I still fail to understand the reason for rents to go up.
There are so many flippers who try to sell and now trying to rent - right ? or maybe I am wrong ?
Just the fact that rent would only cover 1/2 the cash flow is not an excuse not to rent or to only rent if the rent is double.
something does not end up. Empty homes should translate to lower rent (I understand some markets have laws against rent but still..comon sense is that empty homes leads to lower rents.
Simplistically, rents go up because there is more demand for rentals. Rent is not (at this time) competing with other rent, it's competing with "ownership". And on that basis, it's so far below that the rent can go up a lot more and still be a bargain.
Now, ownership cost is going to come down (falling house prices and all the rest we've already mentioned). There will come a point where the two meet in the middle - at which point we'll probably see an overshoot (rent higher than housing). My guess is that this will act as a brake to the fall of housing - but that's a guess, not a certitude.
"Perceived Subprime-Mortgage Risk Rises on Late-Payment Data
2007-05-29 10:43 (New York)
By Jody Shenn
May 29 (Bloomberg) -- The perceived risk of owning existing
low-rated subprime mortgage bonds rose after the latest releases
of late-payment figures, according to data based on benchmark
derivatives.
An index of credit-default swaps on 20 securities rated
BBB- and created in the second half of 2006 fell about 1.5
percent today to about 67.50, traders said. The ABX-HE-BBB- 07-1
index fell 30 percent in February, suggesting investors saw an
increased likelihood of the bonds defaulting; it and other ABX
indexes then rallied between late April and mid-May.
The latest index is down about 8.4 percent since May 14,
though up 7.6 percent from a February 27 low. The ABX-HE-BBB-
06-02 index, linked to subprime securities created in the first
half of last year, was trading down about 1.5 percent at 72.5 at
9 a.m. New York time. It's off about 5.6 percent since May 14.
The data on April delinquencies and defaults, released May
25, followed ``fairly neutral'' reports for March, in which late
payments rose more slowly and foreclosures went up more quickly,
Glen Taksler and Ward Bortz, analysts at Charlotte, North
Carolina-based Bank of America Corp., wrote in a May 25 report.
Late payments of at least 60 days, borrower bankruptcies,
foreclosures and seized property rose among all 19 of the 07-1
deals whose trustees released reports May 25, according to
Wachovia Corp. analysts led by Glenn Schultz."
Is this a thread hijack? With that said, yes, that is what happens. Take a look at upstate NY which has less population now than in the 50s. Houses are incredibly cheap to rent.
Just outside of Ithaca, one of the more expensive places in this area, you can rent a 3/2 farm house with 10 acres of land for $900/month.
With falling home sales, rents will go up in some areas, down in others. In major metro areas where housing is short close in and all the new housing was built 30-50 miles out, inner-metro rents will increase because so many renters won't be escaping to cheaper purchased housing in the exurbs. Exurban rent will fall, because of oversupply of houses and not enough renters to fill them.
Comes down to this: if there's a good local economy and plenty of jobs, rents will rise or at least stay even. But where the good jobs are mostly 30-50 miles away, rents will fall.
Walker, yes, it's a thread hijack. Worse, it's a repeat of what Yal asked in the previous thread - and if I'd noticed it there first I'd not have succumbed here. That said...
Yal, so what? I mean, what does it matter whether there are more renters than flippers (or vice versa) in an area? Unless you're trying to disagree with my previous point, of course, but having difficulty expressing it. So let me walk it again:
Rents are significantly lower than ownership. Thus there are two separate pressures driving rents higher. Flippers want to try to recover as much debt as possible (minimize losses), so they're going to offer at rates between current rents and their prices owed. At the same time, owners of rentals (the ones who did it intentionally) are going to see the opportunity for greater profits, and will adjust upward accordingly.
Now eventually - long-term - if there is a sustained surplus of rentals to renters the price will go down. But short-term the ratio is immaterial. Instead it's the two preceding issues - minimizing loss and maximizing profit.
The element that needs kept uppermost in mind is the reminder that housing is a slow-motion process. Eventually prices will adjust. Eventually rents will change. But now? Sorta, kinda, but mostly in reaction to what the situation was three to six months ago.
Since almost no industry shoots itself in the foot for fear of stock values negatively affecting executive incomes, one could strongly reason that even this latest Home Builders report is optimistic. Nevertheless, it is extremely suspicious that it sharply contrasts both the FED's and NAR's outlook on the housing market.
Sorry for the thread hijack but it is all related.
We are seeing 5 types of data:
Positive stats
Negative stats
Negative stories
Comments on bust (like this one about 2011)
Yet, someone just paid 13B (10% premium) for many apartments across the US metro areas.
If indeed we are having a real estate bust this deal makes no sense to me.
What is further puzzling is that the $13B deal involves debt of $22B.
I don't accept that rent is decided by what flippers "want". Rent is a market like all other it is driven by demand not just the cost of the supply.
Why would there be higher demand at times when properties that were not meant as rental are suddenly turning into rentals (i.e. increased supply) hence my question about does the increase in supply outweigh the increase in demand (as result of the sub prime new lending guidelines)
Is there something else at play here: Gasoline prices ? (a shift to living from suburbia to metro areas) or there is something very odd about this deal that is hidden from us ?
Given the direction R/E stocks were going (down when the dow was up but recovered all loses today) don't you think this deal could have been cheaper 2 years from now ?
"Is there something else at play here: Gasoline prices ? (a shift to living from suburbia to metro areas) or there is something very odd about this deal that is hidden from us ?"
It could be a bet. As I said above, rents are highest or stay highest where there are good jobs and limited housing; and it seems as if more and more of the good jobs are concentrated in metro areas.
Higher gas prices/energy costs have the effect of moving outer suburbers further away from the inner metro area and its jobs, because there's an increase in the economic cost of commuting. The metro areas then become more desirable, because the 'burbs move farther away economically.
You'd need a pretty big jolt in energy prices to make this happen, though.
Yal - it makes sense when you look at the underlying reality. Such deals move value from the holders of debt obligations of the company, or backed in some way by the company, to stockholders. If you start out with a good chunk of stock, you can make a mint through one of these deals. The dealmakers who organize the financing get great fees.
The usual lossholders are pension funds, retired people and the like - because as overall debt rises, the expectation of default rises, and the worth of those debt obligations drops. So it's a way to make a great deal of money in a financial transaction which, on net, moves total value from debtholders to stockholders.
Well, the deal for Archstone-Smith Trust deal is 13.5BN of equity (market cap of ASN) along with the assumption of 7.7BN of debt.
Right now the offer is for $22.2BN in cash for the debt free company. Obviously, the company will be re-levered to a debt ratio that the purchaser wants.
"So it's a way to make a great deal of money in a financial transaction which, on net, moves total value from debtholders to stockholders."
Don't all debts have to be paid first before the equity holders see any retained earnings or dividend payouts? If so, what good is equity with a crap-load of debt behind it? Just like, what good is a $500,000 house with $500,000 in mortgage debt owed on it???
Yal said: "Why would there be higher demand at times when properties that were not meant as rental are suddenly turning into rentals (i.e. increased supply) hence my question about does the increase in supply outweigh the increase in demand (as result of the sub prime new lending guidelines)..."
You're looking at this issue as if there were only one dimension to it. It's not just supply and demand, it's also price.
Example: One of the "bear" arguments against housing was the example of "Why would anyone pay a $4,000/month mortgage when they could rent for $2,000/month in the same area?"
Well, what happens when families are forced out of their homes and have to find other places to live is that there's a surplus of "expensive to live in" homes and a shortage of "cheap to live in" rentals. The price of the expensive homes comes down of course, but the price of cheap rentals goes up and they reach a new "equilibrium point" in between.
Your question assumes that all housing prices are going down, and that's not what's happening. In fact, that misconception is why the housing "bust" is so totally blown out of proportion. Unreasonably priced housing is coming down, but reasonably priced housing is either rising or holding its own.
It's only when unemployment becomes problemmatic that even reasonably priced housing is under pressure.
Sorry for adding to the rent hijack, but its a critical issue given how much the Fed relies on slowing rental inflation to lead to tame CPI.
The homeownership rate in the U.S. has increased from about 65% to about, at its peak in '05, 69%. That 4% is arguably the effect of stated income 100% CLTV (not necessarily subprime) "affordability" loans making owners out of renters.
Now, the homeownership rate is falling, and the supply of rental apartments has not grown in recent years because the trend has been towards condo conversions. This may be at odds with a high rental vacancy rate, but keep in mind that its the rate of change that matters here (i.e. the rental vacancy rate may be high but falling).
So I agree that the dominant factor affecting rents is a decline in the homeownership rate producing new renters, and less renters becoming FTHB.
This all comes down to rental yields. That's what really out of whack and likely to regress to the mean over time -- a dynamic the Fed seems too ignorant of.
The "out of proportion" part that Sebastian alludes to wasn't the reference to the value of housing, it was to the effect of the housing crash on the rest of the economy.
There is no doubt that housing is "crashing".
Housing, if Sebastian will even admit that it can crash, is doing so now in a way that everyone admits is more rapid and severe than all the "experts" predicted. And now it universally accepted that it is only going to get worse.
Forclosures are at all time nominal highs in areas with little or no job loss, record low rates etc. This can only be explained by a "bursting bubble" since no other external reasons explain it.
Now, the "out of proportion" part is yet to be seen. Can a housing crash spill over into the rest of the economy?
That has yet to be seen. Round 1 has to go to the housing bears at this point.
A Treasury Department auction of $18 billion in new 2-year notes attracted weak demand, including a low 22.9% indirect bid, the carefully watched category that includes foreign central banks.
"This all comes down to rental yields. That's what really out of whack and likely to regress to the mean over time -- a dynamic the Fed seems too ignorant of."
I'm still waiting for 10-12 x income pricing on income property to come back; haven't seen them since the mid-90s. Current values are twice that.
My rent just went up, by 27%. It wasn't cheap to begin with, it was on top of 10% increases in the past 2 years. This particular market (Palo Alto - the Google belt, with "hot" companies like Facebook setting up shop here too) is tight. I tried threatening to move but my landlord was fine with it. I am now seriously evaluating leaving the area.
Name: "You have to sell me:
The volume of new rentals coming on line is significant relative to the size of the market. "
hows this for Chicago downtown?
"residential developers are planning to deliver a record number of new, downtown units. From 2007 through 2011, they are slated to build 16,300 for-sale residences for an area with about 90,000 existing dwellings. Next year, a record 5,200 units will be completed to surpass the previous record of 4,200 in 2006 and 2003" Chicago Tribune, May 24, 2007
wondering how many of these units will become rentals ...
Downtown Chicago Condo Sales Plummet 46% First Quarter 2007
New Chicago Condo Sales In Near Free Fall
Crains Chicago reported today that Condominum and Townhome sales in Chicago have fallen for the last seven straight quarters, and now its apparent that sales are in near free fall. Condo sales fell off the chart to only 1,207 units from January threw April 2007- 2,243 units were sold in the same period last year. This is the lowest 1st quarter total sales since 2003.
Chicago Condo developers have about 7,416 unsold units today. About 45% of these units are in the development stage, pre-construction phase, and may never get built given the current slack sales pace.
I live in Cupertino/Santa Clara. Living here, the news about the housing bubble bursting and the housing recesssion seems like a fairy tale
Homes are still selling very robustly. There is nothing that has a list of under 800K in Cupertino (not even a fixer upper shack). Anecdotal evidence indicates that homes sell in hours (not even days), multiple bids are the norm and homes sell for easily 100K over list. This is true not just for Cupertino, but also for Sunnyvale, Mountain View and of course Saratoga and Los Altos.
The rental market is extremely tight as well. Rents have been going up steadily, at around 10% a year on average. A 2BR/2BA apartment goes for well over 2000/month (2100 seems to be the common rent for that).
The whole thing is absolutely insane, and there's a general feeling that money is raining down from the sky (although somehow I have not been able to catch any of that ).
I would love to get the hell out of here. For some unknown reason, the wife is rooted to the place
I'm in a similar boat. I was renting a duplex in Mt. View and the landlord decided to sell the property, and terminated my lease.
I can't blame him. People are apparently still willing to pay 250x rents to be an owner/occupant of this sort of a place. No way can he make that back by continuing to rent it out.
Maybe your landlord decided, "Well, if this property is worth $X.Xe6 on the open market, I'm just going to increase the rent until I can get a competitive return on investment. If I can't, screw it and I'll sell it."
I think that renters of single family houses and 2-4 unit places in Palo Alto/Mt. View/Los Altos will experience a lot of this kind of pressure in the near term.
Now, nobody is willing to pony up that kind of cash for larger apartment complexes, so those people should be relatively safe.
"unreasonably priced" housing=buying houses at current prices (i.e. bubble)
"reasonably priced" housing=rental housing..."
Reasonably and unreasonably priced housing isn't just about owning or renting, and it's not limited geographically. A median-priced home in California might be uncomfortably small, to-Hell-and-gone from everything, or both. Where I live, for the same price you could have a McMansion close to everything or a more-typical, more-affordable 2,000+ sq.ft. close to everything.
What the bears refer to as a "crash" is simply a normal adjustment from too-high prices limited to specific areas to more-affordable prices elsewhere.
And for the umpteenth time, housing isn't going to crash until unemployment becomes problemmatic. The core of the middle-class has to get hard-hit by a recession before it's even possible for a real crash to occur.
pablo: that is true for the inner bay area's you mentioned. Here in Sonoma (near the town) inventory is huge, rents are falling, foreclosures beginning to affect SFH pricing.
Yal said: "In parts of Ca. housing are already crashing."
Then it's not a crash.
Homebuilding stocks are doing poorly, yet the overall stock market isn't crashing. Extreme weakness in localized areas doesn't constitute a "crash" in either housing or the stock market.
Average Joe, earlier I was referring to the OFHEO index - I think the quarter will be negative, but the YoY will still be slightly positive. That is just a guess.
BTW, I expect defaults to increase significantly when people realize prices are falling ... and will continue to fall.
If the Stock Market starts falling the real estate values will start falling fast in the high flying areas
where prices and rental rates are high.
Many people in these areas are living on stock appreciation not true salaries. They can not really afford houses at these price levels. This is especially true if they are in some sort of ARM mortgage that will be repricing higher.
--
Seb is right -- nothing is crashing right now. A recession is not a crash for the economy either. Let us just say that the economy and housing are in slow downwards trend. From 0.5-1.0% GDP growth for 2007Q1 it wouldn't take a crash to slide into a recession or would it?
If the recession begins during Mar-May of 2007 then the crash will take place during 2008-10. That is when we will have a depression than Seb wouldn't be able to deny.
Jas
PS: Seb is very lucky in that so many people are trying to educate him.
About the stock market, short bets are at record high! Bulls have been pushing up stock prices primarily based on take-overs speculations, Bears have been betting on deteriorating market and economic fundamentals. Time will tell
anon,
I understand that a high Put/Call ratio is one of the most reliable, albeit contradictory, indicators of future strength in the market.
I do also think much of the recent economic slowdown is due to The Fed tightening money for inflation. I personally don't see where the inflation fear comes from, but they're supposed to be smarter than I am.
Sebastian's position that we can't have a recession till we have a recession has validity. I think it's in error, but it's an error of underlying principle, not of mechanics.
At the heart, all recessions are the result of people being unable or unwilling to spend more than they did last quarter/year. Generally, the public quits spending because it can't, not because it's unwilling. And again generally (historically), the can't is because the source of income -- employment -- is gone. To make the longwinded explanation short: unemployment climbs too high.
The flaw, in my eyes, is the assumption that employment is the sole source of income. Or more accurately (and fairly), the assumption that while there are other sources of income, their ebb and flow is relatively insignificant against the income from employment. Since that's a minority position (except in this forum) I feel it incumbent on me to defend the position instead of requesting Sebastian challenge it. Therefore...
The core of my position is that for the past seven years real GDP has increased at a nominal rate of ~3% per year, or a nominal increase of approximately 23%. At the same time, real wages have remained relatively flat - the recent growth was preceded by several years of relative decline. In parallel, the rate of employment growth has been significantly below the growth of the GDP. It seems apparent to me that if something cuts into this non-wage non-employment source of income, it will have the same impact as unemployment. That is, a shortfall in ability to spend will force a reduction in spending, which as I stated up front is the root of a recession.
I'll pause to ask that if Sebastian's going to challenge my post, he refute that single point -- that cutting the non-wage source of income will have the same effect as cutting an equivalent quantity of wage-sourced income. With that pause out of the way, I'm going to partially support other parts of his case.
I don't think housing (or mortgage games or whatever) is the sole, or even the overwhelming majority, of this non-wage income. As a consequence, it's possible that a failure in housing will not itself trigger or represent a recession. This is not to say its impact will be insignificant, it's just that it should not be considered at the expense of all other issues.
I have stated what I believe is the majority element before - a bubble of debt instruments of which mortgages form only a part. But I could be wrong. What I'm willing to stand by, however, is the solid fact that since there has been GDP growth without corresponding employment/wage growth, it is possible to have a decline in GDP (a recession) without corresponding employment/wage declines.
Bob Dobbs- I think the gas prices argument is way overplayed when it comes to housing decisions. If you commute an extra 30 miles each way for 250 days a year @ 20mpg and assume gas prices are $3; your total fuel costs to commute would be $188 a month. The recent price spike is responsible for maybe $88 of that. For most people in urban areas $88 a month isn't going to factor significantly into where they choose to live because rents vary much more widely than that for just changing floors in a building.
Gas prices will have much more impact on discretionary purchases like Starbucks coffee and movie theater tickets than it will on RE decisions.
To those other Bay Area posters who are amazed and dismayed by the resliency of the boom here... Just keep the Credit Suisse ARM Reset bar-graph with you at all times. It should be your housing-anxiety talisman. Keep checking it as we get closer to when the Alt-A, Option ARM and Prime ARM resets are due to occur. We're not there yet...
Of course, RE related job losses and an inevitable stock market correction might also help bring down prices. Not that I'm wishing for bad things...
As one of those who frequently rips Sebastien over his views... I have to give him credit on one point... He is 100% dead right on when he says we have NOT seen a crash yet. We are Not even close.
And another thing I can tell you, we won't have to come here to CR to check for signs of a crash... if (or when) the crash hits you will know. It won't be a secret hidden away in the tea leaves of some big long official report.
We can disagree about whether this is the start or precursor to a crash (like many here believe) or not (as Seb frequently counters)... But make no mistake, we are NOT experiencing a crash yet.
He is 100% dead right on when he says we have NOT seen a crash yet. We are Not even close.
I guess it all depends on what you measure it against.
The market vs. oil?
The market vs. gold?
The market vs. silver?
The market vs. copper?
The market vs. housing prices?
The market vs. healthcare costs?
However...
The market vs. cheap imported finished goods?
The market vs. easily printed fiat dollars?
Those last two are a b**ch, pardon my language. How many of those shorting the stock market forgot about them?
Never fight a land war in Asia (cheap labor).
Never underestimate a government's ability to debauch its fiat currency.
I suspect we might even see a rally in the market vs. housing soon (and possibly more depending on how many others housing can drag down with it). It doesn't necessarily mean the market will go up in dollars if things reverse though. I guess it all just depends on just how bad housing really gets.
Once again, just random anonymous opinions offered up on the productivity miracle that is the Internet. Now get back to work before your job is outsourced!
Those look like condos for sale. Not sure how many will be owner occupied. Question was for new rental stock added to existing stock.
If the market continues to get worse, does the overbuild turn into rentals or sales at a discount?
I ought to stop being lazy and make my own chart: cumulative existing rental inventory. BLS probably has respectable data through 2006. Can do it nationally and by region.
On another note, I don't expect crushed suburbanite home borrowers migrating into the cities. Gas in a Corolla (Lexus got repo'd) is less than the menu price differential (what cook a meal?! thats nuts).
The larger apartment complexes in CA tend not to go on sale much. As a means of dodging Prop 13, instead of selling the apartment complex, the parent shell corporation changes ownership. This way the apartment building still keeps its lower tax rate.
I guess it all depends on what you measure it against.
Stag - the only measure that matters right now is priced against those awful 'fiat dollars'... the stuff we all use to buy our everyday items.
I mean measuring housing prices against gold makes as much sense as measuring it against 'stock market trader bonuses'... one of the things that has shot up faster than gold.
Like I said above - when we have a real crash... you won't need to fabricate metrics (like comparing housing values against hog belly futures) or hunt around for evidence in obscure reports... it'll be there before God and everyone to see, plain as day.
StagflationaryMark,
I think The Treasury has been pretty stingy printing money in the last couple of decades. Gold standard or not, I don't see where they've been running the presses much. M1, M2, pick your measure.
Pulte cuts another 16% of headcount, on top of the 25% cut in late 06/early 07..."our current overhead levels are structured for a business that is larger than the market presently allows"
Yes, Sebastian is right that recessions require job loss. What drives me crazy is that he's blind to the real issue -- what causes those jobs to be lost.
If there's a rattler underfoot, why is it only a concern AFTER it bites?
There's a macro-economic mountain of sh!t hitting the fan, but since the government stats don't yet show it and Wall Street doesn't want to see it then somehow everything is A-OKAY.
I think The Treasury has been pretty stingy printing money in the last couple of decades. Gold standard or not, I don't see where they've been running the presses much. M1, M2, pick your measure.
Let's pick M2 (seasonally adjusted, in trillions)
April 1987: $2.7719
April 1992: $3.4063
April 1997: $3.8761
April 2002: $5.5079
April 2007: $7.2189
Average Annual Growth:
1987 to 1992: 4.2%
1992 to 1997: 2.6%
1997 to 2002: 7.3% (oops)
2002 to 2007: 5.6%
When the economy turns down the government stands by to print more money. If we repeat the prosperity of the 80s and 90s they might back off. I'm just not that much of an optimist apparently. I'm still thinking in terms of That 70s Show (not that I own hard assets these days, they've had quite a run).
Stagflationary Mark,
Doesn't that growth coincide more or less with the growth in the economy in those years?
I'm asking this to get another perspective. Thanks,
I believe we've been borrowing our prosperity (through our trade deficit, budget deficit, and MEW). Further, are companies not rewarded for racking up debt to buy their own stock? Why not? It is other people's money. That's how we seem to look at debt in general these days. Is it sustainable though?
U.S. Heading For Financial Trouble? I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibility. - David Walker, Comptroller General of the United States
Give me a trillion dollars to spend, and I'll throw you one hell of a party too. - Warren Buffett
That's sure what it feels like to me. Are we planning on paying for the party through fiscal responsibility or are we planning to pay for the party using inflation? The latter is awfully tempting for a politician.
If there is no downside to throwing such a big party, then why wouldn't we always do it?
I suppose it is the hangover. Here's to hoping it will be mild. I have my doubts.
Aha, got it. The last few years it dawned on me that:
George Bush, reviled by the left, has been the biggest spender on social programs in human history. Whether sending money to Africa, prescription drugs or The National Endowment for the Arts (+18% funding GWB's first fiscal year), there is nothing he won't toss money at.
Bill Clinton, darling of the left, had a firm fiscal discipline throughout his term. He expanded on budget cuts under Bush the Literate on multiple fronts.
In other words, Clinton carried the Reagan legacy and Bush ended it.
I've heard it said that our national debt is among the lowest vs GDP compared to the rest of the world. However, the rest of the world depends on the stability of the US. We have no such luxury.
So, yes I'm also nervous about the bar tab.
I still fail to understand the reason for rents to go up.
There are so many flippers who try to sell and now trying to rent - right ? or maybe I am wrong ?
Just the fact that rent would only cover 1/2 the cash flow is not an excuse not to rent or to only rent if the rent is double.
something does not end up. Empty homes should translate to lower rent (I understand some markets have laws against rent but still..comon sense is that empty homes leads to lower rents.
So maybe Seiders won't sink to the same level as Lereah.
ew case-shiller
http://www2.standardandpoors.com/spf/pdf/index/052907_homeprice.pdf
Another thing I do not understand is why buying a 12B REIT for 13.5B invove debt of 22.5B .
Yal,
Simplistically, rents go up because there is more demand for rentals. Rent is not (at this time) competing with other rent, it's competing with "ownership". And on that basis, it's so far below that the rent can go up a lot more and still be a bargain.
Now, ownership cost is going to come down (falling house prices and all the rest we've already mentioned). There will come a point where the two meet in the middle - at which point we'll probably see an overshoot (rent higher than housing). My guess is that this will act as a brake to the fall of housing - but that's a guess, not a certitude.
Reality setting in on ABX quotes:
"Perceived Subprime-Mortgage Risk Rises on Late-Payment Data
2007-05-29 10:43 (New York)
By Jody Shenn
May 29 (Bloomberg) -- The perceived risk of owning existing
low-rated subprime mortgage bonds rose after the latest releases
of late-payment figures, according to data based on benchmark
derivatives.
An index of credit-default swaps on 20 securities rated
BBB- and created in the second half of 2006 fell about 1.5
percent today to about 67.50, traders said. The ABX-HE-BBB- 07-1
index fell 30 percent in February, suggesting investors saw an
increased likelihood of the bonds defaulting; it and other ABX
indexes then rallied between late April and mid-May.
The latest index is down about 8.4 percent since May 14,
though up 7.6 percent from a February 27 low. The ABX-HE-BBB-
06-02 index, linked to subprime securities created in the first
half of last year, was trading down about 1.5 percent at 72.5 at
9 a.m. New York time. It's off about 5.6 percent since May 14.
The data on April delinquencies and defaults, released May
25, followed ``fairly neutral'' reports for March, in which late
payments rose more slowly and foreclosures went up more quickly,
Glen Taksler and Ward Bortz, analysts at Charlotte, North
Carolina-based Bank of America Corp., wrote in a May 25 report.
Late payments of at least 60 days, borrower bankruptcies,
foreclosures and seized property rose among all 19 of the 07-1
deals whose trustees released reports May 25, according to
Wachovia Corp. analysts led by Glenn Schultz."
No public link yet.
"Empty homes should translate to lower rent"
Is this a thread hijack? With that said, yes, that is what happens. Take a look at upstate NY which has less population now than in the 50s. Houses are incredibly cheap to rent.
Just outside of Ithaca, one of the more expensive places in this area, you can rent a 3/2 farm house with 10 acres of land for $900/month.
Kirk,
what you say is good for the long long run.
In the short term my question is:
Are there more renters or more flippers with empty homes ?
The answer is different in any given area.
No good news on this board.
Falling home prices, increases in mortgage delinquency rates and no recovery in New Construction until 2011.
The average Joe is going to have tough times ahead.
To much debt, falling house prices, increased medical costs, increases in local taxes, increases in cost to educate his kids.
Forgot one, decreases in Social Security benefits.
It's been a tough few years here. I makes me wonder why we are having an immigration problem.
NJMortgages: add to the list higher interst rates. 10yr is almost at 4.9%
Re: Rent
With falling home sales, rents will go up in some areas, down in others. In major metro areas where housing is short close in and all the new housing was built 30-50 miles out, inner-metro rents will increase because so many renters won't be escaping to cheaper purchased housing in the exurbs. Exurban rent will fall, because of oversupply of houses and not enough renters to fill them.
Comes down to this: if there's a good local economy and plenty of jobs, rents will rise or at least stay even. But where the good jobs are mostly 30-50 miles away, rents will fall.
CR,
Case Schiller is negative, sooner than you thought?
Walker, yes, it's a thread hijack. Worse, it's a repeat of what Yal asked in the previous thread - and if I'd noticed it there first I'd not have succumbed here. That said...
Yal, so what? I mean, what does it matter whether there are more renters than flippers (or vice versa) in an area? Unless you're trying to disagree with my previous point, of course, but having difficulty expressing it. So let me walk it again:
Rents are significantly lower than ownership. Thus there are two separate pressures driving rents higher. Flippers want to try to recover as much debt as possible (minimize losses), so they're going to offer at rates between current rents and their prices owed. At the same time, owners of rentals (the ones who did it intentionally) are going to see the opportunity for greater profits, and will adjust upward accordingly.
Now eventually - long-term - if there is a sustained surplus of rentals to renters the price will go down. But short-term the ratio is immaterial. Instead it's the two preceding issues - minimizing loss and maximizing profit.
The element that needs kept uppermost in mind is the reminder that housing is a slow-motion process. Eventually prices will adjust. Eventually rents will change. But now? Sorta, kinda, but mostly in reaction to what the situation was three to six months ago.
REITs are the new dot bombs. Only the story this time goes, "If you buy or build it, the rents will come." Yeah, whatever.
The ratios and dividend yields are way off, some with P/E ratios over 100! After a few years, the charts for DJR or IYR will look the NASDAQ bubble.
Since almost no industry shoots itself in the foot for fear of stock values negatively affecting executive incomes, one could strongly reason that even this latest Home Builders report is optimistic. Nevertheless, it is extremely suspicious that it sharply contrasts both the FED's and NAR's outlook on the housing market.
Fireworks
Sorry for the thread hijack but it is all related.
We are seeing 5 types of data:
If indeed we are having a real estate bust this deal makes no sense to me.
What is further puzzling is that the $13B deal involves debt of $22B.
I don't accept that rent is decided by what flippers "want". Rent is a market like all other it is driven by demand not just the cost of the supply.
Why would there be higher demand at times when properties that were not meant as rental are suddenly turning into rentals (i.e. increased supply) hence my question about does the increase in supply outweigh the increase in demand (as result of the sub prime new lending guidelines)
Is there something else at play here: Gasoline prices ? (a shift to living from suburbia to metro areas) or there is something very odd about this deal that is hidden from us ?
Given the direction R/E stocks were going (down when the dow was up but recovered all loses today) don't you think this deal could have been cheaper 2 years from now ?
"The upswing will be relatively slow, unlike earlier cycles."
More chart interpretation conflict. When I look, I see slow upswings in historical housing cycles recoveries.
The glass will be half empty, unlike earlier median wetness vessels.
"If indeed we are having a real estate bust this deal makes no sense to me."
Do ANY of the deals we hear about now make any sense???
"Is there something else at play here: Gasoline prices ? (a shift to living from suburbia to metro areas) or there is something very odd about this deal that is hidden from us ?"
It could be a bet. As I said above, rents are highest or stay highest where there are good jobs and limited housing; and it seems as if more and more of the good jobs are concentrated in metro areas.
Higher gas prices/energy costs have the effect of moving outer suburbers further away from the inner metro area and its jobs, because there's an increase in the economic cost of commuting. The metro areas then become more desirable, because the 'burbs move farther away economically.
You'd need a pretty big jolt in energy prices to make this happen, though.
Like owner-occupied primary residences, rental living space is illiquid.
Rental living space has not seen the same price increases as owner-occupied.
In an otherwise stable economy, income available for housing has not changed for renters or owners.
The renters are not facing ARM resets.
I'll buy:
Increased rental supply puts negative pressure on rental pricing.
You have to sell me:
The volume of new rentals coming on line is significant relative to the size of the market.
Yal - it makes sense when you look at the underlying reality. Such deals move value from the holders of debt obligations of the company, or backed in some way by the company, to stockholders. If you start out with a good chunk of stock, you can make a mint through one of these deals. The dealmakers who organize the financing get great fees.
The usual lossholders are pension funds, retired people and the like - because as overall debt rises, the expectation of default rises, and the worth of those debt obligations drops. So it's a way to make a great deal of money in a financial transaction which, on net, moves total value from debtholders to stockholders.
Well, the deal for Archstone-Smith Trust deal is 13.5BN of equity (market cap of ASN) along with the assumption of 7.7BN of debt.
Right now the offer is for $22.2BN in cash for the debt free company. Obviously, the company will be re-levered to a debt ratio that the purchaser wants.
"So it's a way to make a great deal of money in a financial transaction which, on net, moves total value from debtholders to stockholders."
Don't all debts have to be paid first before the equity holders see any retained earnings or dividend payouts? If so, what good is equity with a crap-load of debt behind it? Just like, what good is a $500,000 house with $500,000 in mortgage debt owed on it???
Yal said: "Why would there be higher demand at times when properties that were not meant as rental are suddenly turning into rentals (i.e. increased supply) hence my question about does the increase in supply outweigh the increase in demand (as result of the sub prime new lending guidelines)..."
You're looking at this issue as if there were only one dimension to it. It's not just supply and demand, it's also price.
Example: One of the "bear" arguments against housing was the example of "Why would anyone pay a $4,000/month mortgage when they could rent for $2,000/month in the same area?"
Well, what happens when families are forced out of their homes and have to find other places to live is that there's a surplus of "expensive to live in" homes and a shortage of "cheap to live in" rentals. The price of the expensive homes comes down of course, but the price of cheap rentals goes up and they reach a new "equilibrium point" in between.
Your question assumes that all housing prices are going down, and that's not what's happening. In fact, that misconception is why the housing "bust" is so totally blown out of proportion. Unreasonably priced housing is coming down, but reasonably priced housing is either rising or holding its own.
It's only when unemployment becomes problemmatic that even reasonably priced housing is under pressure.
Sebastian
A sebastian admission?
"unreasonably priced" housing=buying houses at current prices (i.e. bubble)
"reasonably priced" housing=rental housing.
Mmmmmmmmm, isn't that what all the "bubbleheads" and "Bitterrenters" have been saying for last two 1/2 years?
Sorry for adding to the rent hijack, but its a critical issue given how much the Fed relies on slowing rental inflation to lead to tame CPI.
The homeownership rate in the U.S. has increased from about 65% to about, at its peak in '05, 69%. That 4% is arguably the effect of stated income 100% CLTV (not necessarily subprime) "affordability" loans making owners out of renters.
Now, the homeownership rate is falling, and the supply of rental apartments has not grown in recent years because the trend has been towards condo conversions. This may be at odds with a high rental vacancy rate, but keep in mind that its the rate of change that matters here (i.e. the rental vacancy rate may be high but falling).
So I agree that the dominant factor affecting rents is a decline in the homeownership rate producing new renters, and less renters becoming FTHB.
This all comes down to rental yields. That's what really out of whack and likely to regress to the mean over time -- a dynamic the Fed seems too ignorant of.
The "out of proportion" part that Sebastian alludes to wasn't the reference to the value of housing, it was to the effect of the housing crash on the rest of the economy.
There is no doubt that housing is "crashing".
Housing, if Sebastian will even admit that it can crash, is doing so now in a way that everyone admits is more rapid and severe than all the "experts" predicted. And now it universally accepted that it is only going to get worse.
Forclosures are at all time nominal highs in areas with little or no job loss, record low rates etc. This can only be explained by a "bursting bubble" since no other external reasons explain it.
Now, the "out of proportion" part is yet to be seen. Can a housing crash spill over into the rest of the economy?
That has yet to be seen. Round 1 has to go to the housing bears at this point.
2-year note auction attracts tepid demand
2-year note auction attracts tepid demand - MarketWatch
A Treasury Department auction of $18 billion in new 2-year notes attracted weak demand, including a low 22.9% indirect bid, the carefully watched category that includes foreign central banks.
"This all comes down to rental yields. That's what really out of whack and likely to regress to the mean over time -- a dynamic the Fed seems too ignorant of."
I'm still waiting for 10-12 x income pricing on income property to come back; haven't seen them since the mid-90s. Current values are twice that.
My rent just went up, by 27%. It wasn't cheap to begin with, it was on top of 10% increases in the past 2 years. This particular market (Palo Alto - the Google belt, with "hot" companies like Facebook setting up shop here too) is tight. I tried threatening to move but my landlord was fine with it. I am now seriously evaluating leaving the area.
Name: "You have to sell me:
The volume of new rentals coming on line is significant relative to the size of the market. "
hows this for Chicago downtown?
"residential developers are planning to deliver a record number of new, downtown units. From 2007 through 2011, they are slated to build 16,300 for-sale residences for an area with about 90,000 existing dwellings. Next year, a record 5,200 units will be completed to surpass the previous record of 4,200 in 2006 and 2003" Chicago Tribune, May 24, 2007
wondering how many of these units will become rentals ...
Downtown Chicago Condo Sales Plummet 46% First Quarter 2007
New Chicago Condo Sales In Near Free Fall
Crains Chicago reported today that Condominum and Townhome sales in Chicago have fallen for the last seven straight quarters, and now its apparent that sales are in near free fall. Condo sales fell off the chart to only 1,207 units from January threw April 2007- 2,243 units were sold in the same period last year. This is the lowest 1st quarter total sales since 2003.
Chicago Condo developers have about 7,416 unsold units today. About 45% of these units are in the development stage, pre-construction phase, and may never get built given the current slack sales pace.
Ditto to what "Renting in Palo Alto wrote"
I live in Cupertino/Santa Clara. Living here, the news about the housing bubble bursting and the housing recesssion seems like a fairy tale
Homes are still selling very robustly. There is nothing that has a list of under 800K in Cupertino (not even a fixer upper shack). Anecdotal evidence indicates that homes sell in hours (not even days), multiple bids are the norm and homes sell for easily 100K over list. This is true not just for Cupertino, but also for Sunnyvale, Mountain View and of course Saratoga and Los Altos.
The rental market is extremely tight as well. Rents have been going up steadily, at around 10% a year on average. A 2BR/2BA apartment goes for well over 2000/month (2100 seems to be the common rent for that).
The whole thing is absolutely insane, and there's a general feeling that money is raining down from the sky (although somehow I have not been able to catch any of that
).
I would love to get the hell out of here. For some unknown reason, the wife is rooted to the place
Renting in Palo Alto,
What kind of place were you renting?
I'm in a similar boat. I was renting a duplex in Mt. View and the landlord decided to sell the property, and terminated my lease.
I can't blame him. People are apparently still willing to pay 250x rents to be an owner/occupant of this sort of a place. No way can he make that back by continuing to rent it out.
Maybe your landlord decided, "Well, if this property is worth $X.Xe6 on the open market, I'm just going to increase the rent until I can get a competitive return on investment. If I can't, screw it and I'll sell it."
I think that renters of single family houses and 2-4 unit places in Palo Alto/Mt. View/Los Altos will experience a lot of this kind of pressure in the near term.
Now, nobody is willing to pony up that kind of cash for larger apartment complexes, so those people should be relatively safe.
Average Joe said: "A sebastian admission?
"unreasonably priced" housing=buying houses at current prices (i.e. bubble)
"reasonably priced" housing=rental housing..."
Reasonably and unreasonably priced housing isn't just about owning or renting, and it's not limited geographically. A median-priced home in California might be uncomfortably small, to-Hell-and-gone from everything, or both. Where I live, for the same price you could have a McMansion close to everything or a more-typical, more-affordable 2,000+ sq.ft. close to everything.
What the bears refer to as a "crash" is simply a normal adjustment from too-high prices limited to specific areas to more-affordable prices elsewhere.
And for the umpteenth time, housing isn't going to crash until unemployment becomes problemmatic. The core of the middle-class has to get hard-hit by a recession before it's even possible for a real crash to occur.
Sebastia
Seb,
In parts of Ca. housing are already crashing.
pablo: that is true for the inner bay area's you mentioned. Here in Sonoma (near the town) inventory is huge, rents are falling, foreclosures beginning to affect SFH pricing.
Yal said: "In parts of Ca. housing are already crashing."
Then it's not a crash.
Homebuilding stocks are doing poorly, yet the overall stock market isn't crashing. Extreme weakness in localized areas doesn't constitute a "crash" in either housing or the stock market.
Sebastia
Average Joe, earlier I was referring to the OFHEO index - I think the quarter will be negative, but the YoY will still be slightly positive. That is just a guess.
BTW, I expect defaults to increase significantly when people realize prices are falling ... and will continue to fall.
Best to all.
If the Stock Market starts falling the real estate values will start falling fast in the high flying areas
where prices and rental rates are high.
Many people in these areas are living on stock appreciation not true salaries. They can not really afford houses at these price levels. This is especially true if they are in some sort of ARM mortgage that will be repricing higher.
--
Seb is right -- nothing is crashing right now. A recession is not a crash for the economy either. Let us just say that the economy and housing are in slow downwards trend. From 0.5-1.0% GDP growth for 2007Q1 it wouldn't take a crash to slide into a recession or would it?
If the recession begins during Mar-May of 2007 then the crash will take place during 2008-10. That is when we will have a depression than Seb wouldn't be able to deny.
Jas
PS: Seb is very lucky in that so many people are trying to educate him.
I live in a smallish, old 4BR/2BA house. Rent started at $2700 just 3 years ago (during the bust), and now it is at $3900. Time to get out of here.
About the stock market, short bets are at record high! Bulls have been pushing up stock prices primarily based on take-overs speculations, Bears have been betting on deteriorating market and economic fundamentals. Time will tell
Link below:
Short Sales Break Record on NYSE; Market Bulls Get More Bullish - Bloomberg.com
anon,
I understand that a high Put/Call ratio is one of the most reliable, albeit contradictory, indicators of future strength in the market.
I do also think much of the recent economic slowdown is due to The Fed tightening money for inflation. I personally don't see where the inflation fear comes from, but they're supposed to be smarter than I am.
Sebastian's position that we can't have a recession till we have a recession has validity. I think it's in error, but it's an error of underlying principle, not of mechanics.
At the heart, all recessions are the result of people being unable or unwilling to spend more than they did last quarter/year. Generally, the public quits spending because it can't, not because it's unwilling. And again generally (historically), the can't is because the source of income -- employment -- is gone. To make the longwinded explanation short: unemployment climbs too high.
The flaw, in my eyes, is the assumption that employment is the sole source of income. Or more accurately (and fairly), the assumption that while there are other sources of income, their ebb and flow is relatively insignificant against the income from employment. Since that's a minority position (except in this forum) I feel it incumbent on me to defend the position instead of requesting Sebastian challenge it. Therefore...
The core of my position is that for the past seven years real GDP has increased at a nominal rate of ~3% per year, or a nominal increase of approximately 23%. At the same time, real wages have remained relatively flat - the recent growth was preceded by several years of relative decline. In parallel, the rate of employment growth has been significantly below the growth of the GDP. It seems apparent to me that if something cuts into this non-wage non-employment source of income, it will have the same impact as unemployment. That is, a shortfall in ability to spend will force a reduction in spending, which as I stated up front is the root of a recession.
I'll pause to ask that if Sebastian's going to challenge my post, he refute that single point -- that cutting the non-wage source of income will have the same effect as cutting an equivalent quantity of wage-sourced income. With that pause out of the way, I'm going to partially support other parts of his case.
I don't think housing (or mortgage games or whatever) is the sole, or even the overwhelming majority, of this non-wage income. As a consequence, it's possible that a failure in housing will not itself trigger or represent a recession. This is not to say its impact will be insignificant, it's just that it should not be considered at the expense of all other issues.
I have stated what I believe is the majority element before - a bubble of debt instruments of which mortgages form only a part. But I could be wrong. What I'm willing to stand by, however, is the solid fact that since there has been GDP growth without corresponding employment/wage growth, it is possible to have a decline in GDP (a recession) without corresponding employment/wage declines.
Bob Dobbs- I think the gas prices argument is way overplayed when it comes to housing decisions. If you commute an extra 30 miles each way for 250 days a year @ 20mpg and assume gas prices are $3; your total fuel costs to commute would be $188 a month. The recent price spike is responsible for maybe $88 of that. For most people in urban areas $88 a month isn't going to factor significantly into where they choose to live because rents vary much more widely than that for just changing floors in a building.
Gas prices will have much more impact on discretionary purchases like Starbucks coffee and movie theater tickets than it will on RE decisions.
To those other Bay Area posters who are amazed and dismayed by the resliency of the boom here... Just keep the Credit Suisse ARM Reset bar-graph with you at all times. It should be your housing-anxiety talisman. Keep checking it as we get closer to when the Alt-A, Option ARM and Prime ARM resets are due to occur. We're not there yet...
Of course, RE related job losses and an inevitable stock market correction might also help bring down prices. Not that I'm wishing for bad things...
Interesting thread - on topic and off.
As one of those who frequently rips Sebastien over his views... I have to give him credit on one point... He is 100% dead right on when he says we have NOT seen a crash yet. We are Not even close.
And another thing I can tell you, we won't have to come here to CR to check for signs of a crash... if (or when) the crash hits you will know. It won't be a secret hidden away in the tea leaves of some big long official report.
We can disagree about whether this is the start or precursor to a crash (like many here believe) or not (as Seb frequently counters)... But make no mistake, we are NOT experiencing a crash yet.
dryfly,
He is 100% dead right on when he says we have NOT seen a crash yet. We are Not even close.
I guess it all depends on what you measure it against.
The market vs. oil?
The market vs. gold?
The market vs. silver?
The market vs. copper?
The market vs. housing prices?
The market vs. healthcare costs?
However...
The market vs. cheap imported finished goods?
The market vs. easily printed fiat dollars?
Those last two are a b**ch, pardon my language. How many of those shorting the stock market forgot about them?
I suspect we might even see a rally in the market vs. housing soon (and possibly more depending on how many others housing can drag down with it). It doesn't necessarily mean the market will go up in dollars if things reverse though. I guess it all just depends on just how bad housing really gets.
Once again, just random anonymous opinions offered up on the productivity miracle that is the Internet. Now get back to work before your job is outsourced!
darius,
Those look like condos for sale. Not sure how many will be owner occupied. Question was for new rental stock added to existing stock.
If the market continues to get worse, does the overbuild turn into rentals or sales at a discount?
I ought to stop being lazy and make my own chart: cumulative existing rental inventory. BLS probably has respectable data through 2006. Can do it nationally and by region.
On another note, I don't expect crushed suburbanite home borrowers migrating into the cities. Gas in a Corolla (Lexus got repo'd) is less than the menu price differential (what cook a meal?! thats nuts).
The larger apartment complexes in CA tend not to go on sale much. As a means of dodging Prop 13, instead of selling the apartment complex, the parent shell corporation changes ownership. This way the apartment building still keeps its lower tax rate.
I guess it all depends on what you measure it against.
Stag - the only measure that matters right now is priced against those awful 'fiat dollars'... the stuff we all use to buy our everyday items.
I mean measuring housing prices against gold makes as much sense as measuring it against 'stock market trader bonuses'... one of the things that has shot up faster than gold.
Like I said above - when we have a real crash... you won't need to fabricate metrics (like comparing housing values against hog belly futures) or hunt around for evidence in obscure reports... it'll be there before God and everyone to see, plain as day.
We aren't there yet.
StagflationaryMark,
I think The Treasury has been pretty stingy printing money in the last couple of decades. Gold standard or not, I don't see where they've been running the presses much. M1, M2, pick your measure.
Pulte cuts another 16% of headcount, on top of the 25% cut in late 06/early 07..."our current overhead levels are structured for a business that is larger than the market presently allows"
Pulte Homes, Inc. | Press Room | Press Release
Yes, Sebastian is right that recessions require job loss. What drives me crazy is that he's blind to the real issue -- what causes those jobs to be lost.
If there's a rattler underfoot, why is it only a concern AFTER it bites?
There's a macro-economic mountain of sh!t hitting the fan, but since the government stats don't yet show it and Wall Street doesn't want to see it then somehow everything is A-OKAY.
Sorry, I'm not that naive.
lama,
I think The Treasury has been pretty stingy printing money in the last couple of decades. Gold standard or not, I don't see where they've been running the presses much. M1, M2, pick your measure.
Let's pick M2 (seasonally adjusted, in trillions)
April 1987: $2.7719
April 1992: $3.4063
April 1997: $3.8761
April 2002: $5.5079
April 2007: $7.2189
Average Annual Growth:
1987 to 1992: 4.2%
1992 to 1997: 2.6%
1997 to 2002: 7.3% (oops)
2002 to 2007: 5.6%
When the economy turns down the government stands by to print more money. If we repeat the prosperity of the 80s and 90s they might back off. I'm just not that much of an optimist apparently. I'm still thinking in terms of That 70s Show (not that I own hard assets these days, they've had quite a run).
Stagflationary Mark,
Doesn't that growth coincide more or less with the growth in the economy in those years?
I'm asking this to get another perspective. Thanks,
lama,
I believe we've been borrowing our prosperity (through our trade deficit, budget deficit, and MEW). Further, are companies not rewarded for racking up debt to buy their own stock? Why not? It is other people's money. That's how we seem to look at debt in general these days. Is it sustainable though?
U.S. Heading For Financial Trouble?
I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibility. - David Walker, Comptroller General of the United States
Give me a trillion dollars to spend, and I'll throw you one hell of a party too. - Warren Buffett
That's sure what it feels like to me. Are we planning on paying for the party through fiscal responsibility or are we planning to pay for the party using inflation? The latter is awfully tempting for a politician.
If there is no downside to throwing such a big party, then why wouldn't we always do it?
I suppose it is the hangover. Here's to hoping it will be mild. I have my doubts.
Aha, got it. The last few years it dawned on me that:
George Bush, reviled by the left, has been the biggest spender on social programs in human history. Whether sending money to Africa, prescription drugs or The National Endowment for the Arts (+18% funding GWB's first fiscal year), there is nothing he won't toss money at.
Bill Clinton, darling of the left, had a firm fiscal discipline throughout his term. He expanded on budget cuts under Bush the Literate on multiple fronts.
In other words, Clinton carried the Reagan legacy and Bush ended it.
I've heard it said that our national debt is among the lowest vs GDP compared to the rest of the world. However, the rest of the world depends on the stability of the US. We have no such luxury.
So, yes I'm also nervous about the bar tab.