"iFirst we saw rising inventories, now it appears we are seeing more signs of falling activity. Next I would expect to see prices flatten out or even start to decline."
that's how the play is written. it'll be interesting to see how much demand gets generated at the various price points. will a 10% drop in prices clean up existing inventory or will it take more? i'll bet there are more than a handful of buyers out there that'll think a 10% reduction from today's nosebleed prices constitutes a deal.
Ok fatbear, is that a sponge cake? Maybe one of those tricky souffles that you have to hussle from the oven to the table so everybody can watch it deflate? [Ok that would be my organic cuisine that forbids the use of hair spray to maintain the souffle's magnificent loft.]
Great post CR documenting this national slowdown. I wonder how the former local hot spots are doing and whether new hot spots are forming elsewhere? Does this money leave the country? Is Wyoming actually seeing improvement in its heretofore dead real estate scene?
Simon: In the past few years, when borrowers have had trouble making their mortgage payments, some lenders have allowed the borrowers to take equity out of their homes and refinance. Therefore, these borrowers didnt count as delinquencies in the official data; they showed up as voluntary prepayments instead. This trend has resulted lately in the lowest losses weve ever seen in the mortgage market. We think that the historical data currently understates delinquencies and overstates voluntary prepayments by a very substantial margin. The Federal Reserve Bank of St. Louis published a paper along these lines this summer.1 This practice should wind down as interest rates rise and housing slows.
Keep in mind that low foreclosure and delinquency rates are used to justify that housing is priced right and there is no bubble.
Makes you wonder what other stats are not what they seem.
(Accidentally clicked "Publish" instead of "Preview", so will continue here...)
As I was saying, Richard is almost certainly correct that there will be many for whom a 10% price drop will seem a deal, and who'll jump in and buy.
But that won't stop prices from dropping. In Japan the decline of home prices brought out plenty of new demand, but prices just kept on falling. In areas near Tokyo (e.g., Chiba), land prices are down more than 40%, and many condos are down 75% from the 1990 peak. Because the builders have to keep building to stay in business, and cheaper land and materials let them build more cheaply, and even if they have to sell land at a loss that's better than making nothing on it, supply keeps on coming even in a glutted market.
Of course, Japan in the 90s had much less housing than the US, and much more pent-up demand (all those people who had thought they'd been forever priced out of the maket). With the home ownership rate here in the US over 70%, and ample spacious housing ... Hmmmm.
Sir John Templeton was quoted last year as foreseeing a 50% drop in US housing prices. My expectations are similar.
One is that the funding for the mortgages is coming from the CDO market, and that the ratings of CDOs at any given yield are higher than for other types of securities.
The other is: These borrowers have low FICO scores and are not in very good shape financially. We are going to see $500 billion in these subprime loans this year alone. Homeownership in the U.S. has gone from 64% to 69% in large part because those people can now buy houses.
A lot of people out are there playing with other people's money, and we can be sure that they are either basing or justifying their decisions to put that money into CDOs using the official ratings. We can also be sure that those ratings are based on long-term historical experience with a mortgage market in which the kind of subprime loans we see today were not allowed (especially in $500 billion annual volume), and short-term experience with a market in which borrowers who get into trouble with them can be bailed out by the refinancing ploys Simon describes.
When this finally unwinds, it will become apparent that the rating agencies massively underestimated the risk and so massively overrated the CDOs. This debacle will dwarf the early 90s S&L crisis.
I strongly recommend you poke around the stats available on the Japanese sites I pointed to. A great wealth of info there on the path their real estate bubble deflation has taken.
Speaking of CDO risk, the Delphi filing for BK apparently caught many by surprise: Credit Derivative news and developments
That was 2 weeks ago and a small event compared to Katrina where the insurance industry and CDOs must have taken a very serious hit.
But could I find a link to that? No.
So maybe there was no hit. Apparently $200B worth of physical damage is no concern for CDOs which are smart enough to stay out of hurricane zones. Another instance of the resilience and flexibility of our new economy? [You bet, even Katrina did not make an impression on GDP.]
How do insurance companies stay out of CDO trading? We will never know.
Hi, i am a spanish "tourist" visiting this interesting page, and, for the first time, I have felt scared when reading this particular post, comments and links. It is for me surprising to see that in the US many mortgages are backed by CDOs securities probably held by hedge funds based anywhere in the world.
I would like to know the "mechanics" of such lending procedures in order to check if something similar occurs in the spanish housing bubble which is roughly synchronized with the american one.
Anycase, it is a pleasure for me to read this page. Best wishes.
Carefully fold in the rise in construction activity, stir, and bake - voila - a truly well-baked cake - n'est pas?
"iFirst we saw rising inventories, now it appears we are seeing more signs of falling activity. Next I would expect to see prices flatten out or even start to decline."
that's how the play is written. it'll be interesting to see how much demand gets generated at the various price points. will a 10% drop in prices clean up existing inventory or will it take more? i'll bet there are more than a handful of buyers out there that'll think a 10% reduction from today's nosebleed prices constitutes a deal.
Ok fatbear, is that a sponge cake? Maybe one of those tricky souffles that you have to hussle from the oven to the table so everybody can watch it deflate? [Ok that would be my organic cuisine that forbids the use of hair spray to maintain the souffle's magnificent loft.]
Great post CR documenting this national slowdown. I wonder how the former local hot spots are doing and whether new hot spots are forming elsewhere? Does this money leave the country? Is Wyoming actually seeing improvement in its heretofore dead real estate scene?
Here's a r.e. commentary by PIMCO's Scott Simon on the U.S. Housing Market that IS worth the read:
The page cannot be found
Excellent link bailey. Merci.
Calmo, we will know more about how the bubble is speading (if it is) with the next OFHEO release on Dec 1st.
Bailey, great link - thanks.
Best Regards.
From Bailey's link:
Simon: In the past few years, when borrowers have had trouble making their mortgage payments, some lenders have allowed the borrowers to take equity out of their homes and refinance. Therefore, these borrowers didnt count as delinquencies in the official data; they showed up as voluntary prepayments instead. This trend has resulted lately in the lowest losses weve ever seen in the mortgage market. We think that the historical data currently understates delinquencies and overstates voluntary prepayments by a very substantial margin. The Federal Reserve Bank of St. Louis published a paper along these lines this summer.1 This practice should wind down as interest rates rise and housing slows.
Keep in mind that low foreclosure and delinquency rates are used to justify that housing is priced right and there is no bubble.
Makes you wonder what other stats are not what they seem.
Richard is almost certainly correct that there will be many for whom a 10% price drop will seem a deal, and who'll jump in and buy.
Japan housing construction counts
Residential land price trends by prefecture (see Chiba numbers)
Real estate and land main page
(Accidentally clicked "Publish" instead of "Preview", so will continue here...)
As I was saying, Richard is almost certainly correct that there will be many for whom a 10% price drop will seem a deal, and who'll jump in and buy.
But that won't stop prices from dropping. In Japan the decline of home prices brought out plenty of new demand, but prices just kept on falling. In areas near Tokyo (e.g., Chiba), land prices are down more than 40%, and many condos are down 75% from the 1990 peak. Because the builders have to keep building to stay in business, and cheaper land and materials let them build more cheaply, and even if they have to sell land at a loss that's better than making nothing on it, supply keeps on coming even in a glutted market.
Of course, Japan in the 90s had much less housing than the US, and much more pent-up demand (all those people who had thought they'd been forever priced out of the maket). With the home ownership rate here in the US over 70%, and ample spacious housing ... Hmmmm.
Sir John Templeton was quoted last year as foreseeing a 50% drop in US housing prices. My expectations are similar.
Trying again with the main real estate and land page of Japan's Statistical Bureau
Edited By Siteowner
Housing construction growth sharply declines in the UK
what do we think of Pimco's solution?
The page cannot be found
Two things catch my eye in the Pimco Simon piece.
One is that the funding for the mortgages is coming from the CDO market, and that the ratings of CDOs at any given yield are higher than for other types of securities.
The other is: These borrowers have low FICO scores and are not in very good shape financially. We are going to see $500 billion in these subprime loans this year alone. Homeownership in the U.S. has gone from 64% to 69% in large part because those people can now buy houses.
A lot of people out are there playing with other people's money, and we can be sure that they are either basing or justifying their decisions to put that money into CDOs using the official ratings. We can also be sure that those ratings are based on long-term historical experience with a mortgage market in which the kind of subprime loans we see today were not allowed (especially in $500 billion annual volume), and short-term experience with a market in which borrowers who get into trouble with them can be bailed out by the refinancing ploys Simon describes.
When this finally unwinds, it will become apparent that the rating agencies massively underestimated the risk and so massively overrated the CDOs. This debacle will dwarf the early 90s S&L crisis.
CR,
I strongly recommend you poke around the stats available on the Japanese sites I pointed to. A great wealth of info there on the path their real estate bubble deflation has taken.
The Mitsui report is also interesting.
Speaking of CDO risk, the Delphi filing for BK apparently caught many by surprise:
Credit Derivative news and developments
That was 2 weeks ago and a small event compared to Katrina where the insurance industry and CDOs must have taken a very serious hit.
But could I find a link to that? No.
So maybe there was no hit. Apparently $200B worth of physical damage is no concern for CDOs which are smart enough to stay out of hurricane zones. Another instance of the resilience and flexibility of our new economy? [You bet, even Katrina did not make an impression on GDP.]
How do insurance companies stay out of CDO trading? We will never know.
Hi, i am a spanish "tourist" visiting this interesting page, and, for the first time, I have felt scared when reading this particular post, comments and links. It is for me surprising to see that in the US many mortgages are backed by CDOs securities probably held by hedge funds based anywhere in the world.
I would like to know the "mechanics" of such lending procedures in order to check if something similar occurs in the spanish housing bubble which is roughly synchronized with the american one.
Anycase, it is a pleasure for me to read this page. Best wishes.