terrible... this train-wreck is really going to hurt our economy... is it going to cause a recession or a depression? also... i find it amazing how greenspan has recognized the home equity problem but won't do anything about it... in jan '06, i believe the fed said that they are going to have new guidelines concerning the useage of home equity... but isn't that a little bit too late? isn't that just encouraging more madness for the rest of the year? when will someone step-up to the plate and take care of this serious problem...

 
At 9:25 AM, Anonymous Anonymous said...

housing bubble poll on the front page of yahoo finance

http://finance.yahoo.com/?

guess the right answer. :)

 
At 9:28 AM, Anonymous Anonymous said...

One of the reasons Japan went to 100 yr mortgages is because inheritance is taxed at 70% so it is benefitial for parents to have their children continue to make payments (and pay it off) rather than pay a boatload of taxes.

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

Another thing...real state agents and so-called "economists" tout this boom at immigration...do you really think that there is a 3-5 fold increase in immigration today...if anything it is less, ever since 9/11 it is harder to immigrate in US.

And it's quite funny to mention illegals buying houses.

 
At 9:39 AM, Anonymous Anonymous said...

To 9:25 : And it is on the front page of the Financial Times:

http://news.ft.com/home/us

The last sentence of the article is a bit disturbing.

 
At 9:40 AM, Anonymous John Vosilla said...

"A major difference I see between the housing bubble and the internet bubble is that real estate always has some value to it, whereas most of the internet companies that went bankrupt weren't worth squat.

What is scary about this housing bubble is all the debt that is financing it."


It's the equity that would be upside down when this mania ends if these assest were valued based on equivalent rent and cash flows. But that is so old school for today's newly minted experts.

 
At 9:42 AM, Anonymous Anonymous said...

anon 8:54

"our nation's prosperity is unchallenged in the world"

..huge trade deficit
..huge budget deficit
..0% national savings rate
..hemoraging of manufacturing jobs/base
..sinking dollar
..20 years of prosperity built almost entirely by increased debt

sorry son, you've been listening to Fox News and Larry Kudlow too much, and you are about to find out how little they know

 
At 9:49 AM, Anonymous Loren said...

What's scary about housing vs. stocks - stocks (unless you short) you can only lose what you pay. Even on margin you had assets to pledge to back the margin.

With a house you can lose more than you ever had, and end up homeless to boot. Nearly all new real estate buyers are very exposed to losses. I've been a homeowner for 9 years now and I still have only 40% equity. And not even the worst stock brokers charge 7% GROSS Proceeds to sell out of stock.

Yes, it's the debt that is disturbing. It's the debt that makes it a risky game.

 
At 9:53 AM, Blogger deb said...

Leverage is wonderful on the way up.

 
At 10:11 AM, Anonymous Anonymous said...

"sorry son, you've been listening to Fox News and Larry Kudlow too much, and you are about to find out how little they know"

In Fox's defense, they do have "The Cost of Freedom" on every Saturday. It's four one half hour financial shows.

I have bee seeing the Bubble discussed from both side for some time now.

 
At 10:11 AM, Anonymous Anonymous said...

"sorry son, you've been listening to Fox News and Larry Kudlow too much, and you are about to find out how little they know"

In Fox's defense, they do have "The Cost of Freedom" on every Saturday. It's four one half hour financial shows.

I have bee seeing the Bubble discussed from both side for some time now.

 
At 10:22 AM, Blogger John Law said...

(sorry son, you've been listening to Fox News and Larry Kudlow too much, and you are about to find out how little they know)

yeah!

 
At 10:46 AM, Anonymous boulderbo said...

What is scary about this housing bubble is all the debt that is financing it.

JLP

jlp, being a financial consultant you would know the danger of reverse leverage. you can buy $100,000 worth of stock and go to zero, lose $100,000. put $100k into a single family in california at $750k, have the market correct by 25% and you've lost $200k (although that's a big hypothetical, because few believe in down payments these days). i'm sure that very few of these borrowers know what a deficiency judgement is, but they should, as a short sale will follow them for a long time. the smart money back in the 80's bought this stuff for pennies on the dollar.

 
At 2:08 PM, Anonymous alex norman said...

Who cares about negative effects of leverage if you've only put in 3% worth of equity?

Or even better, 0% equity? How about -3% equity??

Then when rates rise or prices fall, just walk away with a bad mark on your credit record...

The Greed of the Mortgage Finance Industry has created a universe of Moral Hazard for RE speculators.

With the increase of securitization of mortgage lending over the last five years, the question becomes, who is holding the bag?

GSE's? Hedge Funds? Foreign Central Banks?

The American Taxpayer (Govt.Bailout)...?

 
At 5:27 PM, Anonymous Anonymous said...

(boulderbo said: i'm sure that very few of these borrowers know what a deficiency judgement is, but they should)

Since this was made in the context of CA RE the web indicates that CA is not a deficiency judgement state. So you can just walk away and leave it. So the financial system takes all the risk at least in CA. Hmmm, I wonder how safe my wad is in WAMU?

 
At 7:06 AM, Anonymous Anonymous said...

concerning David L.... i find it comical how this guy says that the drivers in this market are low interest rates and demographic shifts... and then he comes out and basically says that this market is really being driven by speculators... and that it has to stop... is this CYA or what?

 
At 9:07 AM, Blogger AsgardRagnarok said...

Numbersguy should have added, and I know this has been brought up before about 100yr mortgages...

Interest payments on:

$500,000 at 6% fixed

30 years = $ 579190.95
40 years = $ 820512.74
50 years = $ 1079214.38
100 years =$ 2507567.31

 
At 9:05 PM, Anonymous Anonymous said...

Look how everything is just going fine. Fundementally you have infinite creation of wealth by creation of credit. No problem because probably the real estate mortgage paper junk is sold to these japaneese and chineese morons. Remenber ENRON. Who were the one who lost the most ? Japaneeses Insurance Companies 25 billions. So goes the saying. Asiatic are fantastic with manufacturing but in finance there are really stupid. You Americans are really lucky to have the stupid japaneese and chineese financial institutions buying your real estate junk like Fannie and Sallie bonds. They are backed by thin air. These morons don't even know it.

 

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