Monday, July 03, 2006

"This party is about over" - CEPR

From the Center for Economic and Policy Research:

Fed Treading on Thin Ice as U.S. Housing Bubble Weakens
By Mark Weisbrot

Everyone recognizes that the U.S. economy is slowing, but the question is, how bad will it get? One disturbing sign is that the Federal Reserve is raising interest rates as the economy slows, and it is not clear when it will stop. This is not good because each rate hike is deliberately designed to slow the economy by causing both consumers and businesses to borrow and therefore buy less. The idea, as Fed economists see it, is that as overall spending is reduced, employers will hire fewer workers. As unemployment rises, employees are in a weaker bargaining position, and this leads to slower wage growth. Slower wage growth, the Fed hopes, will lower inflation.
But it’s about to get worse. Since the mid-90s the country has accumulated an enormous housing bubble, as house prices nationally have risen nearly 70 percent after adjusting for inflation. In some bubble areas, mostly the east and west coast, the real increase has been over 100 percent. Since house prices have historically increased at about the same rate as inflation, this means that more than $5 trillion of excess paper wealth – similar to the stock market bubble of the late 1990s – has been created. Just as bursting of the stock market bubble caused a recession in 2001, the collapse of the housing bubble will almost certainly do so.

There is evidence that this bubble is already beginning to burst: new home sales, existing home sales, and the median price of existing homes were all lower in the first quarter of this year as compared to peaks last year. Vacancy rates for new homes are rising.

House prices do not have to collapse at once in order to tip the economy into recession. Many Americans use their houses as an ATM machine, borrowing against the value of their homes. These home equity loans, including hundreds of billions of dollars “cashed out” when people refinanced their homes as mortgage rates hit record lows in recent years, are what has driven the U.S. economic recovery since 2001. Falling home prices leave less equity that homeowners can borrow against. The personal savings rate is at a record low for the post-World-War II era, hitting negative 1.6 percent in April.

Rising mortgage interest rates will finish off the housing bubble if oversupply and a psychological reversal of the speculative mania don’t do it first. This party is about over, most unfortunately for the majority of Americans who never got to join in the festivities.


Anonymous Anonymous said...

Where is the party ending??? Certainly not in the NYC area where consumer spending is on fire and non regulated rents are rising at the fastest rate in 25 years..

Seems pretty odd that people don't want to buy now because of 'rising interest rates' and because of the so called housing bubble, but they have no problem spending $2,500 - $4,000 a month on rent in Manhattan or close to $2,000 on rent in the 'other 4 boros'.

But the economy can't slow when everyone seems to have tons of cash to spend on clothing, restaurants, new cars, & vacations when we 'supposedly' have rising interest rates & stagnant wage growth. But standards are higher than ever before. Somehow you are seem as having a character defect & inferior if you don't want to spend a few thousand on designer clothing, or the newest IPOD & Cell Phone every month.

You just cannot live on less six figures in this area even if you pay less than $1,000 a month in rent or mortgage payments.

7/03/2006 05:20:00 PM  
Anonymous Anonymous said...

As unemployment rises, employees are in a weaker bargaining position, and this leads to slower wage growth. Slower wage growth, the Fed hopes, will lower inflation.

Unemployment IS NOT rising in this area. As long as you interview decently and have references to back you up finding a job paying $75,000 a year which will barely cover a single persons expenses is pretty easy.

Strong employment gains are what is keeping retail sales on fire even as gasoline, taxes, rents, & utilties rise.

7/03/2006 05:23:00 PM  
Blogger chicagofinance said...

OK - using such logic - the Fed will recognize these trends and continue to increase the Funds rate indefinitely

7/03/2006 05:41:00 PM  
Blogger InvestorDavid said...

anon @ 6:20 pm,

"but they have no problem spending $2,500 - $4,000 a month on rent in Manhattan or close to $2,000 on rent in the 'other 4 boros'."

I know plenty of young recent college graudates or kids in mid to late 20's working for I-banks or various places living in those places -- with 3 other roommates sharing a room.

"Somehow you are seem as having a character defect & inferior if you don't want to spend a few thousand on designer clothing, or the newest IPOD & Cell Phone every month."

I am not familiar with this kind of culture. Maybe because I am not in my 20's, rather I am in my 40's.

Maybe you should stop hanging around these kind of folks?

7/03/2006 06:05:00 PM  
Blogger InvestorDavid said...

Rising interest rates will certainly deflate the bubble.

But in my opinion, it's the resetting of ARM and Interest Only payment which will cause the Popping of the bubble in addition to an avalanche of foreclosures.

7/03/2006 06:06:00 PM  
Anonymous Anonymous said...





7/03/2006 06:13:00 PM  
Anonymous Anonymous said...

BOOOOOOOOOOYcott over priced $H!T Boxes....




7/03/2006 06:15:00 PM  
Anonymous Anonymous said...

Its a damn shame that nobody talks about how this country (ny state, NJ, and nyc included), have lost thousamnds of manufacturing jobs, and these jobs have been replaced with increasing lines of credit.

Hell, I remember when there were these jobs even in nyc and newark, now its all gone. Its a crying shame.

I blame the damn politicans on that one. Never heard about that one.

7/03/2006 07:07:00 PM  
Blogger confused said...

sabrina1I have been waiting for the bubble to burst preaching to anyone why it will. Now I feel like a fool, rates are much higher now ( Miami) then this time a year ago ,the so called "peak". Now I really can't afford anything anymore and just don't see the bubble bursting.
How can it continue, simple people bought and sold and bought and have enough equity in their homes. For those of us who did not buy and are on fixed incomes ( I mean with jobs that won't pay much more in the future) there is little hope. Yes the prices went up because of a "perfect storm" with the low interest rates, and speculators fueling the market. Yes the peak has passed but prices in my humble opinion are not going down. Yes the asking price will go down but if prices don't go back to say april of 2005 they did not really go down esp with the higher interest rates..

Wish it wasn't so , I would love for the bubble to burst!!

7/03/2006 07:19:00 PM  
Blogger grim said...

An incredible stat:

Young buyers find real estate to call their own

More adults younger than 30 are entering the real-estate market, and many are doing it at ages uncommon a decade ago. And buyers are getting still younger as Generation Y joins in.

In 1995, people 25 and younger bought 172,000 homes nationally, said Walter Molony, spokesman for the National Association of Realtors. In 2005, that number jumped to 501,000.

7/03/2006 08:00:00 PM  
Anonymous Anonymous said...

{{{OK - using such logic - the Fed will recognize these trends and continue to increase the Funds rate indefinitely}}}

Of course they should but the Fed is too much of a pussy behold to the NAR, Car Dealers & Retailers all of whom are pleading with the Fed not to raise rates.

It also seems like much of the data is being spun into economic weakness when the underlying trends are still strong growth.

Only consumer spending & retail sales continue to surprise on the strong side. Not only are retail sales strong, but it seems like people are buying less at Wal Mart & more at expensive stores like Nordstrom & Bloomingdales.

This weeks "Chain Store Sales " report should show more of the same. Likely a 5% gain over last year with many stores (especially apparel) posting double digit gains over last year.
Only Wal Mart is lagging.

7/03/2006 08:05:00 PM  
Anonymous Anonymous said...

{{{More adults younger than 30 are entering the real-estate market, and many are doing it at ages uncommon a decade ago. And buyers are getting still younger as Generation Y joins in.}}}

Yes, but where are they getting the money and how can they qualify unless Mom or Dad Cosigns???

How is someone with just a few years out of school able to save up the 20% down payment to buy a place in Manhattan??

Not everyone works on Wall Street despite what the New York Times & NY Magazine say.

At the so called reported 'Median, or Mean Income, you couldn't qualify (let alone afford) to rent a one bedroom apartment at todays rents in any of the 5 boros or in most of NJ.

{{In 1995, people 25 and younger bought 172,000 homes nationally, said Walter Molony, spokesman for the National Association of Realtors. In 2005, that number jumped to 501,000.}}

But then they would have to give up spending on the frivolous junk that this age group sees as so important - Ex. $300 Jeans, New Cell Phones & IPODS every month, eating out every night, Sushi for Lunch every day, a new BMW or Porche every other year.

7/03/2006 08:11:00 PM  
Anonymous Anonymous said...

Hey Confused,

Just take out a no money down Interest ONLY ARM. A slick mtg broker will help you. Then maybe you'll feel better for about a month after signing the papers.

7/03/2006 08:21:00 PM  
Anonymous Anonymous said...

Just take out a no money down Interest ONLY ARM. A slick mtg broker will help you. Then maybe you'll feel better for about a month after signing the papers.

But this really isn't done in the NYC metro area

You will be laughed out the door if you try to get an Interest Only ARM for a Condo or Co-Op apartment in this area.

Plus there really isn't any such thing as an actual 'Stated Income Loan'. You still need to provide bank statements & tax returns to prove the income that you are claiming.

7/03/2006 08:45:00 PM  
Anonymous Anonymous said...

Dudes and Ladies,
Take a look at the census. The average family income is 45K. The poverty rate is a tad over or under 20%. The average rent is well under 1K. That is the average reality. Now, the "average" so-and-so does not surf the net, comment on macroeconomics or read the Sunday styles section of the Times. Many on this board suffer from selection bias--they are only looking at their experience, and the habits of the class they inhabit. But the census stats are a better measure of where we are going. Housing is out-of-wack, no matter how many 20-somethings are drinking top-self whiskeys at 20 bucks a pop. There are 100 bud drinkers behind each yuppie, and they drive the macroeconomy.

7/03/2006 09:00:00 PM  
Anonymous Anonymous said...

But this really isn't done in the NYC metro area

I'm not sure about that. Our broker told us there are plenty of people in the area taking out ARMs. Maybe not stated income loans, but plenty of people in this area are in way over their heads. Don't kid yourself.

7/03/2006 09:22:00 PM  
Blogger confused said...

Another reason a lot of college grads can afford to buy a piece of real estate is because they do not have kids. Kids for how fantastic they are do cost quite a bit. You have to choose a property in a good school district or have enough $$ to pay for private school. Then you need more space/bedrooms and pay the outrages healt insurance prices. It seems ironic that the more expensive prices were getting in 2005 the more properties were sold. I am paying $1,200.00 in rent for a condo that now sells for 350K plus 2.57% in prop taxes plus $500 p/m in maint and insurance. It makes no sense. My fam income is 70K and I have one child. This means I make more money than the meidan fam income here in Miami. It makes no sense but is seems to be reality.
I invested my $$ elsewhere and have a nice saving in the bank close to 200K. Not sure if this is the time to buy though..

7/03/2006 09:23:00 PM  
Anonymous Anonymous said...

{{{I am paying $1,200.00 in rent for a condo that now sells for 350K plus 2.57% in prop taxes plus $500 p/m in maint and insurance. It makes no sense. My fam income is 70K and I have one child. This means I make more money than the meidan fam income here in Miami. It makes no sense but is seems to be reality.}}}

$70,000 isn't much. I make just under $75,000 as a single person and don't have a wife, kid or even a pet to support. I pay $840 for a small rent stabilized studio in Flushing Queens.

I have looked for something larger or closer to Manhattan while staying in Queens, but everything else is beyond what I can afford, or can qualify for given the very strict criteria of landlords in the NYC / NJ area. I cannot afford to put 3-6 months rent upfront, and I don't have that 720 FICO score which is the minimum to rent.

I am looking for another job because I need a salary of $85,000 or more just so I can get a bigger apartment somewhere in Queens or on Long Island. Should be easy given that unemployment is under 5% in NYC.

Even vacation is out of reach unless you count taking a subway trip to Coney Island for the day.

I imagine that most of these couples you see with kids on the Upper East or Upper West side must make well over $400,000 as a family, and the average person my age in Manhattan 25-30 must make between $150,000 - $200,000 a year.

7/03/2006 09:45:00 PM  
Anonymous Anonymous said...

I am starting to wonder whether this facility is now being used by people who want to feel good about their money. We get it; people in NYC and NNJ make major coin. Now do something for the less fortunate and volunteer to feed the homeless.

By the way, to those out there who are fakin - STOP playing around before you get financially hurt!

7/03/2006 10:08:00 PM  
Anonymous Anonymous said...

Queens, you're making median income. Didn't you already realize you needed to fix your credit card debt and you would be doing great? You have to say no to Miss Visa, and get a $85K job not to move to a bigger place, but to pay off the debt.

Confused in Miami, you're making good bucks for down there. Housing inventory is building up. You'll have your pick. It is difficult to decide at what point to jump in... Are you afraid of losing your nest egg if you buy now?
Or are you more afraid that interest rates will go up and up and you'll never jump in? Remember, you can always refinance in five or 10 years, but the equity goes away and it just isn't there to pull out.

Tough call, isn't it? You are not alone. Housing cost and financing changes hit middle income folks hard - what's left of them.


7/03/2006 10:10:00 PM  
Blogger confused said...

an income of $75k in Miami is quite high. I am a manager of a groups & incentive wholesaler which basically means I bid on quotes sent to us by corporations world wide. I negotiate contracts, put programs together for groups Nation wide. Every detail needs to be worked out and I am competing with a large number of other wholesalers. I am always "On call" when groups are in town (anywhere in the US, Canada and the Caribbean). For this I get 40K per year and this is not underpaid..
Miami's incomes have not grown with the increase in prices. For those who bought a property a few years back things are very different..

7/03/2006 10:10:00 PM  
Anonymous seattle price drop said...

"This party is about over, most unfortunately for the millions of Americans who didn't get to join in the festivities".

What an odd thing to say. I thought perhaps you'd made a typo Grim, inserting "UNfortunately" where "fortunately" should be.

So I went to the link. He did indeed say "unfortunately".

So apparently this man's idea of the good life is taking out a 600K I/O loan on a tiny house?

Actually, Anon 6:20, you CAN live on far less than 6 figures, even in Manhattan. I know people who are doing it now. I expect many more will learn how in the next few years.

7/03/2006 10:14:00 PM  
Anonymous Anonymous said...

Seattle..I paused on that phrase, too.

I think that he means homeowners who purchased and got to party on their equity..well, at least they had a party. Non-purchasers ate mac-n-cheese.



7/03/2006 10:17:00 PM  
Blogger njdoc said...


You should call yourself Greedy! If renting is causing you so much consternation, just bite the bullet and buy something. You have a decent down payment, should you want to put it down, and 30 year rates are still low. You placed your bet like everybody else, so if you feel that you were wrong, than cut your losses and buy. If you know are are right, then stop crying and continue renting. As George Soros says, those that invest against the herd are more likely to get trampled.

7/03/2006 10:18:00 PM  
Anonymous Anonymous said...

To anon 10:00:46,

Great point, but the median rent is $900 in NYC.

7/03/2006 10:18:00 PM  
Anonymous Anonymous said...

On the issue of selection bias on this board. It might be useful to get a sense of who posts here. Please help me out, because I am somewhat confused about the cost of living in the area (will be moving soon).

What do you need to make yourself happy in NNJ/NYC?
How often do you eat out?
Do you go to ultralounges and pay for bottle service?
Do your kids attend the best private schools?
Do you FEEL privileged?

Feel free to add to the list and answer.

7/03/2006 10:28:00 PM  
Blogger confused said...

anyone knows what is going on with real estate in the Houston area?? I looked on ziprealty and get listings sent to daily. The prices for gorgeous homes are so inexpensive it makes you wonder A)) why is there so much inventory and B) why so much house for so little money?? I looked at the Richmond , Katy and Cypress area. A nice 4 bedroom plus enormous yard can be bought for less than $200k. A house like that would cost 4 x as much if not more..
Is it because of lack of job opportunity?? I am very curious to know. The weather is not that different from what we have here in Miami?

7/03/2006 10:28:00 PM  
Blogger confused said...

to njdoc:
no I am not Greedy, but I do see your point and do agree about it not being too late. It will just eat up most of my monthly income and that does worry me.
A mortgage broker I met recently advised me to go with a bank index rate (not sure if I got it right).

7/03/2006 10:34:00 PM  
Anonymous seattle price drop said...


Oh you're probably right- he's talking about that elusive "equity". Pretty amazing how everyone is right on board with the debt party.

7/03/2006 10:36:00 PM  
Blogger njdoc said...


This market sucks for everybody who didn't buy before 2002-2003. These last few years have been the bubble years. We all know this and it's painful. As a family man, you have to decide what is in your family's best interests. These things are very difficult to time, especially for your primary residence. Once you have a family, the decision is even more difficult. My advice to buy something you can comftorably afford on todays income. It may be a shit box, but at least your wife can decorate it the way she likes. NOBODY knows how this thing will evolve. But you need a place to live, and don't sound too happy about renting.

7/03/2006 10:42:00 PM  
Blogger confused said...

to njdoc:
thanks, but shit holes here means bad school districts and not so nice neighborhoods..There is a unit for sale in my bld for 303k ( the one next to it is for sale for 390K same unit same view).
Funny how you think I am a family man.. I feel like that sometimes but am all woman:-))
Have a great 4th:-))

7/03/2006 11:20:00 PM  
Blogger njdoc said...


Sorry about the streotype. Good luck

7/03/2006 11:28:00 PM  
Blogger confused said...

no need to be sorry. thanks for the advise:-))

7/03/2006 11:32:00 PM  
Anonymous UnRealtor said...

For anyone interested in Millburn township, taxes are going up yet again:

Total tax rate projected to rise by seven points

Thursday, June 29, 2006


Township officials are projecting a total tax rate this year of $2.12 for every $100 of assessed property value, a 7-point increase over last year's rate of $2.05.

Taxes for the average homeowner, whose property is assessed at $778,800, are estimated at $16,510.56. Using last year's tax rate of $2.05, taxes on the same property would have been $15,965, according to Viturello.

That's on top of taxes which have already doubled in the last 4 years.

And the idiots also want to add a special 'school tax' for $20M in school renovations (the voters turned down a $40M proposal).

What has this town done with their 100% increase in tax receipts from the last 4 years?

7/03/2006 11:49:00 PM  
Anonymous Anonymous said...

Great blog - wish I had it come across it sooner.

I think I have an interesting question that I haven't seen posed before.

I've been out of school since the turn of the century, and every time I've wanted to buy in Central NJ, the prices just continue to remain out of my reach.

I can't count how times I've heard, "you better buy now before the price goes up," yet I'm just not able to get onto the first rung of the ladder. It's not like I waited purely by choice. I've been trying since '02.

Now, I've got enough saved up for a decent downpayment, and I'd like to live in a decent area with decent schools. I'm single for now, making about $80K year (which doesn't go far), but I hope to be married in a couple of years.

This chart helped put things in perspective, but I'm not sure if it's inflation-adjusted, and one weakness is that it doesn't tie in interest rates:

My sense of history isn't great, but isn't it true that at the height of the bubbles around '80 and '90, interest rates were really high as well as prices? If so, then it would have made sense to wait things out.

But now, the situation is more confusing to me. I think prices are ripe for decreases, but interest rates only can only seem to go up. Keeping the down payment constant, if rates increase from 6% to 7% in one year, prices would have to drop 10% just so you could break even on the monthly payments. (I know that there are a number of offsetting effects like actually being able to put a larger % of the price down, but it's hard for an amateur like me to weigh all this.)

I'm not really sure how to handle the competing effects of price decreases and rate increases. I don't think this situation was the case with the other bubbles. Anyone?

The bottom line for me is I can't stand living at home and saving for that much longer, and I want to have some kind of "decent" standard of living soon enough - even if it's renting. A 1- or 2-bedroom condo would probably be nice for me, but I heard those were bad to have during the 90's decline.

So confusing...

7/04/2006 12:51:00 AM  
Blogger Richard said...

greedy sellers continue to permeate this market. i've been eyeing a house in westfield that originally started at $659k. sellers bought it in 1990 for $215k. they've dropped it twice to $600k. i offered $570k after doing a value analysis. this is a very fair offer. the sellers stand to make a $250k profit (before commissions) and they've paid off 17 of a 30 year mortgage. they said my bid was too low even though a few other houses have been sitting for months in the same area at the same price. so what do they do? they withdraw the property cause they can't get the money they want. instead of taking $25k less (i would've gone up $5k) and taking a nice profit they get greedy and pull the house thinking if they list in the spring they'll get equal or more money.

idiots. unfortunately most sellers aren't that sophisiticated. there's an old addage in the market. take the money on the table, particularly one at that profit level. next spring they'll relist it and surely get less than asking. lol!

7/04/2006 01:14:00 AM  
Anonymous Anonymous said...


I've noticed quite a few houses have been withdrawn from the market. They are bound to come back on the market as sellers too are desperate to sell their house. Those with the will to survive will end up achieving their goal.

It could be the sellers or buyers, only time will tell.

7/04/2006 05:29:00 AM  
Anonymous Anonymous said...

Does anyone have any thoughts about the "Port Imperial" section of NJ. There is alot of new construction going on with many promissed for 07/08.

7/04/2006 06:29:00 AM  
Anonymous willyboy said...

ANON 151:

If rates go up and prices go down, and if, as it turns out, your monthly payment to buy the house at a lower price/higher rate is the same as when the price was higher and the rate was lower, you are still ahead in a couple of ways:

1. The purchase price is less, and at any given time, if you need/choose to sell, you owe less.

2. The higher the interest rate you end up paying, the closer your rate will be to what your buyer will be paying, and presumably his acceptable purchase price won't have to be discounted to make up for worse financing than yours.

Buy now or buy later? Buy anytime, at the right price.

7/04/2006 06:46:00 AM  
Anonymous Anonymous said...

Port Imperial is a bunch of new construction overpriced townhomes and condos, only some of them have city views and you will pay close to a million for those. The others have no view and are on River Road, which has very bad traffic. Convenient for commuting to work, certainly, but I wouldn't count on resale value there. If you want to live in Weehawken or West New York you can get a much better deal in any of the apt. buildings on Boulevard East, with much better chance of city views. For $300k you can get a very nice one bedroom in Galaxy, Tower West, Riviera Towers etc. You won't even get a Coors Light for $300k at Port Imperial. I suppose if $ is no object then POrt IMperial works out fine.

7/04/2006 07:11:00 AM  
Anonymous Anonymous said...

Anon 1:51

If you want to buy in central Jersey, and you don't mind buying a condo or townhome, you can mitigate your risk by keeping your purchase price and taxes as low as possible.

For example, if you think prices may not go down for three years, you can buy a lower priced $200k townhome in Mercer county.

Then, if prices do go down, and you want to buy your dream home, you have the option of trying to sell the townhome, or of renting it.

7/04/2006 07:45:00 AM  
Anonymous Anonymous said...

With the apartment sale in
West New York. Do they give
spanish lessons to go with the

7/04/2006 09:13:00 AM  
Anonymous Anonymous said...

I disagree with the Seaside is trash comments.

You want everything to look alike, don't you?

I remember an Atlantic City as a child that was trashy - and wonderful.

Now look at it.

7/04/2006 05:09:00 PM  

Post a Comment

<< Home