I'd bet on price collapse in the bay area, at least the outliers, a year or two+ from now. The bay area may not be as fueled by housing, but prices are too high for inflation alone to decay prices easily, and toxic mortgages are by the boatload.
Areas where prices have been propelled by investment and vacation home buying could end up in trouble as well. If the estimate of 40% is accurate, the trouble could be significant.
Here's something I don't understand: to at least some extent, increases in home prices were driven by decreasing interest rates.
If interest rates go back up, how can prices not come down by roughly the same amount (where "amount" = that portion of the price increase ascribable to the previous interest rate decrease)?
If Boomers are going to be living off of home equity during retirement (with their debt ridden property being sold rather than passed to their kids when that time comes) and first or second homes may be sold once a retirement location is chosen, then there should be a lot more property coming on the market over the next couple of decades. Is this demographic trend going to place strong downward pressure on prices going forward?
It will be interesting. There are suddenly alot of houses with "For Sale" signs sprouting up near me (1-7 miles slightly north and west from Boston is the area I cover in my daily/weekly travels). I don't know if these people are trying to sell before the bottom really falls out of the market, or what.
When the weather first got nice in mid-April, a bunch of houses that had been for sale all winter sold at once -- but none of the houses which have come onto the market since spring started have budged.
Pure anecdotal evidence from me as usual, but watching local house sales has been my hobby for at least 4-5 years now. The sheer number of "For Sale" signs around right now is a little unnerving.
The UCLA Anderson Forecast has incorrect data from the 1990's housing bust. Their graph shows prices were flat for 5 years. The OFHEO housing and Shiller index shows a 10% price decline.
They also ignore exotic lending.
They say that because in the 1990's housing prices went flat, this time they will also. They don't consider this housing bubble dwarfs the last one, exotic lending, consumer dependence on rising equity to get cash to go shopping, the extraordinary reliance on RE for jobs.
The UCLA Anderson forecast looks only at the 1990's housing bust for an analogy. That one was flat, so will be this one. The second factor they consider is jobs. But again, their analysis fails to account for the utter dependence on RE. While they acknowledge 200K job loss in construction, they ignore title officers, carpet installers, retailers, car dealers, restaurants, and others who prospered from the ripple effect of MEW. They say that the realtor jobs lost will be compensated by a rise in Prof and Bus Services (but those jobs are RE related too if you dig inside the #s - accountants and architects related to RE).
Thornberg did a really poor job in his analysis, but hey, he pleased his banking buddy, Wachovia, which just bought out the biggest subprime lender in CA: Golden West.
While I believe the house prices will drop it won't necessairly be in proportion to the increase in interest rates. True most people look at "what will my payment be", but given the fact that many current owners can simply sit on thier house instead of selling for a loss thus the prices won't drop as much. Of course thier will be deals out there, another factor preventing the prices from droping will be the devaluation of the dollar due to inflation.
how can prices not come down by roughly the same amount
Over time they will, but rates won't climb as high as they were before, in fact they have probably already near topping out, and inflation will make a full decline unnecessary.
Boomers liquidating second homes will limit future appreciation, but it will occur so slowly over such a long period of time, it really won't trigger a decline.
Anybody wrote, True most people look at "what will my payment be", but given the fact that many current owners can simply sit on thier house instead of selling for a loss thus the prices won't drop as much.
That's true. Though at some point, if the market isn't clearing, the definition of "price" becomes debateable.
Lord wrote, Over time they will, but rates won't climb as high as they were before, in fact they have probably already near topping out, and inflation will make a full decline unnecessary.
Maybe. Maybe not. Depends on the forex markets and nonmarket actors like Asian central banks.
""The new breed of IOs differs from those of the '20s in two ways. First, they are not interest-only for their entire life, only for the first five or (more often) 10 years. At the end of that period, the payment is raised to the fully amortizing level. This appears to make them less risky than the IOs of the '20s, but not so. They are more risky."
Didn't the Japanese RE market have a similar "innovation" as our RE market has now--ie. creative financing, 50+ year mortgages, etc.?
Why can't a Japanese-style RE bust happen in the U.S., or at least many parts of it?
Why can't a Japanese-style RE bust happen in the U.S., or at least many parts of it?
Of course it's possible. What most people overlook is that economic systems are not a physical science that can be predicted with near-mathematical accuracy but a social science that is driven by the actions of mortal human beings.
The Fed can drop rates to 0% - just like in Japan. BUT ... if people don't feel confident about borrowing and going deeper into debt to buy what they now PERCEIVE to be an overvalued asset, the game is over and we have housing price deflation.
For a credit-driven boom to continue, you need two things to occur:
A willing lender
A willing borrower
I've read that 99% of the money supply is driven by credit creation, not currency in circulation.
If the masses can't be persuaded to take on more and more credit to support overvalued home prices, the bubble bursts and we have price deflation ... just like in Japan.
I know this is an oversimplification, but this is basically what can happen.
Home prices are determined by comps because most homes aren't bought with cash, thus interest rates are the final arbiter of prices.
"...rates won't climb as high as they were before, in fact they have probably already near topping out.." Lord | 05.19.06 - 2:30 pm |
Rates are probably just catching their breath on their uphill run. How else will we refund the avalanche of Treasury debt coming due without enticing foreign lenders with higher rates to compensate for the loss of dollar purchasing value?
Those higher rates will push weak ARM and exotic (stupid loans to marginal credit risk) borrowers into default and foreclosure. They have little equity to fight for and no assets to sell to pay their loans.
End result, default, foreclosure, bank auctions and... ta da... lower comps.
"...the fact that many current owners can simply sit on their house instead of selling for a loss thus the prices won't drop as much.." Anybody | 05.19.06 - 2:21 pm |
Nope. It won't MATTER much. The debt bubble will be deflating and it will take asset prices down with as liquidity diminishes.
Better party like its 1999. Party over. Oops! Out of time.
The Fed controls rates, especially with so much ARM paper. The Treasury can always borrow from them. They don't want to create a recession although they may if inflation persists. In that case, higher rates would be very shortlived. The adjustment process is well underway
How can a "volume pop" not engender a "price pop"? In the end it comes down to supply vs. (paying) demand. As long as sellers don't (have to?) budge and "enough" prospective buyers can make high offers (obtain loans), prices will hold. I guess it depends on what types of loans are going to be available, and to whom. What I have seen of apparent risk tolerance in others doesn't make me very hopeful for myself. There will be enough people who are going to sign up for way larger loans than myself, provided they can.
By current local appearances, there is not really a lot of inventory for sale wherever I walk and drive (I'm not actively looking), but For Sale signs have just picked up over the last few weeks after a prolonged rain period, possibly "pent up supply". What I have seen so far may or may not indicate "stabilizing" prices, the sample size is too small.
For all of you fans of the likes of Thornberg and Shiller, ponder this:
While Thornberg's housing predictions are being widely derided due to the length of time he been wrong and his recent change of heart as to the nature of the coming "collapse", Shiller's credibility has been sustained by his supposed past timely calling of the stock market bubble, at least amongst the press and most of the don't-know-any-better public.
I saved this July, 1996, article "Price Earnings Ratios as Forecasters of Returns: The Stock Market Outlook in 1996" by "stock-market expert", Professor Robert Shiller of Yale University. His conclusion:
"It appears that long run investors should stay out of the market for the next decade."
On July 1, 1996, the S&P 500 Index was 671. Today, nearly a "decade" later, the S&P Index closed at 1,261.81 (dividends not included).
The ability to get publicity is not the same as accuracy, and those who are in the markets with actual money do not and never have ever listened to either one of those pilgrims.
I'd bet on price collapse in the bay area, at least the outliers, a year or two+ from now. The bay area may not be as fueled by housing, but prices are too high for inflation alone to decay prices easily, and toxic mortgages are by the boatload.
Areas where prices have been propelled by investment and vacation home buying could end up in trouble as well. If the estimate of 40% is accurate, the trouble could be significant.
Here's something I don't understand: to at least some extent, increases in home prices were driven by decreasing interest rates.
If interest rates go back up, how can prices not come down by roughly the same amount (where "amount" = that portion of the price increase ascribable to the previous interest rate decrease)?
CR,
What do you make of the Boomer factor?
Boomers bet on property for support - USATODAY.com
If Boomers are going to be living off of home equity during retirement (with their debt ridden property being sold rather than passed to their kids when that time comes) and first or second homes may be sold once a retirement location is chosen, then there should be a lot more property coming on the market over the next couple of decades. Is this demographic trend going to place strong downward pressure on prices going forward?
It will be interesting. There are suddenly alot of houses with "For Sale" signs sprouting up near me (1-7 miles slightly north and west from Boston is the area I cover in my daily/weekly travels). I don't know if these people are trying to sell before the bottom really falls out of the market, or what.
When the weather first got nice in mid-April, a bunch of houses that had been for sale all winter sold at once -- but none of the houses which have come onto the market since spring started have budged.
Pure anecdotal evidence from me as usual, but watching local house sales has been my hobby for at least 4-5 years now. The sheer number of "For Sale" signs around right now is a little unnerving.
The UCLA Anderson Forecast has incorrect data from the 1990's housing bust. Their graph shows prices were flat for 5 years. The OFHEO housing and Shiller index shows a 10% price decline.
They also ignore exotic lending.
They say that because in the 1990's housing prices went flat, this time they will also. They don't consider this housing bubble dwarfs the last one, exotic lending, consumer dependence on rising equity to get cash to go shopping, the extraordinary reliance on RE for jobs.
The UCLA Anderson forecast looks only at the 1990's housing bust for an analogy. That one was flat, so will be this one. The second factor they consider is jobs. But again, their analysis fails to account for the utter dependence on RE. While they acknowledge 200K job loss in construction, they ignore title officers, carpet installers, retailers, car dealers, restaurants, and others who prospered from the ripple effect of MEW. They say that the realtor jobs lost will be compensated by a rise in Prof and Bus Services (but those jobs are RE related too if you dig inside the #s - accountants and architects related to RE).
Thornberg did a really poor job in his analysis, but hey, he pleased his banking buddy, Wachovia, which just bought out the biggest subprime lender in CA: Golden West.
Liberal,
While I believe the house prices will drop it won't necessairly be in proportion to the increase in interest rates. True most people look at "what will my payment be", but given the fact that many current owners can simply sit on thier house instead of selling for a loss thus the prices won't drop as much. Of course thier will be deals out there, another factor preventing the prices from droping will be the devaluation of the dollar due to inflation.
how can prices not come down by roughly the same amount
Over time they will, but rates won't climb as high as they were before, in fact they have probably already near topping out, and inflation will make a full decline unnecessary.
Boomers liquidating second homes will limit future appreciation, but it will occur so slowly over such a long period of time, it really won't trigger a decline.
Anybody wrote, True most people look at "what will my payment be", but given the fact that many current owners can simply sit on thier house instead of selling for a loss thus the prices won't drop as much.
That's true. Though at some point, if the market isn't clearing, the definition of "price" becomes debateable.
Lord wrote, Over time they will, but rates won't climb as high as they were before, in fact they have probably already near topping out, and inflation will make a full decline unnecessary.
Maybe. Maybe not. Depends on the forex markets and nonmarket actors like Asian central banks.
Can some expert please explain why exotic mortgages + securitization DOES NOT increase the systemic risk in the housing market?
From Bankrate:
Interest-only mortgages: A risky new twist (Page 1 of 2)
""The new breed of IOs differs from those of the '20s in two ways. First, they are not interest-only for their entire life, only for the first five or (more often) 10 years. At the end of that period, the payment is raised to the fully amortizing level. This appears to make them less risky than the IOs of the '20s, but not so. They are more risky."
Didn't the Japanese RE market have a similar "innovation" as our RE market has now--ie. creative financing, 50+ year mortgages, etc.?
Why can't a Japanese-style RE bust happen in the U.S., or at least many parts of it?
Rob,
Of course it's possible. What most people overlook is that economic systems are not a physical science that can be predicted with near-mathematical accuracy but a social science that is driven by the actions of mortal human beings.
The Fed can drop rates to 0% - just like in Japan. BUT ... if people don't feel confident about borrowing and going deeper into debt to buy what they now PERCEIVE to be an overvalued asset, the game is over and we have housing price deflation.
For a credit-driven boom to continue, you need two things to occur:
I've read that 99% of the money supply is driven by credit creation, not currency in circulation.
If the masses can't be persuaded to take on more and more credit to support overvalued home prices, the bubble bursts and we have price deflation ... just like in Japan.
I know this is an oversimplification, but this is basically what can happen.
Home prices are determined by comps because most homes aren't bought with cash, thus interest rates are the final arbiter of prices.
"...rates won't climb as high as they were before, in fact they have probably already near topping out.." Lord | 05.19.06 - 2:30 pm |
Rates are probably just catching their breath on their uphill run. How else will we refund the avalanche of Treasury debt coming due without enticing foreign lenders with higher rates to compensate for the loss of dollar purchasing value?
Those higher rates will push weak ARM and exotic (stupid loans to marginal credit risk) borrowers into default and foreclosure. They have little equity to fight for and no assets to sell to pay their loans.
End result, default, foreclosure, bank auctions and... ta da... lower comps.
"...the fact that many current owners can simply sit on their house instead of selling for a loss thus the prices won't drop as much.." Anybody | 05.19.06 - 2:21 pm |
Nope. It won't MATTER much. The debt bubble will be deflating and it will take asset prices down with as liquidity diminishes.
Better party like its 1999. Party over. Oops! Out of time.
The Fed controls rates, especially with so much ARM paper. The Treasury can always borrow from them. They don't want to create a recession although they may if inflation persists. In that case, higher rates would be very shortlived. The adjustment process is well underway
How can a "volume pop" not engender a "price pop"? In the end it comes down to supply vs. (paying) demand. As long as sellers don't (have to?) budge and "enough" prospective buyers can make high offers (obtain loans), prices will hold. I guess it depends on what types of loans are going to be available, and to whom. What I have seen of apparent risk tolerance in others doesn't make me very hopeful for myself. There will be enough people who are going to sign up for way larger loans than myself, provided they can.
By current local appearances, there is not really a lot of inventory for sale wherever I walk and drive (I'm not actively looking), but For Sale signs have just picked up over the last few weeks after a prolonged rain period, possibly "pent up supply". What I have seen so far may or may not indicate "stabilizing" prices, the sample size is too small.
For all of you fans of the likes of Thornberg and Shiller, ponder this:
While Thornberg's housing predictions are being widely derided due to the length of time he been wrong and his recent change of heart as to the nature of the coming "collapse", Shiller's credibility has been sustained by his supposed past timely calling of the stock market bubble, at least amongst the press and most of the don't-know-any-better public.
I saved this July, 1996, article "Price Earnings Ratios as Forecasters of Returns: The Stock Market Outlook in 1996" by "stock-market expert", Professor Robert Shiller of Yale University. His conclusion:
"It appears that long run investors should stay out of the market for the next decade."
On July 1, 1996, the S&P 500 Index was 671. Today, nearly a "decade" later, the S&P Index closed at 1,261.81 (dividends not included).
Price Earnings Ratios as Forecasters of Returns
The ability to get publicity is not the same as accuracy, and those who are in the markets with actual money do not and never have ever listened to either one of those pilgrims.