Monday, August 21, 2006

A Housing Crisis Approaches

From Barrons (no link):

The No-Money-Down Disaster
By LON WITTER

According to the Commerce Department's estimates, the national median price of new homes has dropped almost 3% since January. New-home inventories hit a record in April and are only slightly off those all-time highs. Existing-home inventories are 39% higher than they were just one year ago. Meanwhile, sales are down more than 10%.
...
These experts and analysts are basing their predictions on a possible increase in wages, inflation and GDP growth. They are overlooking the fact that by any rational valuation there has been no support for the run-up in housing prices since 2001, when the wealth of the middle class was battered by a bear market. Since then, inflation has been low, and wages practically stagnant. Housing prices, on the other hand, are through the roof.

Extrapolating housing prices from their current level based on wages and inflation is like saying a $100 Internet stock with no cash flow and negative earnings will rise as long as it is able to narrow the loss. The analysis ignores the fact that the stock never should have been trading at $100 in the first place.

By any traditional valuation, housing prices at the end of 2005 were 30% to 50% too high. Others have pointed this out, but few have had the nerve to state the obvious: Even if wages and GDP grow, the national median price of housing will probably fall by close to 30% in the next three years. That's simple reversion to the mean.

A careful look at the reasons for the rise in housing will give a good indication of the impact this drop will have on the stock market. They include, in chronological order: The collapse of the Internet bubble, which chased hot money out of the stock market; rock-bottom interest rates; 50 years of economic history that suggested housing never goes down, and creative financing.

The first three factors might not be enough to cause a crash, except that together they led to the fourth factor. Irresponsible financing causes bubbles. It causes individuals to buy houses they can't afford. It causes speculation to run wild by lowering the bar to entry. Finally, it leads individuals who bought houses years ago at reasonable prices into the speculative borrowing trap. The home-equity credit line has supported American consumer spending, but at a steep price: Families that tapped into their home equity with creative loans are now in the same trap as those who bought homes they couldn't afford at the top of the market.
...
• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000

• 43% of first-time home buyers in 2005 put no money down

• 15.2% of 2005 buyers owe at least 10% more than their home is worth

• 10% of all home owners with mortgages have no equity in their homes

• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.
...
If we have the courage to take the right medicine right away, the effect of a market collapse could be very sharp and painful, but relatively short-lived. If, like Japan, we fail to act, the coming decade could be very bleak indeed.

30 Comments:

Anonymous Anonymous said...

It's a disaster.

8/21/2006 08:05:00 AM  
Anonymous Anonymous said...

http://articles.moneycentral.
msn.com/Investing/
ContrarianChronicles/
FaceItTheHousingBustIsHere.aspx

8/21/2006 08:09:00 AM  
Blogger grim said...

http://tinyurl.com/gc7e2

8/21/2006 08:13:00 AM  
Blogger Metroplexual said...

the reset $ amount keeps changing for 2006-7.

I first saw $600 billion for 2006 with $1.3 trillion for 2007 for a total of $1.9 trillion. Then I saw $2.1 trillion for these years. Now it is $2.7 trillion. Are they including IO resets in these higher #'s I wonder?

8/21/2006 08:16:00 AM  
Anonymous Anonymous said...

But you wouldn't know it by the retail numbers and prices of rentals.

Both are robust and hitting staggering highs

You can't even find a one bed for less than $2,000 in any of the 5 boros or Long Island. And back to school & holiday shopping is the most robust in six or seven years.

Most people are living in hedonistic prosperity and will never think of cutting back

8/21/2006 08:17:00 AM  
Anonymous Anonymous said...

Easy Flips Turn Into Flops In Florida

The Herald Tribune has this update from Florida. “Back in December 2004, when David Holland paid $315,700 for a new home in an east Venice Centex subdivision, the granite-and-tile beauty looked like an easy flip. But as Centex’s sales slowed down, his property turned into a flop.”

“Last week, Holland cut his losses. He put his house up for an ‘absolute auction,’ meaning no minimum and no reserve. He walked away with $255,000, a painful reminder that real properties, like stocks, do not always go up.”

8/21/2006 08:37:00 AM  
Anonymous Anonymous said...

Funny about NYC--you most certainly can rent a very attractive, immaculate, one-bedroom for about 800 a month, in the Parkchester in the Bronx. I lived there for two years, and had as trouble-free an experience as one could hope for anywhere in the city.

The Parkchester is a nicer version of Stuyvestant Town on the Lower East Side. Because it's in the Bronx and not in the (choke, puke) Lower East Side, there is NO WAIT for a one-bedroom but a TEN YEAR WAIT for the poorer option in Manhattan.

The units are spanking-clean and very nice. Terazzo hallways and brass mailboxes. Security keys, private police force, movie theater, Macy's, and incredible artworks--terra-cottas on every building.

I am a native of Manhattan, so I'm entitled to this opinion! The Parkchester blew me away.

Where is this 2000 a month figure coming from, if not from narcissistic out-of-towners who insist on renting in groovy, disgusting Hell's Kitchen with all the other narcissists?

Be smart, rent in the Bronx. It has the best infrastructure of the five boroughs, and about sixty-five percent of the negative publicity is pure unadulerated racism. The remaining thirty-five percent can be dealt with by avoiding certain areas.

My saga is this: I lived in the Parkchester till a still better deal in Brooklyn fell into my lap--an entire immaculate FLOOR-THROUGH for 900 a month. The rent never rose, but the owner finally sold. Now I'm quite happily discovering New Jersey....Rutherford, to be exact!

Have a good day!

8/21/2006 08:47:00 AM  
Blogger Richard said...

>>And back to school & holiday shopping is the most robust in six or seven years.

school shopping is mandatory and while spending is healthy has shown signs of more discretion. holiday shopping hasn't happened yet. i expect it to be flat to in the low single digit % increases and that's after even bigger discounting (squeezing margins) than before. the ugly pain isn't going to hit us until mid-2007 to 2009. just sit back and watch. all this debt pileup can't sustain itself. the house of cards is straining and the seams.

8/21/2006 08:57:00 AM  
Anonymous Anonymous said...

Back to school shopping is mandatory??

Sure, the average family spends at least $5,000 on one child and they must buy a $3,000 laptop, new cell phone & another $3,000 worth of fall clothing.

I would never feel comfortable going to school or college in Nassau or Bergen county these days. I wouldn't fit in because I look too poor and can't afford $300 Jeans or Abercrombie tops.

8/21/2006 09:09:00 AM  
Anonymous Anonymous said...

Stop with the $300 jeans!!!!!
I don't know anyone who wears them and all our families have over $100,000 incomes.
Teenagers and adults all spend under $70. for jeans (Gap, Liz Claiborne, Calvin Klein, etc)

8/21/2006 09:13:00 AM  
Blogger NJGal said...

Ok, I'm coming out the closet - I own some designer jeans! But $300? Never heard of those. Most of the jeans I know cost $150 - still pricey but not $300.

Although I second anon at 8:21 - enough with the g-damn jeans. Go buy yourself a pair already - you obviously want them badly.

8/21/2006 09:18:00 AM  
Blogger Metroplexual said...

Grim am I wrong about the reset loan values?

8/21/2006 09:19:00 AM  
Blogger grim said...

I believe it's likely due to the fact that these numbers are estimates based on statistics published by mortgage research/data firms (LoanPerformance, Mortgage Bankers Association, etc).

8/21/2006 09:41:00 AM  
Anonymous UnRealtor said...

From US News & World Report:


Housing Slump Threatens Jobs

August 20, 2006

Jiany Massad isn't quite ready to throw in the towel on his fledgling career as a Miami real-estate tycoon. But if the local housing market continues to head south, the 30-year-old real-estate broker is already making alternate plans. "I might restart my old business," he says of a home decorating company that specialized in high-end window treatments. "At least it's real-estate-related."

With home sales down by nearly a third in Florida last quarter, thousands of those who hoped to cash in on the real-estate gold rush are now facing the cold reality of working in one of the country's most cyclical businesses. "Everyone's getting out," Massad says of colleagues who have already traded in their real-estate licenses for jobs in the jewelry trade and Internet sales.

http://www.usnews.com/usnews/biztech/articles/060820/28jobs.htm

http://tinyurl.com/jm235

8/21/2006 09:48:00 AM  
Anonymous UnRealtor said...

"Be smart, rent in the Bronx. It has the best infrastructure of the five boroughs, and about sixty-five percent of the negative publicity is pure unadulerated racism."


Some of those "racists" at work?

http://bxtimes.com/Police_Blotter.htm

8/21/2006 09:52:00 AM  
Anonymous Anonymous said...

Parkchester is nice, but don't go too far in the wrong direction, you will get jacked.

I'd recommend Bay Ridge, though it's about 45min to Manhattan if you can actually get a bloody R train to show up...

8/21/2006 09:52:00 AM  
Anonymous Anonymous said...

This article is a great summary statement of current conditions; perhaps the clearest statement I have read to date.

8/21/2006 10:30:00 AM  
Blogger Metroplexual said...

Thanks grim,

I just sometimes think I am losing it when I see different data for the supposed same thing.

8/21/2006 10:39:00 AM  
Anonymous Anonymous said...

LOOK FOOLSBALL BUYERS!!!!!!!!

YOU ARE UNDERWATER NOW.
http://www.smh.com.au/
news/national/housing-
crash-puts-sellers-in-
debt-crisis/2006/08/20/
1156012414995.html

Gotta shake your head. No matter what there is always at least a few FOOLs around to be suckered.

Good luck Bagholders.

8/21/2006 10:52:00 AM  
Blogger Richard said...

the only reason we're not in a prolonged recession right now was historically low interest rates that has fueled record debt borrowing and pumped up house prices so people can extract equity on the cheap. if you didn't have this 'one time' phenomenon this country would be in far worse shape. now that the 'alcohol' is starting to wear off we're beginning to see that the girl we took home doesn't look like pamela sue anderson :) seriously folks cash is king right now. sit tight save your cash and brush off all those people saying you're throwing away money on rent.

8/21/2006 11:32:00 AM  
Anonymous Anonymous said...

Some of those "racists" at work?

http://bxtimes.com/Police_Blotter.htm


NO--that's the thirty-five percent! Crime is higher in brooklyn than elsewhere in the city.

I'm not THAT color-blind!

8/21/2006 11:54:00 AM  
Anonymous jay said...

My family wanted to visit open houses yesterday, so off we went. I thought it would be useful to get a first hand look at the current market.

While the family toured the houses, I chatted up the realtors.

One older realtor who was in the business during the late 80's bubble related a story of how he sold a place in 1987 for $150k, and resold it again in 1991 for $90k.

Then he related how a recent sale from last year was resold this year at a $90k loss, and how familiar this all was.

When I told him I sold last year, currently renting and was not a serious buyer, he shocked me by saying I should continue renting until at least next year.

Uncommon honest admission by a realtor.


JAY

8/21/2006 12:10:00 PM  
Anonymous Anonymous said...

Whew...that blotter is full of crayola-type descriptions. I'm surprised they aren't using words like "a sienna hued person with wisteria-tinted eyes..."
www.crayola.com

I don't thing we get that nonsense down here as much. We get the names, which is much better.

http://tinyurl.com/fz4ex

Pat

8/21/2006 12:23:00 PM  
Anonymous Anonymous said...

Anyone care to offer an opinion of where stocks will go over the next twelve months? Some of my stocks have risen to prices where if I sold, I could make a handsome profit.

I want to use the money to pay off my mortgage. I have no other debt.

D2B

8/21/2006 12:51:00 PM  
Anonymous Anonymous said...

Top Cities Where Mortgage Rates
Will Hit Consumers the Hardest



http://tinyurl.com/gct9h

8/21/2006 01:37:00 PM  
Anonymous Anonymous said...

yes, the bronx, a wonderful place.

Handgun issued with the lease.

Please, and now the guys in
Rutherford , nj, another wonderful
place.

He needs Bergen, top place to live.

Rent a beautiful townhome, in
say riveredge the only place to live in BC.

8/21/2006 02:34:00 PM  
Anonymous Anonymous said...

Some Lenders Cut Riskier Mortgages
Monday August 21, 3:27 pm ET
By Lingling Wei, Dow Jones Newswires
Some Lenders Cut Riskier Mortgages Due to Wall Street Pressure


NEW YORK (AP) -- Some mortgage lenders are feeling the heat from Wall Street to tighten their lending standards and cut their exposure to riskier loans.
The force at work is the increasing demand from investment banks for lenders to buy back the loans due to borrowers' failure to make their first few payments on those loans. Such "early payment defaults" so far have largely been limited to nonprime mortgages made to borrowers who pay higher rates than those qualifying for standard loans due to their weak credit or inadequate documentation.

ADVERTISEMENT


Buybacks of defaulted loans demanded by whole-loan acquirers, particularly Wall Street firms, have in recent quarters led some lenders to incur losses and set aside more money in their reserve funds for potential loan repurchases in the future. An increase in those reserves then cut into their profits. To shield themselves from future buybacks, some lenders including NetBank Inc. and Fremont General Corp. have backed away from offering loans that have seen greater delinquencies, such as those featuring higher loan amount relative to the property value and lower credit scores

8/21/2006 02:41:00 PM  
Anonymous UnRealtor said...

Number of homes listed for sale in Phoenix, Arizona:

7/31/2005 11,609

8/31/2005 15,099

9/30/2005 19,192

10/31/2005 23,790

11/30/2005 26,797

12/31/2005 26,497

1/31/2006 32,563

2/28/2006 36,174

3/31/2006 40,192

4/30/2006 44,290

5/31/2006 47,542

6/30/2006 50,347

7/31/2006 52,535

8/20/2006 53,350

8/21/2006 02:59:00 PM  
Blogger bubble disciple said...

I heard that Throgs Neck, Bx is also nice.

8/21/2006 04:17:00 PM  
Blogger bubble disciple said...

I heard that Throgs Neck, Bx is also nice.

8/21/2006 04:18:00 PM  

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