Flat Home Market Sinks Debt-Based Economy
If you want to know what an on-going property bust looks like, there is the example of England. "Mortgage equity withdrawal slumped to 6.9 billion pounds in the fourth quarter of 2004, the lowest since the final three months of 2001, according to Bank of England statistics."
"'The main trigger has been a slowdown in the housing market sufficient to remove a lot of finance that was boosting the consumer,' John Butler, economist at HSBC said. 'Less mortgage equity withdrawal means less finance available to households, so even a slowing housing market is enough to cause a turnaround in consumer spending.'"
"Consumption has driven 80 percent of the expansion in the U.K. economy since 1997. About 70 percent of the jobs created in the U.K. since 1997 have been directly related to the expansion in consumer spending and the property market, Butler estimates. That means employment will suffer as the property boom fizzles. He predicts as many as 230,000 job losses by the middle of next year."
20 Comments:
Love your blog!
I first heard about the housing bubble in 2002, via itulip (http://itulip.com/). They still have a long, detailed housing bubble essay up on their site.
Thanks to them, I sold off most of my stocks before 2000, and paid off my student and cc debt. Learning to live within my means, via The Dollar Stretcher (http://www.stretcher.com), was also very helpful.)
And thanks to you, Ben, and all the posters here, I'm saving my pennies for a home *in 2010*.
(I'm saving my pennies for a home *in 2010*)
I've seen that year-2010-crop up alot.
The most bullish of the housing bulls all seem to believe that the current mania can run for a few more years. But most of them also believe that things will possibly turn ugly after that.
Cases in point:
---David Lereah of the NAR has a new book out entitled, "Are You Missing the Real Estate Boom? : Why Home Values and Other Real Estate Investments Will Climb Through The End ofThe Decade"
---"Where, How and Why to Buy Real Estate Before 2009" by Andrew Garvey
---"The Great Real Estate Boom Through 2010", RE "guru" Marshall Reddick
---Harry Dent (hsdent.com) predicts total stock/RE mania through 2009. Then a depression.
These are the bulls! All of them predicting massive gains over the next 3 1/2-4 years, then the bottom will fall out. A couple predict depression or major recession.
If the bullish of the bulls are predicting calamity ahead in 3-4 years, what are the chances that real estate keeps ramping up to the exact moment when calamity strikes? How about zero. My guess is that we could see more upside ahead, followed by a slow decline or stagnation, then the bottom will fall out.
The reporter doesn't mention the amount of sales, only the prices. Who wants to bet the number of sales were down? Love the last quote.
http://www.nypost.com/news/regionalnews/24163.htm
APPLE HOME BOOM
By BRADEN KEIL
May 19, 2005 -- In a slap to the growing predictions of a real-estate market crash, Manhattan apartment prices have posted yet another bubble-licious upswing.
Real Estate Board of New York figures released today for the end of the first quarter of 2005 show an astonishing 12 records were set throughout the borough.
Northern Manhattan — above 96th Street on the East Side and 110th Street on the West Side — was one of the hottest areas. Condo prices there jumped 68 percent from a year ago to a median price of $353,000.
Median prices — which are the middle of the sales-price range — also soared in the north's smaller co-op market, jumping 81 percent to $488,000 over the same period.
"I think it's showing the emerging and continued strength of that particular market," said Michael Slattery, the head of REBNY's research department, who expects the trend to continue in Manhattan's northern reaches. "The price rises from the East Side and West Side will bring even more people into this area."
Further south — the prime area for co-op wars — the East Side is barely clinging to its claim to be New York's highest-priced neighborhood. In the past year, the East Side's median co-op price actually dropped to $677,000 from $700,000, while West Side co-ops rose a significant 28 percent to $660,000 from $515,000.
Meanwhile, the average price for a condo apartment on the East Side showed more strength with a 33 percent rise to $1,101,872. The West Side's average condo fetched $1,230,724.
The hot prewar condo market on the East Side (42nd to 96th streets) jumped from a median $515,000 to $793,000. The most dramatic number in that market — average sales price — soared to $1.9 million from $1,107,888 a year ago, an 84 percent rise.
Downtown south of 42nd Street, the median price for a condo came in at $730,000, up from $612,000. And for the first time since REBNY began tracking prices 10 years ago, the average condo crossed the $1 million mark to $1,076,723, a gain of 27 percent.
Median prices for prewar downtown units — co-ops and condos — climbed 43 percent to $1,426,000 while the average price went up 36 percent to $1,701,631.
None of which should calm all the talk about a market crash. But Slattery, for one, doesn't seem too worried.
"I don't see a [bubble burst]," he said. "The interest rates are still relatively low. The economy is still good. The job growth is modestly growing. And we're a safe city."
"I don't see a [bubble burst]," he said. "The interest rates are still relatively low. The economy is still good. The job growth is modestly growing. And we're a safe city."
It's just like car accidents. The most common excuse for the at fault driver was "I didn't see _____ (fill in the blank) coming, in time to stop/ slow down, etc.".
My wife gives me the same "I just don't see it happening" thing. I ask what leads her to believe that. She has no good reason. Yet, I give her the whole spiel with ARMS, IO loans and stagnant incomes, but it just doesn't sink in. She just won't believe that housing prices could collapse and that the debt contraction could cause other wide spread problems.
"She just won't believe that housing prices could collapse and that the debt contraction could cause other wide spread problems."
Most don't believe it. Because it would be epic in nature and unlikely from the perspective of anyone who has not lived through such a thing, which most of us have not.
My wife has been bullish on RE for thirty years, and she pushed me with regard to selling a year and a half ago. When I ask her why she believes it is risky now, she has no good reason either.
Go figure.
PS, my landlord just took the house we are renting off the market (North San Diego) because there was very little interest.
(Most don't believe it.)
You got that right. Recent Gallup poll showed 77 percent of Americans have never heard of the housing bubble and had no idea anyone was even discussing it.
There's going to be a lot of surprised people out there someday soon.
I've been beating this drum for 2-3 years now. Obviously way early. But I was beating the drum about tech stocks back in 98 (again way too early.)
I took my own advice about tech stocks and sold them off in 98. Even sold my company in early 2000. I took my own advice on RE and sold my house in 2003 and most of my income prop in late 2004. Probably left a little on the table. But better too early than too late particularly with illiquid assets.
When I started talking about a "housing bubble" in 2002-2003, my partner thought I was nuts. When I really got worked up about it late last year, she thought I should seek therapy. Now when I show her the massive coverage of it over the past few months, she only says, "Wow."
And still 77 percent say they've never heard of it. I say, "Wow."
You know what would be great for a website.
A complete collection of home price historical charts for major zip codes using the Home Price Check on the WSJ site:
http://valueyourhome.realestatejournal.com
For fun, I've been entering "1 main street" and random zip codes.
Seems like 80210 is rolling over.
50210 is perfectly linear.
20210 is parabolic and broke it's moving average recently.
etc.
Does anyone else believe the recent British and Australian housing market behaviour represents the handwriting on the wall for the rest of the world?
Poynter (a jounalism blog, read by many in the industry) is covering the Housing Bubble coverage:
http://www.poynter.org/column.asp?id=2&aid=82475
I think the Feds and the gov will fight very hard to keep this housing bubble going. If need be, they will fudge the stats as they do the inflation, unemployment and GDP numbers.
Won't it be funny when housing prices are dropping 10-20% per year, but the official stats show a gain!
Very scary:
40% of 2004 new houses vacant (Ireland)
http://www.examiner.ie/pport/web/ireland/Full_Story/did-sgAiidkE9h0-gsgHuTLc4nqWo2.asp
Greenspan said it too rishy:
http://money.cnn.com/2005/05/19/news/economy/greenspan_fannie/index.htm?cnn=yes
Anon 11:50
"Seems like 80210 is rolling over."
Indeed, I think you are correct. It's a Denver ZIP code, and although average single family prices are still edging up, condos are in a definite softening.
House prices are difficult to measure, since all are unique in one way or another. Median and mean prices can be affected by sales being higher in one end of the market or other. The only real test is to look for properties that have turned over after a set period of time. But even that is affected by things like remodeling, changes in neighborhood desirability, etc.
You can bet the gov't will cherry pick the numbers that make the market look it's strongest.
..DenverKen
The Fed will keep the housing bubble going because they learned through the latest presidential election that the general population can be manipulated through lying, fudging numbers and using the media to their advantage. Only in the past few years has the average American taken everything and anything they hear or read as the truth. People don't have time to search for the answers for themselves anymore. I think this whole credit bubble is a true testament to where our nation is headed. The heard mentality is in full force. It's a bleak outlook.
I have in-laws in Littleton. They are trying to sell a house - very little acction right now, and the house has been on the market since December. Early to mid 2004 they tried to sell a condo - decided to keep renting it - no qualified buyers willing to live in it(it's not in the best development) - had one "investor" make a bogus offer (guy just disappeared when it came time to put money down - he had offered 50% down with owner carry - my dad-in-law said the guy was creepy). They also hold raw land in the South part of the state and most of it has been moving very slowly too.
Fort Collins (where I live) is a bit better. Our mortgage broker said a lot of inherited money is coming into this market (as of 2 years ago). Even here it's labeled a buyer's market by our realtor friend.
--"Does anyone else believe the recent British and Australian housing market behaviour represents the handwriting on the wall for the rest of the world?"--
Absolutely, US/UK/Aust have been pretty much in lock step over the past 5 years. Australian has had almost idential interest rates, home prices and rate of appreciation as the US.
They say we are about 6 months behind them in regards to the bubble bursting.
"Fort Collins (where I live) is a bit better. Our mortgage broker said a lot of inherited money is coming into this market (as of 2 years ago). Even here it's labeled a buyer's market by our realtor friend."
I live in SoCal and personally know many couples who have either already moved to, or are about to move to, Fort Collins. If my friends are any indication, get ready for some bidding wars!
"All of them predicting massive gains over the next 3 1/2-4 years, then the bottom will fall out. A couple predict depression or major recession."
So let's do a little calculation. A 600K house in the Bay Area (pretty typical) would wind up costing 1.46M after 4 years of 25% appreciation. Because affordability is already 5-8% in the Bay Area (depending on where you live), appreciation like this would make affordability 1-2%. Hmmmmm...sounds a little overly optimistic to me.
Appreciation significantly less than this amount won't appeal to flippers and will cause a flood of property to come onto the market in a hurry. Either way, a soft-landing, or appreciation "rust" isn't going to happen.
Dr. Bubb,
Thanks for posting that excellent piece!
Australia is leading the Anglo-Saxon property cycle because houses are traditionally sold the old fashioned by holding an auction on the doorstep.
This will of course generate rapid escalation during bubble conditions, but market reality will also sink in quicker on the downside.
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