Monday, September 11, 2006

A Global Housing Bubble?

From the Economist:

Checking the thermostat
Property prices are cooling fast in America, but heating up elsewhere

HOUSES are not just places to live in; they are increasingly important to whole economies, which is why The Economist started publishing global house-price indicators in 2002. This has allowed us to track the biggest global property-price boom in history. The latest gloomy news from America may suggest that the world is on the brink of its biggest ever house-price bust. However, our latest quarterly update suggests that, outside America, prices are perking up.

America's housing market has certainly caught a chill. According to the Office of Federal Housing Enterprise Oversight (OFHEO), the average price of a house rose by only 1.2% in the second quarter, the smallest gain since 1999. The past year has seen the sharpest slowdown in the rate of growth since the series started in 1975. Even so, average prices are still up by 10.1% on a year ago. This is much stronger than the series published by the National Association of Realtors (NAR), which showed a rise of only 0.9% in the year to July.
Elsewhere, our global house-price indicators signal a cheerier story. House-price inflation is faster than a year ago in roughly half of the 20 countries we track (see table). Apart from America, only Spain, Hong Kong and South Africa have seen big slowdowns. In ten of the countries, prices are rising at double-digit rates, compared with only seven countries last year.

European housing markets—notably Denmark, Belgium, Ireland, France and Sweden—now dominate the top of the league. Anecdotal evidence suggests that even the German market is starting to wake up after more than a decade of flat or falling prices, but this has yet to show up the index that we use, which is published with a long lag (there are no figures for 2006). If any readers know of a more timely index, please let us know.
An OECD study published last year adjusted the price/rent ratio for interest rates and other factors, to estimate how overvalued home prices were around the globe. Updating those figures to take account of price rises since then suggests that housing is now 35-50% overvalued in Britain and Australia and perhaps 20% too dear in America. A return to fair value will mean either rising rents or falling prices. If rents continue to rise at today's pace, many years of stagnant prices will be required to bring the price/rent ratio back to its long-term average. Especially after a giddy ascent, it is too soon to talk about a soft landing before a return to firm ground.


Blogger chicagofinance said...

Just paid $2.49 for regular gas in Red Bank!

9/11/2006 08:50:00 PM  
Anonymous Anonymous said...


Commodities seem to be down across the board. Gold, silver, copper, oil, gas, coal etc. Any reason in particular?

9/11/2006 09:03:00 PM  
Blogger Richie said...

Everyone's investing in Denim now... Gold is so 8 days ago...

9/11/2006 09:14:00 PM  
Anonymous Anonymous said...

"Any reason in particular?"

I think its just a good ol fashion sell off...slight pullback...profit taking...nothing wrong with that.

I see it as a really nice window.

The fundamentals are still there for a long term bull market.

When I say go long...I mean 5 years plus...

Maybe markets are expecting rate hike soon?

Just my peso worth of input.

What say you shytown?


9/11/2006 09:15:00 PM  
Anonymous Anonymous said...

Although, I do have to admit..

I too am surprized crude is below $70. That wasn't in my radar.


9/11/2006 09:17:00 PM  
Blogger chicagofinance said...

Oil/gas: no hurricanes, Iran is negotiating etc. etc.

Precious metals and commodities: whispers of a global economic slowdown

Just recognize that the hedge funds are in control of these markets, so expect volatility

As an example, on fundamentals alone, oil should trade at $45-50/barrel. However the fear/specualtive premium is at least $20 at this point.

If you are not familiar with these markets, do not mess around with them.

By the way, there is a strong possibility that they sanp back just as much as they could sell off.

9/11/2006 10:26:00 PM  
Blogger chicagofinance said...

oil/gas - give demand a chance and the market will begin to substitute and curtail

9/11/2006 10:27:00 PM  
Anonymous Anonymous said...

Re falling gas prices..

btw, it seems the Clinton administration made a nice handout to Chevron..

A group of oil companies led by Chevron, which said last week that they had discovered a huge new oil field in the Gulf of Mexico, could avoid more than $1 billion in royalty payments to the federal government for the oil.

The potential bonus to Chevron and its partners stems from a mistake the Interior Department made in signing offshore leases in the late 1990’s for drilling in federal waters.

9/11/2006 11:00:00 PM  
Anonymous Anonymous said...

FORBES.COM article posted on MSNBC.Com

How low will real estate go?

The boom is over, now the arguing is about how long lean times will last

By Lacey Rose

Updated: 6:33 p.m. ET Sept 11, 2006
Get used to it — the seller's market is closing up shop. The days of fat, fast home value increases are gone. Pack away those flipping fantasies.

"The boom is definitely over, there's no debate about that," said Mark Zandi, chief economist of West Chester, Pa.-based research firm Moody's "Now the question is more how hard is it going to land, if it lands at all."

The answer? Depends who you ask — and what location you're talking about. How to feel about it? Depends which side of the market you're on — and what location you're talking about.

Few, if any, economists are enthusiastic about current market conditions, thanks to a host of bleak figures recently released by home builders, federal agencies and the National Association of Realtors.

On Aug. 22, luxury home builder Toll Bros. announced that its net income fell 19 percent in the quarter ending July 31 from a year prior. Earlier in the month, the company said new orders had fallen 47 percent. According to NAR, the number of existing home sales plunged 4.1 percent in July to a seasonally adjusted annual rate of 6.3 million, the lowest since January 2004. Nationwide, the median sales price for an existing single-family home inched up a painfully small 0.9 percent compared to double-digits in 2005.

But that's just today's pain. What about six months from now? A year? Five years? Opinions about the future range from hopeful outlooks to doomsday predictions.

"One possibility is that you get a quick return to normal, which is what the economists for the realtor groups tend to hope for," said Edward Leamer, director of the UCLA Anderson Forecast. "But there's nothing in the historical record that suggests that we're going to get a return to normal anytime soon."

"It is a question of whether it is deep and quick or not so deep and much longer," Leamer added. His prediction: "Not so deep and rather long."

The way Zandi sees it, the market is going to weaken considerably more. "It has been correcting for about a year, and it's got another year to go," he said.

Not surprisingly, Lawrence Yun, a senior economist for NAR, is more optimistic. He claims that the market has returned to more earthly figures after a period of unsustainable growth. "Any decline will be very short-lived," he said. "By the spring of 2007, the market will begin to see increased sales and strengthening in home prices."

Others are less willing to prognosticate an end date for the slowdown, due to a host of unknowns, including future interest rates and job markets.

Whatever the future holds, the present doesn't look good. The number of unsold homes on the market rose another 3.2 percent in July to 3.9 million, a 13-year high, according to NAR. If the current selling rate held steady, it would take 7.3 months for all of those houses to move.

One reason for the holdup is a disconnect between buyers and sellers, said Anderson's Leamer.

Many property owners are reluctant to cut their prices. Unlike builders, who are so desperate to sell their properties that some are throwing in extras like upgraded countertops and one-week vacations, many sellers are willing to wait. Their logic is simple, Leamer explained: "A lot of owners figure, 'My idiot neighbor sold his home for $1 million, and I'm not taking a penny less.' "

On the other side of the equation are the buyers, equally strong-willed. Unwilling to fork over those sums in a wavering market, they are watching from the sidelines, waiting for prices to drop.

"Buyers are holding back currently to see how long and far this cooling will go," said NAR's Yun.

What's more, two key sources of housing demand are locked out of the market, explained Moody's Zandi. One is first-time home buyers, who can't afford to buy given the mix of rising interest rates and still-high home prices. The other is speculators, who can no longer benefit from dramatic appreciation by flipping real estate.

Of course, real estate is a highly fragmented market — what happens in Palm Beach, Fla., may be completely different from what is taking place in Cleveland or Phoenix. Not everyone benefited equally from the boom, and not everyone will suffer the same in a bust.

Areas that were once epicenters of the boom, like Phoenix, San Diego and Las Vegas, will be among the hardest hit, Leamer said. "Regions where a lot of the economic growth came directly from the real estate sector and where that was a huge plus, that's going to turn into a huge negative," he explained. "Wherever the party was the loudest, that's where the hangover is going to be the greatest."

To get a sense of how home prices will perform in various parts of the U.S., we turned to Moody's for historic and predicted median home prices in 15 major metropolitan areas. We looked back ten years and forward another ten. The results show several cities, including Boston, New York and Washington, D.C., experiencing ups and downs (more precisely, downs and ups) in coming years — a boon for buyers, perhaps, but not for current owners. Other places, such as Houston and Minneapolis-St. Paul, may just keep chugging along.

The company bases its forecasts on an econometric model that looks at the relationship between prices and various factors that have historically driven supply and demand in these markets. The intricate formula was proved to work when compared with actual house-price performance through the early 1990s, a period when home prices rose and then fell sharply.

9/11/2006 11:53:00 PM  
Anonymous Anonymous said...

"Everyone's investing in Denim now..."


9/12/2006 05:08:00 AM  
Anonymous Anonymous said...


The present outlook for the global economy is weighing on gold and silver. The last few days the markets have suffered from slackening growth and moderating inflation fears. However, that can change any time. Also, these markets tend to whipsaw, they have an uncanny ability of shaking out the weak longs. Why the dollar is rallying, is beyond me, short covering?? Chi. is right, be very careful, the hedge funds control this trade. Look at the trade in a 5-8 year time horizon.

By the way, if the global economy is cooling, what are the reprecussions for RE.

BC Bob

9/12/2006 07:22:00 AM  
Anonymous Anonymous said...

BC Bob + Shytown,

I did my midnight gardening long before the hedge funds were in the buisness. ;)

But with that said, this window is still tempting.


9/12/2006 09:14:00 AM  
Anonymous Anonymous said...

I've been looking more and more at corduroy.
IMHO it's a real sleeper just waiting for the right investors.
Think we probably have quite a few here.

9/12/2006 06:11:00 PM  
Anonymous Anonymous said...

I've been looking more and more at corduroy.
IMHO it's a real sleeper just waiting for the right investors.
Think we probably have quite a few here.

9/12/2006 06:12:00 PM  

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