I think that this number is still an understatement. I know quite a few people: relavites, friends, etc. bought new houses as primary residence, and yet they keep the current ones for rental or investment. So, the actual number of houses being used for investment purpose is much higher than the official statistics.
In two years the FED funds rate will be at or below 1% again and ARM rates will be at 2% (my guess). Whether people will still be willing to take out loans after a housing bubble burst is an open question. Also, how many people can survive a temporary rate hike without house price appreciation and are not forced to sell/foreclose? - Two questions, and the answer could be between a soft landing and a deflationary depression.
That's why the economy is such an interesting topic....
grim, thanks for the nice comment. I was actually shocked when I realized primary residence purchases actually fell in '05!
curious, it seems like I must be missing something (maybe double counting?) ... but I'm using the NAR numbers, with links, and I get 47%. I'd be happy if someone corrected me.
dd, very possible. I wonder how NAR makes that determination when someone buys as a primary, but doesn't sell their old house.
I think you are close on the Fed Funds. However, the lowest I saw ARMs was about 2.875% on the 6 month LIBOR in June 2003.
The lowest the 3/1 got was about 3.25% conforming. The lowest 5/1 Jumbo I ever did was 4.00%.
The Fed has definitely over tightened and again will chase the market down.
Will the Fed be able to drop rates that much? 2007 is very different than 2001. I think they are more likely to prop up the dollar and fight inflation. As far as I can tell the government is doing everything it can to raise rates for sometime to come... big debt, low taxes, change demographics, protectionism, discourage foreign investments... thta and asia is now movng past the 1997 financial crisis and a lot of there $ shold be staying home. The global economy works two ways and when foreign investment starts to move out of the US it could be sometime until it returns.
Over at Ben's bubble blog, there's this quoted about Downey's results
Salient figures in the Downey 10-K: Ninety-seven percent of the $133 million of deferred interest outstanding came from loans with balances above the original principal amounts, and the company generated 62% of its profits from noncash income from deferred interest.
billy, those are amazing numbers - especially 62% of their profits from deferred interest!
How about this: Homebuilder Brookfield Homes Corp (BHS.N: Quote, Profile, Research) on Wednesday said net orders for the first quarter fell to 227 units from 517 units a year ago, saying the decline was primarily in the San Diego/Riverside and Washington D.C. markets.
cr, I agree it's confusing, the 39.9% looks like it's of "ALL" sales, while the 7.075 referred to is just "existing" sales. Hope you'll comment on MBA's response to FDIC survey on changing res. mtg. lending criteria, I think it's outrageous.
My thinking is that a weak housing market, already hitting the skids, will have a hugely negative impact on consumer spending later this year. This could possibly put us in a recession.
The past four years has been a real estate driven economy predicated on cheap money. It's turned into musical chairs and the music has stopped (sorry for the metaphor), as the money is no longer as cheap and incomes have not risen to keep pace with the asset price inflation. It's my belief that the Fed will run to bail out the "ownership society" with more cheap money. Maybe not 1% fed funds, but something low, where it puts ARM rates back in the low 5%'s.
If the fed does not, we are looking at a serious crisis, as a record number of new homeowners, somewhere like 40% last year, used 100% financing to purchase homes. If the LTV's increase, and are compounded by rising ARM adjustments, owners will not be able to refi or sell their way out. The lenders will end up with the keys.
i'll bet that half of those "second homes" were flippers. i'll bet that all of the "investment" properties were flippers. the irs, in its 1031 exchange language, states that investment units must be held for "productive use" (rental income). if it is not held for producing income, then it is not investment property, and can not be used, legally, in a 1031 exchange. i challange anyone to show me how a house, bought in the last year, in a hot market, could possibly bring in more than a three cap. what we probably have now are 2.32 million speculators stuck with unflipped units, generating negative cashflow.
with in the next 12 months, a lot of these "investors" will see their properties sold on court house steps. since the chinese bought so many of those gse's, will they become the owners of these foreclosed units, and, consequently become america's landlords? i'm beginning to recall something about american capitalists being the buyers of the rope to hang themselves. who was the seller?
lyon, I agree with everything that you are saying. Well, except that the fed is going to try to bail out the market. My point is that the fed might not be able to drop rates as much as they have in the past (that and timing a non-efficient is hard). The difference is that the central banks around the world are raising rates. The Asian and European (plus Aus) markets are looking very strong. This is very different from the last down turn where foreign markets had issues too and they were sending money here. If the fed drops rates in an environment where the rest of the world is raising rates I think we will see the $ drop and a lot of foreign capital exit the US. With our government spending and healthcare costs for retiring boomers this might mean that the fed has to keep rates higher.
I guess it depends on what the fed cares most about..
It seems like we are watching a slow motion train wreck with housing ... yet the stock market is setting new five year highs and most pundits are bullish on the economy. Interesting times.
bailey, I added the MBA response to my previous post on The Guidance. It is an amazing response: there is no need for regulation, the market will keep everything OK. Yeah, right.
realist - While I think you're right in general, I saw some good investment purchases come through our office this year... usually distressed deals involving pending foreclosure and/or estates, etc. on intown properties and heavily discounted. This in the Atlanta area.
many of these new real etstae moguls wuill find out the meaning of illiquidity. Illiquidity has always been the reason bubbleheads give why real estate is not like stocks.
This time it truly is different. record levels of debt will cause a meltdown of real estate prices.
This is one of the better threads CR & all. Kudos. A few things to add...
As per the Lyon & BBB debate as to whether the Fed can drop rates again (to save the 'ownership society') or not (because they have to defend the dollar to keep us from double digit inflation)...
dryfly i agree the fed can't cut rates significantly if at all. so goes the dollar so goes our nation. we're just too deep in debt and while we still maintain the world's reserve currency we'll have to put up a few sacrifical lambs to maintain that status. as you can guess, one of those lambs will be the overstretched homeowner.
dryfly and others, i've heard from a few 'noteworthy' sources that we're early into a 20-year commodities bull run. that means there's time still to get in. i'm not sure i believe this, but i can understand the logic with foreign demand driving up material costs but if we hit a US-led global recession wouldn't that demand dampen and turn the tide?
Pertaining to the fed not being able to lower rates-
My belief is that if the US housing market tanks, consumer spending will dry up. This will have an immediate effect on the countries, China and India, and their demand for commodities. This is a kind of chicken and egg scenario.
China's growth rate is extremely linked to the US consumer. If US demand were to seriously decrease for asian imports due to lack of consumer discretionary capital, it would impact the amount of monetary inflows the Chinese have for new infrastructure spending or to invest in US treasuries.. Thereby, less demand for commodities such as oil, gold, copper, zinc, etc...would lead to a drop in world commodity prices.
Therefore, it is a moot point that the fed has to be concerned about these volatile assets, when we are actually the dog wagging the tail.
Looking back a couple of decades, it seems clear that margins always shrink when bull markets take place in commodities, as technological innovation always succeeds in decreasing prices anyway.
Therefore, I try not to be worried about volatile markets and attmept to see that first and foremost, all things are political. This means the fed in my mind will attempt to create a new collective belief that everything will be okay, and continue the cheap money train mentally while putting Armageddon of unitl tomorrow.
-hmm- I think it goes without saying that the Fed will not be rushing to bail out the housing debtors. It has a much bigger job to do and that is to support the value of their currency. The only way for Bernanke to do that, in a world where most CB's are raising rates, is to raise them too. With record twin deficits and a congress hell-bent on spending its way into oblivion, we need to attract foreign investment through higher rates. Bernanke has to choose the lesser of two evils.....so don't count on lower rates next year from the Fed.
kirk
curious
i specified that their was no cap rate, to be had, in "hot markets". atlanta is not a hot market. georgia has the highest foreclosure rate in the country.
dryfly
1n 1986, once the u.s. talked the japanese into letting the yen float, the dollar tanked 50%. then, in 1987, under greenspan, the u.s. stockmarket crashed. but from then on, it was japan that took a 16 year economic plunge, as the u.s. economy cranked.
so if the dollar tanks, we could end up paying back the rest of the world (except china, with its dollar peg) at fifty cents on the dollar. remember, helicoptor ben once talked about monetizing the bond market. who needs that foreign capital, when you can print your own?
I wonder how many were flippers? My anecdotal take on it--Cape Cod and Eastern Shore of Maryland--is that those were real second and third homes. Not flippers.
I would guess--a real guess--is that second and third homes "seeded" areas that then became speculative.
The one difference between then (80s) and now is the percentage of EVERYTHING we import & those imports are priced in dollars. Exchange rates matter far more now as a result.
In the 80s we were still pretty much a mfg country. Japan was chomping away at autos & electronics but most everything else was made here & more importantly the bulk of the value added was made here - from raw materials to final packaging with prices AND costs completely in dollars.
If dollars went up or down it didn't matter because it was dollars from beginning to end.
Not anymore.
Now the 'US built' appliance in your basement you paid dollars for has a Korean motor & Chinese controls & a Mexican (soon to be Chinese) transmission. The big clunky stampings & such are US but a lot of the value isn't... and those commodities while 'priced' in dollars in the supplier contracts are cost sensitive to dollar currency shifts. There is a lag due to the contracts but the cost flows through almost immediately.
If the dollar falls our debts may technically go down but every thing we buy with foreign valued added will go up correspondingly. And with all we import it could be a lot.
In the long run a shift like this will bring jobs back better than any protectionist legislation ever written... first we'll recapture domestic markets, then if the dollar falls enough we'll even recapture export markets.
But it won't come free - by then our 'real standard of living' as measured against what our salaries can buy in a basket of products priced 'globally' will also be 50% less (assuming the dollar falls 50%). That won't be fun for a lot of people.
Bernanke I am sure is aware of all this... the trade off of a de facto write down of half our debt vs a simultaneous cutting of our standard of living by 50%. He'll have to walk the razors edge. We'll be there with him unless we move.
So Fannie's dream stopped some time ago and 'building America's Dream' means something else despite the ad.
Like building the other American dream of becoming wealthy and what's wrong with that?
Aside from the fact that certain minorities are not contributing to this 69% "ownership" (not too often cited by the departed CEO, Raines), [and what's wrong with a black CEO not paying attention to declining black "ownership" rates?], it appears only some are building and the rest are only dreaming about it.
Could be dd is right that the graph showing stagnant/falling "primary residence" since 2003 is a conservative picture. How many of those 'primary residences' are gifts from boomers to their children who would otherwise be renting? Is there an international picture of US home ownership that would put this picture in some global context?
dryfly: exactly. It will be painful. But dollar devaluation is still probably the least bad way out of our troubles now that we're nearing the "coffin corner" of government debt, household debt, and trade deficits.
there's always the argentina way (take $.30 on the dollar, or get nothing for your investments), but, that wouldn't be the american way. the iraq war, dealing with illegal immigrant workers, and the new drug programs for seniors are accurate depictions of the NEW american way. through trial and error, our government will bumble its way through this. we should all know, by now, the plan for america is that there is no plan.
With all these second houses, we will not tolerate in the upcoming years people calling for a federal bailout so that people don't "lose their home." I can see it now: parade a poor family in front of the TV and hear "These people are about to lose their home to foreclosure. We need more mortgage debt relief."
What is happening is that half (or more) of people who will take a shower when prices fall will lose their shirts on their second/third/fourth houses. And I don't want to bail out any of these clowns.
I am cringing just thinking about upcoming efforts that will amount to "saving" the family vacation home or the flippers' investments.
Isnt part of this story, Baby Boomers fixing to retire and purchasing second/vacation (that is: retirement homes). I guess they still need to sell the first one! Maybe we will see a new mass migration of population out of Northeast and Midwest to the South and Southwest?
Said it once before, and I'll say it again. You've got the best housing graphs on the web.
I stopped short when I saw that graph.
What happens when all these investors realize that their investment wasn't such a great move?
grim
I wonder what's up with the math... I mean, 40% vs 47% is a big difference. Any speculation?
Maybe they don't count all investor homes as 2nd homes?
I think that this number is still an understatement. I know quite a few people: relavites, friends, etc. bought new houses as primary residence, and yet they keep the current ones for rental or investment. So, the actual number of houses being used for investment purpose is much higher than the official statistics.
In two years the FED funds rate will be at or below 1% again and ARM rates will be at 2% (my guess). Whether people will still be willing to take out loans after a housing bubble burst is an open question. Also, how many people can survive a temporary rate hike without house price appreciation and are not forced to sell/foreclose? - Two questions, and the answer could be between a soft landing and a deflationary depression.
That's why the economy is such an interesting topic....
Joe
grim, thanks for the nice comment. I was actually shocked when I realized primary residence purchases actually fell in '05!
curious, it seems like I must be missing something (maybe double counting?) ... but I'm using the NAR numbers, with links, and I get 47%. I'd be happy if someone corrected me.
dd, very possible. I wonder how NAR makes that determination when someone buys as a primary, but doesn't sell their old house.
Best Wishes.
Joe,
I think you are close on the Fed Funds. However, the lowest I saw ARMs was about 2.875% on the 6 month LIBOR in June 2003.
The lowest the 3/1 got was about 3.25% conforming. The lowest 5/1 Jumbo I ever did was 4.00%.
The Fed has definitely over tightened and again will chase the market down.
Lyon & Joe,
Will the Fed be able to drop rates that much? 2007 is very different than 2001. I think they are more likely to prop up the dollar and fight inflation. As far as I can tell the government is doing everything it can to raise rates for sometime to come... big debt, low taxes, change demographics, protectionism, discourage foreign investments... thta and asia is now movng past the 1997 financial crisis and a lot of there $ shold be staying home. The global economy works two ways and when foreign investment starts to move out of the US it could be sometime until it returns.
Over at Ben's bubble blog, there's this quoted about Downey's results
Salient figures in the Downey 10-K: Ninety-seven percent of the $133 million of deferred interest outstanding came from loans with balances above the original principal amounts, and the company generated 62% of its profits from noncash income from deferred interest.
Repeat of the S&L?
billy, those are amazing numbers - especially 62% of their profits from deferred interest!
How about this: Homebuilder Brookfield Homes Corp (BHS.N: Quote, Profile, Research) on Wednesday said net orders for the first quarter fell to 227 units from 517 units a year ago, saying the decline was primarily in the San Diego/Riverside and Washington D.C. markets.
Ouch!
Best to all.
cr, I agree it's confusing, the 39.9% looks like it's of "ALL" sales, while the 7.075 referred to is just "existing" sales. Hope you'll comment on MBA's response to FDIC survey on changing res. mtg. lending criteria, I think it's outrageous.
bbb,
My thinking is that a weak housing market, already hitting the skids, will have a hugely negative impact on consumer spending later this year. This could possibly put us in a recession.
The past four years has been a real estate driven economy predicated on cheap money. It's turned into musical chairs and the music has stopped (sorry for the metaphor), as the money is no longer as cheap and incomes have not risen to keep pace with the asset price inflation. It's my belief that the Fed will run to bail out the "ownership society" with more cheap money. Maybe not 1% fed funds, but something low, where it puts ARM rates back in the low 5%'s.
If the fed does not, we are looking at a serious crisis, as a record number of new homeowners, somewhere like 40% last year, used 100% financing to purchase homes. If the LTV's increase, and are compounded by rising ARM adjustments, owners will not be able to refi or sell their way out. The lenders will end up with the keys.
i'll bet that half of those "second homes" were flippers. i'll bet that all of the "investment" properties were flippers. the irs, in its 1031 exchange language, states that investment units must be held for "productive use" (rental income). if it is not held for producing income, then it is not investment property, and can not be used, legally, in a 1031 exchange. i challange anyone to show me how a house, bought in the last year, in a hot market, could possibly bring in more than a three cap. what we probably have now are 2.32 million speculators stuck with unflipped units, generating negative cashflow.
with in the next 12 months, a lot of these "investors" will see their properties sold on court house steps. since the chinese bought so many of those gse's, will they become the owners of these foreclosed units, and, consequently become america's landlords? i'm beginning to recall something about american capitalists being the buyers of the rope to hang themselves. who was the seller?
lyon, I agree with everything that you are saying. Well, except that the fed is going to try to bail out the market. My point is that the fed might not be able to drop rates as much as they have in the past (that and timing a non-efficient is hard). The difference is that the central banks around the world are raising rates. The Asian and European (plus Aus) markets are looking very strong. This is very different from the last down turn where foreign markets had issues too and they were sending money here. If the fed drops rates in an environment where the rest of the world is raising rates I think we will see the $ drop and a lot of foreign capital exit the US. With our government spending and healthcare costs for retiring boomers this might mean that the fed has to keep rates higher.
I guess it depends on what the fed cares most about..
It seems like we are watching a slow motion train wreck with housing ... yet the stock market is setting new five year highs and most pundits are bullish on the economy. Interesting times.
bailey, I added the MBA response to my previous post on The Guidance. It is an amazing response: there is no need for regulation, the market will keep everything OK. Yeah, right.
Best Regards.
I probably don't know what I'm talking about but is it possible that there could be some overlap between vacation and investment property purchases?
realist - While I think you're right in general, I saw some good investment purchases come through our office this year... usually distressed deals involving pending foreclosure and/or estates, etc. on intown properties and heavily discounted. This in the Atlanta area.
many of these new real etstae moguls wuill find out the meaning of illiquidity. Illiquidity has always been the reason bubbleheads give why real estate is not like stocks.
This time it truly is different. record levels of debt will cause a meltdown of real estate prices.
This is one of the better threads CR & all. Kudos. A few things to add...
As per the Lyon & BBB debate as to whether the Fed can drop rates again (to save the 'ownership society') or not (because they have to defend the dollar to keep us from double digit inflation)...
Check these charts out:
HERE
http://www.kitconet.com/charts/metals/base/spot-copper-5y-Large.gif
http://www.kitconet.com/charts/metals/base/spot-nickel-5y-Large.gif
http://www.kitconet.com/charts/metals/base/spot-aluminum-5y-Large.gif
I do NOT see how the FED can cut rates faced with these kinds of run ups. And then throw oil on top that. No way.
I think unemployment will be all but ignored in an effort to protect the dollar & also dollar denominated assets.
dryfly i agree the fed can't cut rates significantly if at all. so goes the dollar so goes our nation. we're just too deep in debt and while we still maintain the world's reserve currency we'll have to put up a few sacrifical lambs to maintain that status. as you can guess, one of those lambs will be the overstretched homeowner.
dryfly and others, i've heard from a few 'noteworthy' sources that we're early into a 20-year commodities bull run. that means there's time still to get in. i'm not sure i believe this, but i can understand the logic with foreign demand driving up material costs but if we hit a US-led global recession wouldn't that demand dampen and turn the tide?
Pertaining to the fed not being able to lower rates-
My belief is that if the US housing market tanks, consumer spending will dry up. This will have an immediate effect on the countries, China and India, and their demand for commodities. This is a kind of chicken and egg scenario.
China's growth rate is extremely linked to the US consumer. If US demand were to seriously decrease for asian imports due to lack of consumer discretionary capital, it would impact the amount of monetary inflows the Chinese have for new infrastructure spending or to invest in US treasuries.. Thereby, less demand for commodities such as oil, gold, copper, zinc, etc...would lead to a drop in world commodity prices.
Therefore, it is a moot point that the fed has to be concerned about these volatile assets, when we are actually the dog wagging the tail.
Looking back a couple of decades, it seems clear that margins always shrink when bull markets take place in commodities, as technological innovation always succeeds in decreasing prices anyway.
Therefore, I try not to be worried about volatile markets and attmept to see that first and foremost, all things are political. This means the fed in my mind will attempt to create a new collective belief that everything will be okay, and continue the cheap money train mentally while putting Armageddon of unitl tomorrow.
-hmm- I think it goes without saying that the Fed will not be rushing to bail out the housing debtors. It has a much bigger job to do and that is to support the value of their currency. The only way for Bernanke to do that, in a world where most CB's are raising rates, is to raise them too. With record twin deficits and a congress hell-bent on spending its way into oblivion, we need to attract foreign investment through higher rates. Bernanke has to choose the lesser of two evils.....so don't count on lower rates next year from the Fed.
kirk
NAR reported 7.075 million sales in 2005.
The table you referenced was for existing home sales, not total home sales.
curious
i specified that their was no cap rate, to be had, in "hot markets". atlanta is not a hot market. georgia has the highest foreclosure rate in the country.
dryfly
1n 1986, once the u.s. talked the japanese into letting the yen float, the dollar tanked 50%. then, in 1987, under greenspan, the u.s. stockmarket crashed. but from then on, it was japan that took a 16 year economic plunge, as the u.s. economy cranked.
so if the dollar tanks, we could end up paying back the rest of the world (except china, with its dollar peg) at fifty cents on the dollar. remember, helicoptor ben once talked about monetizing the bond market. who needs that foreign capital, when you can print your own?
Defacto dollar deprecation, would cut our debt by 50% that way. Creative distruction of debt.
realist,
I wonder how many were flippers? My anecdotal take on it--Cape Cod and Eastern Shore of Maryland--is that those were real second and third homes. Not flippers.
I would guess--a real guess--is that second and third homes "seeded" areas that then became speculative.
The one difference between then (80s) and now is the percentage of EVERYTHING we import & those imports are priced in dollars. Exchange rates matter far more now as a result.
In the 80s we were still pretty much a mfg country. Japan was chomping away at autos & electronics but most everything else was made here & more importantly the bulk of the value added was made here - from raw materials to final packaging with prices AND costs completely in dollars.
If dollars went up or down it didn't matter because it was dollars from beginning to end.
Not anymore.
Now the 'US built' appliance in your basement you paid dollars for has a Korean motor & Chinese controls & a Mexican (soon to be Chinese) transmission. The big clunky stampings & such are US but a lot of the value isn't... and those commodities while 'priced' in dollars in the supplier contracts are cost sensitive to dollar currency shifts. There is a lag due to the contracts but the cost flows through almost immediately.
If the dollar falls our debts may technically go down but every thing we buy with foreign valued added will go up correspondingly. And with all we import it could be a lot.
In the long run a shift like this will bring jobs back better than any protectionist legislation ever written... first we'll recapture domestic markets, then if the dollar falls enough we'll even recapture export markets.
But it won't come free - by then our 'real standard of living' as measured against what our salaries can buy in a basket of products priced 'globally' will also be 50% less (assuming the dollar falls 50%). That won't be fun for a lot of people.
Bernanke I am sure is aware of all this... the trade off of a de facto write down of half our debt vs a simultaneous cutting of our standard of living by 50%. He'll have to walk the razors edge. We'll be there with him unless we move.
Billy, Those Downey numbers are STAGGERING!!!!!!!!!! Good Job!
So Fannie's dream stopped some time ago and 'building America's Dream' means something else despite the ad.
Like building the other American dream of becoming wealthy and what's wrong with that?
Aside from the fact that certain minorities are not contributing to this 69% "ownership" (not too often cited by the departed CEO, Raines), [and what's wrong with a black CEO not paying attention to declining black "ownership" rates?], it appears only some are building and the rest are only dreaming about it.
Could be dd is right that the graph showing stagnant/falling "primary residence" since 2003 is a conservative picture. How many of those 'primary residences' are gifts from boomers to their children who would otherwise be renting? Is there an international picture of US home ownership that would put this picture in some global context?
dryfly: exactly. It will be painful. But dollar devaluation is still probably the least bad way out of our troubles now that we're nearing the "coffin corner" of government debt, household debt, and trade deficits.
there's always the argentina way (take $.30 on the dollar, or get nothing for your investments), but, that wouldn't be the american way. the iraq war, dealing with illegal immigrant workers, and the new drug programs for seniors are accurate depictions of the NEW american way. through trial and error, our government will bumble its way through this. we should all know, by now, the plan for america is that there is no plan.
A dollar devaluation will kill off all those Dollar stores and WalMart.
With all these second houses, we will not tolerate in the upcoming years people calling for a federal bailout so that people don't "lose their home." I can see it now: parade a poor family in front of the TV and hear "These people are about to lose their home to foreclosure. We need more mortgage debt relief."
What is happening is that half (or more) of people who will take a shower when prices fall will lose their shirts on their second/third/fourth houses. And I don't want to bail out any of these clowns.
I am cringing just thinking about upcoming efforts that will amount to "saving" the family vacation home or the flippers' investments.
Yuck.
Isnt part of this story, Baby Boomers fixing to retire and purchasing second/vacation (that is: retirement homes). I guess they still need to sell the first one! Maybe we will see a new mass migration of population out of Northeast and Midwest to the South and Southwest?
Nice blog
And good information too. Ill keep visiting often.
Thanks
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