Monday, May 02, 2005

"The Villain Of Our Era"

Peter Eavis over at TheStreet is worried about the housing bubble. "The housing market has gone from nerve-wracking to downright horrifying. It's got to the point where there is simply no defense left for skyrocketing house prices." Welcome to the party Mr. Eavis.

"Mortgages are eating up the biggest proportion of income since the early '90s. The market value of residential real estate is at a record high in relation to after-tax income. The market value of real estate is close to 200% of disposable income now. That ratio's previous high was in the late '80s, when it climbed close to 160%. A ratio close to 200% cannot last more than a few months. It is the equivalent of Nasdaq trading over 5000."

"Borrowers are still borrowing on their homes' equity to pay down more expensive credit card debt. But when house prices cool off in the very near future, the luxury of cheap home-secured credit won't exist."

"When the history books get written, the corporate crooks of the '90s will have a certain lasting notoriety, and deservedly so. But the villain of our era will most certainly be the man who created and then sustained the biggest bubble the U.S. economy has ever had to deal with Fed Chairman Alan Greenspan."


At 10:50 AM, Anonymous Anonymous said...

Housing bubble on big left-wing blog:


At 11:37 AM, Anonymous Anonymous said...

"A ratio close to 200% cannot last more than a few months."

"But when house prices cool off in the very near future, the luxury of cheap home-secured credit won't exist."

Sounds like the bubble is ready to burst. All we'd need is 50 bps from the Fed instead of 25 and this would all be over.

At 11:42 AM, Anonymous Anonymous said...

My office mate bought a condo about a month ago. I just overheard him say that all he has to do now is, "ride the escalator up." SCARY! How far is a $400K condo going to rise?

At 12:51 PM, Anonymous Anonymous said...

Something is bothering me. I'm sitting here listening to CNBC's "Closing Bell" program. The host and the guest are arguing about whether the economy can withstand a 3.5% Fed fund rate.

They are talking like a 3.5% Fed rate would totally kill the economy and yet that seems like NOTHING compared to what would happen if the bubble burst.

Am I alone in thinking that many, many people haven't realized that a bubble exists nor have any comprehension of how a bubble burst would damage the economy ?

I've got this feeling that we are walking toward the edge of a cliff blindfolded.

How much difference can a 25 BP hike be compared to the mass carnage that will occur if the housing bubble bursts ?

If the bubble bursts won't MBSs be severely downgraded in quality and drive a mass devaluation of bonds (ie driving up yields) ? Wouldn't that movement make 25BPs seem like peanuts ?

Why isn't anyone talking about this ? Just because houses don't trade on the stock market doesn't mean that there isn't a looming disaster that warrants attention.

This is going to be a tremendous learning experience one way or another.

At 6:09 PM, Anonymous Anonymous said...

Talking about 3.5% killing the economy is the same thing as talking about a bubble in asset prices (real estate). If you subtract out all of the economic activity from the real estate boom of the last few years (since Nasdaq 5000), what sectors of the economy are growing? If the stimulative effect of the low interest rate environment is taken away, it may be apparent to all that the emperor isn't wearing any clothes.

At 6:19 PM, Blogger TulipsAllOverAgain said...

An excerpt from the PrudentBear that I almost glossed over. Truly unbelievable:

National home prices, adjusted for inflation, have appreciated about 40% since 1995 and many areas are up more than 160% in that same time. “If you go back to the 1980s, during that cycle, adjusted for inflation, total price appreciation was 18%. In the prior boom in the 1970s, it was 15%,” cites David Stiff, an analyst with esteemed real estate research firm Fiserv CSW. He continues, “It’s alarming… I am surprised that it’s that high.”[i]

40% to 160%. Wow! Shiller's data indicates that over the long run, real estate moves only about 1% a year on average ahead of inflation.

At 6:38 PM, Blogger TulipsAllOverAgain said...

What is Stephen Roach talking about (quote follows:

I am not a chartist, but I continue to be struck by the eerie similarities between post-bubble patterns in Japan and America. Five years after the bursting of the US equity bubble, the Nasdaq continues to track the post-bubble Nikkei very closely. Is this merely a coincidence or, in fact, a visible manifestation of the long and drawn out perils of a post-bubble shakeout?

Take a look at the Nikkei vs. the Nasdaq. What shakeout, the Nasdog flew far higher and there has been almost no shakeout in comparison to the Nikkei which popped at the end or 1989. The Japanese bubble, in comparison, is but a blip on the screen. Is the excesses of our current environment that much greater given all of the derivative financing available for speculation (er real estate investing) today? The potential of the "inevitable" shakeout makes me sick.

At 6:58 PM, Anonymous Anonymous said...

I think the FED knows its a bubble! But will not say anything.

Federal Reserve Governor Donald Kohn said.,,SB111469516252319496-CbANXv7iXKfrd0gqrtqUrGxNflQ_20050528,00.html?mod=tff_main_tff_top

"…(W)e should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households."

At 3:46 PM, Anonymous Anonymous said...

I have been in the industry for 5 years now, and without a doubt it's a bubble. I can teel you what I am seeing everyday writting mortgages is a 1% higher rate in mortgages from 6% to 7% would price out MOST borrowers. The thing to watch is the China revaluation of it's Yaun, to keep there currency pegged to ours they must buy IOU's from a bankrupt country (our Treasury bonds), when they let go (rumor is next few weeks) then the bond market could see a sizable jump in rates- which directly correlates to the Mortgage rates. When you see the average Mortgage rate countrywide hit 7%- you will here a large pop and hissssss... game over.

At 1:35 PM, Anonymous Anonymous said...

It's easy to blame Alan for the housing bubble, but the truth is he lowered rates to stave off deflation which he saw happen to Japan 10 years earlier. Why not blame the boneheaded banks giving these absurd loans or the boneheaded consumers who are buying at absurd prices?

BTW, housing bubble is better than deflation.

At 7:14 PM, Anonymous Anonymous said...

Hold tight... you'll get your deflation.

At 2:04 PM, Anonymous david said...

I don't know if Greenspan is the
only villain, or even the main one.
Certainly he's culpable. But
several alarmist statements in the
comments section here seem not to
understand the real forces and
their timescales. For instance,
I 100% agree that saying 3.5% fed
rate is going to kill the economy
is kind of silly. The main thing
is that a rise of this much
that we've already experienced in
the fed funds rate would have
killed the economy in
past recoveries, and our short
memory is at fault. We can sustain
quite a bit more than 3.5% and
still get a GDP figure of >=3%.
So what is driving the statement
about 3.5% being an economy-tipper
is not a denial of housing bubble,
but the thought (wrong) that this
much fed rise is usually going to
show a response. The thing to
watch is the fact that the 10yr
bond is not responding yet to
these fed moves. The real economy
and the housing economy will move
when the 10yr starts to actually
move in tandem with the fed. Now,
the question, whether the fed made
past mistakes of such magnitude by
letting the rate get so low in the
first place. You can't fault the
fed for dropping rates to low low
low levels after 9/11. You can
fault the fed for politically
wanting to make people happy during
other times, and allowing their
one weapon in their arsenal to get
so blunted. I don't know what else
the fed could really do, once it
was already in this mess circa
2002, though. They have
thoughtfully telegraphed everything
to a T and the 10yr note is
totally hunkered down. Now wages
are starting to actually rise,
but in the meantime both national
and consumer debt have gone off
the charts while we were asleep
at the wheel during the lowrate
years. I agree that more
regulation of the banking/lending
industry would have been prudent,
though I frankly have my doubts
that pulling in the Fannies makes
all the difference. Some, yeah, but
their insurance is not the reason
for the greed. Greed is the reason
for the banking industry's greed.
A greed which has hoped to prop up
the amazing profits that they have
gotten for 2002,2003,2004 and they
pray they can sustain but know
they cannot. As a result, we have
just disenfranchized a massive
number of young people who are not
able to even get in this market.
And we've rewarded boomers set to
retire to cheaper pastures with
newfound RE returns. The market
ought to sort itself out with
respect to risk, but why won't it?
Which brings me to my last point:
in reference to another comment
here, the statement that most
people cannot afford a pop of the
lending rates from 6% to 7%, this
is really not much of an argument.
Of course they can't. That's
what it means for the market to be
in a thin equilibrium. By chasing
profits to such a degree, the
industry is a victim of its success
and has put the average borrower
in the position where the market
has reached a current equilibrium
level of prices vs. what people can
barely bear. This extracts maximum
profit for all the hangers-on
and creditors in the system, but
it is actually the normal state
of affairs called a market. All
that it means is that if price
appreciation cools slow enough,
the rise from 6% to 7% can be
smooth. One possibility is this
soft landing, where prices plateau
and stop going up, the banking
industry crashes from lack of REFIs
and people stop buying consumer
goods on helocs, while
the values catch up to reality
and the interest rates adding of
several hundred bucks is slowly
absorbed. This is not an impossible
scenario in some markets. What it
will do is to hammer those markets
that, themselves, employ a lot of
banking/lending people, but if
GDP actually stays ok, then our
only problem becomes longterm
debt instead of immediate asset
deflation. That'll be decided more
by the course that the dollar takes
and that the govt takes when it
comes to federal debt. Yes,
the party will end, and there will
be foreclosures and there will be
houses that take a long time to
sell. But 50% price drops in most
major metros?? I dunno. There's
still so many buyers here
(suburbs of NYC) that it is hard
to see the landing being that
rough for the owneroccupiers.
For the investors, yeah, the
low hanging fruit is gone. But
unless the economy, with very low
local unemployment, starts to tank,
I don't see 'crisis.' When we
did have crisis was 1988-1994
and it was driven then by very poor employment fundamentals.
In our market, I see a coupla
year pause coming up. From there,
it depends on jobs.


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