Monday, May 16, 2005

Yield Curve Flattens Into "Danger Zone"

At the Dallas News, a roundtable discussion with Wall Street analysts and Richard Fisher, president of the Federal Reserve Bank of Dallas, turned to the housing market. "The one factor that could throw a wrench into any plans to pause (rate increases)is housing. Home price increases may not be reflected in the CPI data, but experts say there's no doubt they play a big role in the Fed's decision-making process."

Andrew Tilton, a Goldman Sachs economist said, "The mechanism to cool housing is long-term rates. The trick from the Fed's perspective is how to cool things off without causing a crash and a significant slowdown in consumer spending."

"Mr. Fisher concurred that housing was a priority at the central bank, something his fellow Fed governors and Alan Greenspan have echoed in recent speeches. 'We are monitoring it,' he said."

Sheryl King, economist at Merrill Lynch "refers to the shrinking gap between the yield on the 2-year and 10-year Treasury. After being around 90 basis points, or hundredths of a percentage point, the spread had narrowed by the end of last week to 51 basis points. Fifty basis points has traditionally been accepted as the 'danger zone' among economists."

"'The bond yield curve has flattened significantly,' Ms. King said. 'That tells us the Fed will not be able to engineer a soft landing.'"

41 Comments:

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

I think deflation is more of a worry than deflation. And I think the 10yr bond is low because the market anticipates the debt implosion (housing, home equity, general)and less demand for money say 6 - 12 months out. Any thoughts....

 
At 9:11 AM, Blogger John Law said...

so why aren't long yields going up? is it the foreign central banks?

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

I doubt there can be a soft landing, because the current market is in large part a pyramid scheme. Speculators are paying the prices they pay in anticipation of even higher prices for the next guy. Even a small slowdown can turn the herd, once it gets a lot of airtime.

Someone will explain on the talk shows that a person who is leveraged into an investment can get creamed when the prices go south even a small amount. That's when they'll head for the exit doors. Fuel on the fire will be the examples to-be-given about what is already happening in the U.K.

I just wish I could learn to figure out when the market gets near the bottom.
Chip

 
At 9:21 AM, Blogger deb said...

I can't even think about the bottom yet. It is a long way off and we will all feel very different then about RE. To buy at the bottom (or what you think is the bottom) will be even more psychologically painful than not owning now. We have a long long way to go.

The only possible ending I can see is credit deflation. The debts people have taken on will not be servicable. Then, the dominos will continue to topple, as spending slows, unemployment will increase, even less money to service debt, down and down we go.

Not that I am a doom and gloomer, it just has to be this way. There have been and always will be cycles of optimism and pessimism, borrowing and conserving, feast and famine. The hard times to come will set the stage for the next good times.

 
At 9:27 AM, Blogger Ben Jones said...

The Fed may not count houses for inflation numbers, but it sure will show up in the deflation. I expect a reverse wealth effect. When Dallas had it's last bust, everything was cheap. Luxury cars, Rolex's; the pawn shops were brimming.

A flat yield curve is telling us there is a high chance of recession. Get ready for the mother of all yard sales.

 
At 9:50 AM, Anonymous John Vosilla said...

Ben, do you expect Dallas to bottom soon or will it get dragged down further when the inevitable happens in the expensive bubble markets? My guess is if they'd only stop building like crazy there it would firm up in a hurry.

 
At 9:53 AM, Anonymous John Vosilla said...

"I just wish I could learn to figure out when the market gets near the bottom"

Chip study your local area for prior bottoms and what multiple to median income and rental rates home prices were for a good starting point.

 
At 9:55 AM, Blogger goleta said...

"
I just wish I could learn to figure out when the market gets near the bottom."


The market will overshoot, so the bottom will be even lower than the prices we consider reasonable now.

Home ownership is around 70% and over half of the houses are owned by boomers or speculators and they won't be buyers but sellers in the down market. Lenders will tighten credit and less than 10% of the population like us who currently can afford a house but choose not to will be the only ones qualified to get the mortgages. So it will be at least 35% of the population begging less than 10% of the population to buy their homes.

With that kind of buyer's market, prices that deem reasonable now can still be 50% over the bottom prices.

 
At 10:04 AM, Anonymous Anonymous said...

"I just wish I could learn to figure out when the market gets near the bottom."

It's actually fairly straightforward to call the bottom (vs. calling the top.) Once the fundamentals for housing (various p/e metrics) pencil out, it's time to buy. Yes, there is a possibility that housing will fall even further than this for a short time, but it will rapidly bounce back to the baseline so there is minimal risk in using this approach.

 
At 10:04 AM, Anonymous Anonymous said...

The key is interest rates, and they may be set by China, not Alan Greenspan. Here's a great article in today's International Herald Tribune.

http://www.iht.com/articles/2005/05/12/business/norris13.php

to Goleta: in the late 80s Denver went through a terrible RE crash. Banks owned many properties when borrowers defaulted. Banks do NOT want to hold properties and often would take unbelievable lowball offers. Many times less than half of what the property had last sold for. I'd wait for the downturn to gain speed, and then start calling banks and asking for the person in charge of 'real estate owned'.

Many governments have web sites where you can search the public records for recent sale prices. That will tell you a lot as well.

..DenverKen

 
At 10:18 AM, Anonymous Anonymous said...

"Home ownership is around 70% and over half of the houses are owned by boomers or speculators and they won't be buyers but sellers in the down market. Lenders will tighten credit and less than 10% of the population like us who currently can afford a house but choose not to will be the only ones qualified to get the mortgages. So it will be at least 35% of the population begging less than 10% of the population to buy their homes."

While I think California prices will drop back to their historical norms, I don't think they'll overshoot much on the low end. The problem is that only 55%-60% in CA own a home, so they feel relatively deprived versus the rest of the country.

Californians, after all, are the ones who have driven the west coast bubbles (Vegas, Reno, Phoenix, etc) largely because they can easily afford homes in those locations.

There are plenty of people sitting on the sidelines in CA waiting until they can afford to buy. So, if a bunch of CA homeowners and NV speculators get burned there are still many fresh buyers with clean credit.

 
At 10:22 AM, Blogger Ben Jones said...

John V.
I know that some readers from Dallas don't see a bubble there, but that is only because the prices aren't like those on the coasts. To me that is no basis for the opinion. I have been all over the 'metroplex' as they call it and there has been a building boom going on for many years. There have been mini collapses, like north Dallas when telecom hit the skids.

I don't see how the market can absorb all the housing all around. People commute from Decatur and it is being built out to past McKinney. Car dealerships next to pastures and cows reminds me of the 80's. If they would quit building it would help, but as we've noted, the HB's will speculate with the easy money until they are forced to stop. I do think Dallas will be dragged down. But will prices there fall with CA, or will a banking crisis dry up the spec money, I can't say.

 
At 10:49 AM, Anonymous boulderbo said...

the denver market is the same as dallas, tremendous number of foreclosures (13,000+ for 2005), a nominally growing population and no job growth. the builders continue to build though. when the latest homebuilding numbers came out, the state economist was horrified, as she couldn't figure out who was buying those homes. so even in a market that's going up 2% annually, the speculators are still there. what i've seen from inside the lending industry are a lot of inexperienced younger players buying these hud homes with little or nothing down with plans to "lease option" several of them. yikes, to be 28 and $150,000 under water is scary.

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

this is the first time in recorded history that a fed official has said, on the record, that CPI doesn't include the cost of housing.

i know this seems like a small point, but for the last 20 years the feds have refused to ever even MENTION the fact that it's a bogus "rental equivalency" number that is based on a hypothetical home rental price in a rural midwestern town that doesn't even exist.

a total scam.

and yet, people are so fucking blind they don't stop and wonder what the fucking purpose of an official inflation measure is, if it excludes the SINGLE LARGEST EXPENSE MOST PEOPLE EVER HAVE?

jesus christ, this country is finished. stick a fork in it. we've degenerated from the greatest superpower in the world to nothing more than a population of people trying to scam each other for the last remaining scraps of wealth that hasnt been shipped to asia yet.

so sad.

 
At 10:52 AM, Blogger deb said...

"The problem is that only 55%-60% in CA own a home"

Yes, but now only 5% of homes here are affordable to the median income household. We have a long way to go to bring things back to historial affordability.

What percentage of homes do you suppose were affordable to the median household in '99?? This is not so long ago. It was 50%- yes fifty percent!!! Our market is so very sick, we are totally and completely off the charts in a way no economist would have ever thought possible.

 
At 11:07 AM, Anonymous Anonymous said...

"Yes, but now only 5% of homes here are affordable to the median income household. We have a long way to go to bring things back to historial affordability."

The original post related to overshooting. There's a long way down to the historical norm, but that's not the point.

 
At 11:14 AM, Blogger deb said...

I guess I didn't fully make my point, which was that in CA we are so far off the charts, that anything could happen. It's hard to compare the bust that could occur with busts in the past because we've never been so over inflated. This whole thing could really crater our economy.

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

WASHINGTON -- May 16, 2005 -- Speaking before Realtors® last week, National Association of Realtors' senior economist Lawrence Yun listed three popular market trends that could cause double-digit price acceleration over the next two years. Two of the positive trends -- areas with heavy in-migration and affordable retirement destinations -- bode well for Florida.

Yun noted that some real estate sectors might "decelerate" -- with price growth at slower rates than before. But the three areas of the market that have a strong potential to see home-price acceleration in double-digits over the next two years are:

• Heavy in-migration regions -- places where a high number of residents move in from other parts of the country, including Florida and Nevada.

• Future retirement destinations that are still affordable -- places where homebuyers plan to buy now and live once they retire, including the panhandle of Florida; Charleston and Myrtle Beach, S.C.; Virginia Beach, Va.; Alabama; and the North Carolina coast.

• Tech-sector heavy markets -- markets where the technology industry is making a comeback, including Seattle; Denver; Austin, Texas; and Raleigh-Durham-Chapel Hill, N.C.

"As the rest of the country takes somewhat of a breather, these markets will see acceleration of prices into double-digit levels," Yun said.

Source: Haley M. Hwang, Realtor® Magazine Online

 
At 11:46 AM, Anonymous Anonymous said...

At 9:21 AM, deb said...
To buy at the bottom will be even more psychologically painful than not owning now.

Thanks Deb. That's a great point.

 
At 11:48 AM, Anonymous James Pitts said...

I am living in an apartment in Los Angeles. My annual rent increases have (thankfully) been limited by CPI.

How does the fact that rent increases are connected to CPI further distort the housing costs component of CPI?

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

"While I think California prices will drop back to their historical norms, I don't think they'll overshoot much on the low end."

You may be right, however I wonder if anybody (especially in the Bay Area) knows what a normal valuation even is. When SoCal was having it's meltdown in the late 80's/early 90's the Bay Area barely registered a negative blip. Therefore it can easily be argued that the Bay Area has been in an extended housing bubble for many, many years (much longer than the rest of the country.) It was probably for a variety of reasons that are disimilar to what is happening nationwide today.

In any event, if the houses in the Bay Area were to return to somewhat normal valuations (based on p/e or any number of other metrics) I believe local residents there would view it as a complete cataclysm and would be very reluctant to re-enter, regardless of how long they'd been sitting on the sidelines.

 
At 12:50 PM, Blogger desi dude said...

"I believe local residents there would view it as a complete cataclysm and would be very reluctant to re-enter, regardless of how long they'd been sitting on the sideline"

probably that could be the reason it would overshoot at the bottom???

 
At 12:56 PM, Anonymous Anonymous said...

"You may be right, however I wonder if anybody (especially in the Bay Area) knows what a normal valuation even is. When SoCal was having it's meltdown in the late 80's/early 90's the Bay Area barely registered a negative blip. Therefore it can easily be argued that the Bay Area has been in an extended housing bubble for many, many years (much longer than the rest of the country.)"

To me a realistic ballpark for the "normal" statewide low valuation would be the P/E ratio for houses between '94 and '96. San Jose's new bottom is untested because the web revolution has moved it back to being San Francisco's ugly stepsister. The corporate HQs will remain in Silicon Valley, but not the bulk of the jobs. SF has a better location and better long term prospects.

The state economy and population changes too much with every cycle to go much farther back. CA is never going return to the pre-1970s era of vast amounts of buildable space in desireable locations.

 
At 1:01 PM, Anonymous Anonymous said...

"CA is never going return to the pre-1970s era of vast amounts of buildable space in desireable locations."

No. There won't be vast amounts of buildable space but large number of foreclosed homes.

 
At 1:13 PM, Anonymous Anonymous said...

According for Foreclosure.com, there are currently 2608 pre-foreclosures in the Santa Clara county and 2835 in the Alameda county.

 
At 1:25 PM, Blogger goleta said...


desi dude said...
"probably that could be the reason it would overshoot at the bottom???"


Unlike stocks, waiting it out till RE prices recover may not be an option. Maintaining a home can be very costly, especially with inflated property tax. The market can take 10, 20, or even 30 years to recover with a bubble this big and we have 77 million boomers waiting to sell their homes. That's why I think the overshoot can be as bad as the dot com bust.

 
At 1:34 PM, Anonymous Anonymous said...

The dot com bust did not overshoot though. Stocks are still very expensive.

 
At 1:45 PM, Blogger goleta said...

"The dot com bust did not overshoot though. Stocks are still very expensive."

It once did, but most have recovered from the all time lows. Beside the ones delisted, many tech companies that have been in business or went public before 1990 saw their stocks trashed to all time lows after the bust. There is still a future for some top dot com companies, at least this blog shows doing things online can be more efficient than other means.

 
At 1:50 PM, Anonymous so. cal serf said...

To the Anons who were discussion the foreclosure data, I was just checking out data for CA at:

http://www.foreclosure.com/state/ca.html

As far as I could tell there seems to be a very low number of overall foreclosures in CA but a very large number of "preforeclosures", what is a preforeclosure anyway, could someone briefly explain? thanx

 
At 2:16 PM, Anonymous Anonymous said...

Deb

You said -- "Yes, but now only 5% of homes here are affordable to the median income household."

The verbage sounds different, They used to say that "only **% of the households could afford the median priced home". Do both statements mean the same thing? If so, does that mean the LA affordability index is now at 5%? If so thats a huge drop. Last I remember it was around 17%.

Please clarify.

Thanks.

 
At 2:24 PM, Anonymous snowball said...

It's easy to tell when to buy. You should buy when everyone else around you questions your purchase.

When everyone and the media are all telling tales of how real estate always depreciates in value, and your friends think you're an idiot for sinking money into something that cannot possibly appreciate in value, it is time to buy.

 
At 2:33 PM, Anonymous Anonymous said...

And when there are lots of (upside-down) mortgage-related family murder-suicides. (There were lots in Hong Kong a few years ago) And when people tell you to watch for falling "objects" from the sky.

 
At 3:15 PM, Anonymous katie said...

Banks do NOT want to hold properties and often would take unbelievable lowball offers. Many times less than half of what the property had last sold for.

Does this mean that, faced with mass defaults and a buyer's market, rather than foreclose and sell at a loss, banks might be willing to renegotiate the principle with the borrower?

Could they legally do that? How would this affect the picture of the downturn?

 
At 3:27 PM, Blogger deb said...

"The verbage sounds different, They used to say that "only **% of the households could afford the median priced home". Do both statements mean the same thing? If so, does that mean the LA affordability index is now at 5%? If so thats a huge drop. Last I remember it was around 17%."

It is a different index- Wells Fargo Housing Opportunity Index (http://www.nahb.org/fileUpload_details.aspx?contentID=34325). The table is interesting. It offers historical data on major metropolitan areas.

The thing I find so facinating about what has happened in LA is that the number of homes affordable to a median household has dropped from 50% to 5% with record low interest rates.

 
At 3:30 PM, Anonymous Anonymous said...

It is not the principal but the payment that the borrower cannot service.

Banks usually renegotiate the payment before resorting to foreclosure.

Even if the principal can be renegotiated, the borrower will be hit with a large tax bill because part of the debt is forgiven.

 
At 3:32 PM, Blogger desi dude said...

"Does this mean that, faced with mass defaults and a buyer's market, rather than foreclose and sell at a loss, banks might be willing to renegotiate the principle with the borrower?"


I believe they can do that. I know of a gentleman who tried to do that in the 80's crash. That time the back refused thinking that person will not default.

But this person first stopped making the payments and after six months walked out of the home.

If the bank renegotiates and writes off a part of the loan amount, the onwer will be responsible to pay income tax as this write-off amt will be considered as income.

-- no lega/financial advice--- check with a professional---

 
At 5:04 PM, Anonymous Anonymous said...

"Does this mean that, faced with mass defaults and a buyer's market, rather than foreclose and sell at a loss, banks might be willing to renegotiate the principle with the borrower?"

Worse, I believe their first foreclosure targets will be homes with the most equity in them, so that they'll have a better chance of making up losses from selling into a soft market. The homeowner's equity is a cushion of safety for the bank, not the homeowner.

 
At 6:38 PM, Anonymous Anonymous said...

While I think California prices will drop back to their historical norms, I don't think they'll overshoot much on the low end. The problem is that only 55%-60% in CA own a home, so they feel relatively deprived versus the rest of the country.

I respectfully disagree. I think You missing something else. Which is perception. At this moment in time perception is that real estate is a great investment. After years of falling down prices people with perfect credit and substantial downpayment and decent job will be avoiding RE like hell, because the public perception will be : RE is the worst place to put the money, even, if they just want to leave there.
And then it will be the perfect time to buy RE. And hopefully we'll be still bloging here.
Mike C, Chicago, Renting RE Investor.

 
At 10:40 PM, Blogger desi dude said...

mike
" And hopefully we'll be still bloging here"
i hope not!. we will be busy selecting the house to buy(houses for some people!)

 
At 8:50 AM, Anonymous Anonymous said...

I respectively disagree with you desi dude. I think blogging here will be beneficial, right to the bottom of this bubble and beyond. Ben will have to change the title of the Blog on the way, but we still can share our opinion about RE and other aspects of our economic life. I myself believe that future of this country is very uncertain and all scenrios are possible and I want prepare myself. That is, I think, we should talk more about the way to protect ourselves and possibly benefit from different economic outcomes.
And even though I am renting I am picking up and resale the properties with the profit, right now. But I do this for a living for years and I got my niche. Even in this hot market I can find tremendously undervalued properties wich are not on MLS and flip them.
Mike C, Chicago.

 
At 12:49 PM, Anonymous fullmetalninja said...

Hey Mike C-

I'm another chicagoan (transplant) and have had such mixed feelings about buying.

Seems like everything outside of the developing areas on the Southside (and hell even a lot of those) are over valued.

I work in the suburbs, and its even worse- with really subpar ranches getting 300K and up.

At the same time, information on Chicago real estate is really hard to find- the local papers pretty much just get industry people to comment (buy! buy! buy!), and the national publications generally talk about the coasts- acting like all the Midwest is rural indiana (which is also way over valued right now for those who care).

So as a RE guy- what do you think the ramifications will be on the City and Suburbs here in chicago?

My situation: pay 1300 for rent (1700 sq ft, logan square); wanted to buy but the condo's were crap for anything <300k (in the same neighborhood), and then the association fees would eat you alive.

Anyway- looking for someone anonymous to be honest about this market :).

Thanks

-fullmetalninja

 

Post a Comment

<< Home