Monday, September 04, 2006

If America sneezes, the rest of the World catches a cold

From The Globe and Mail (Canada):

The housing collapse heard round the world

Real estate agent Andrea Gaus knew the market was out of whack when the price of a typical four-bedroom house near good schools in the leafy Maryland suburbs of Washington shot past the $1-million (U.S.) mark.

“It got to the point where appreciation was so high that it priced people out of the market,” Ms. Gaus said.

But the peak has passed, and the consequences of the deflating bubble are buffeting the housing market, in Washington and across the United States.
“Look how fast prices were going up. The same thing is happening on the way down,” observed Ms. Gaus, who's been selling homes in Potomac for 16 years.

“It's a very tough market.”

The once red-hot housing market has fizzled. And the topic du jour among economists, investors and policy makers is whether the end of the housing boom signals the beginning of the end of a long run for the world's mightiest economy, and by association, the rest of the planet.

The U.S. housing crash may prove to be the economic equivalent of the canary in the coal mine — a warning of impending danger in an economy that has surged too far, too fast. Many experts are now openly speculating about a possible U.S. recession next year, brought on by consumers reacting to the shrinking value of their nest egg. If they're right, the fallout could prove to be far nastier than the collapse of the technology bubble at the start of the decade.
Think it all doesn't matter to you? Think again. For nearly a decade now, the United States has been the economic driver for much of the world — Canada included. The United States has been sucking up excess savings and consuming everything in sight, from cars to homes and everything that goes in them.

“It's hard to imagine that a U.S.-centric global economy wouldn't be at risk in the aftermath of a bursting of the U.S. housing bubble,” warned Morgan Stanley chief economist Stephen Roach, one of Wall Street's most outspoken worrywarts.

“The non-U.S. world remains heavily reliant on selling exports to wealth-dependent American consumers. As the United States comes to grips with the aftershocks of another post-bubble shakeout, so too must the rest of the world.”

As he put it: “If the American consumer sneezes, countries in both the developed and the developing world could easily catch a cold.”


Blogger yo me said...

a house is a place to live.
say:you buy a house in this market
$360,000 and put down is $288,000 at 5.6% is $1,657.00 monthly.
say: you lived there for 10 years
$1,657.00 x 120 months =$198,840.00
how much can you sell it for after 10 years?
say: you sold it for $460,000 (i think you can get much more)
$360,000 less principal goes to the bank.
you're left with $100,000.00 plus of forced savings plus the difference in rent wich you would have spent anyway in renting a house $1,600.00
Question:did you gain money?i don't think so,it was your own money.
you forced your self to save money wich will go to the landlord if you were renting.
Property tax? have two kids sending them to private much will that cost? plus the services your town gives you.
rent and save on IRA:for those that rent let me know if you were able to save $100,000 in IRA plus paying for rent and sending your kids to private school.(even in public school)i don't think you can save that much.there is a saying:the more you make the more you spend.what you don't see you don't spend.
i think:you have to make an index as a comparison to decide how much you want to spend monthly.
as for me my index is rental cost.
better to rent or own?let me know.

9/04/2006 08:06:00 AM  
Anonymous Anonymous said...

The value of real estate and the unprecedented growth we have witnessed in prices is IMO exclusively attributable to leverage (historically low interest rates) and the ratio of supply to demand (greater credit availability leading to greater demand and reduced supply attributable to expectations of double digit appreciation and subsidized income thru home equity withdrawals). While we have certainly never seen such rapid appreciation attributable to interest rates a significant rise in prices may be reasonably justified and easily quantified. Given that the market now evaluates the risk of interest rates going lower rather than higher as essentially even, I believe any discussion of how prices may change, attributable to such fluctuations, is merely speculation. Which is why I have been lurking here at this website so as to better understand the demand and supply side of the equation. While I would agree that the same mob mentality that propelled this market beyond the fundamentals will likely play out in reverse, and in quick order (1-3 years) as consumers slow spending, this will allow the credit markets to reduce rates again to temper the effect of greater supply. So the outstanding influence as to the direction of home prices seems to me to lie almost exclusively with those homeowners who have overextended themselves and will be forced to sell, increasing the volume of homes in addition to the normal supply. Depending on the volume of such sales this may or may not have a significant effect on prices. The debate between a soft and hard landing is premised on how quickly such supply materializes and so I’m particularly interested in how much supply does this represent in absolute numbers. Yes we have seen dramatic percentage increases of IO loans cited here as well as large percentage of similar such aggressive financing for recent years but what percentage does this represent of the entire market. The numbers cited here do not seem to add up and as stated in the BW article are not regularly reported. Any credible statistics, by region and price category, members could provide would be appreciated so I may I arrive at an independent conclusion.

Keep up the good work Grim.

9/04/2006 08:22:00 AM  
Blogger emphaticus said...

anon - I agree with you 100%. There seems to be a great deal of cherry-picked data out there tailored to support a specific premise. Overextended homeowners notwithstanding, I'm curious to know how boomer retirements will factor in to the market. Hey boomers, are your bags packed for Fla?

9/04/2006 09:00:00 AM  
Blogger skep-tic said...

yo me,

you make a number of questionable assumptions.

first, where are you getting a 5.6% mortgage? Is this a fixed rate?

Second, you are failing to take into account that the vast majority of your payments in the early years of a mortgage go to interest on the loan. After 10 years on a $288,000 mortgage, you will have barely paid $40,000 toward principal. In comparison, you will have paid over $170,000 in interest. That is a pretty poor forced savings plan.

Third, you are assuming that the house will appreciate roughly 2.5% a year for the next ten years. When it comes down to it, we are all guessing about the direction of house prices, but I would say that you are being pretty optimistic with this prediction.

Fourth, even if your projection is true, you will still lose money once inflation is factored in.

The reality is that even with your very optimistic assumptions, you would do at least as well renting over this 10 year period.

For the amount you are paying in interest (roughly $1400 per month), you could rent an equivalent place, or one close to it.

As for your forced savings plan, you could have the same amount of money that you would be paying toward principal under your plan (roughly $300 per month) automatically deducted from your paycheck and put into an IRA or into a taxable investment account (if you planned to use the money before retirement).

If you start with your proposed downpayment of $72,000 and add $3600 annually, assuming a rate of return of 6% (very conservative), you would have about $166,000 after 10 yrs.

So $166,000 extra in your bank account vs. $40,000 paid in principal toward a house that may or may not have appreciated at all. Which is the better savings plan?

9/04/2006 09:30:00 AM  
Anonymous Anonymous said...

Thanks emphaticus,
I forgot to mention demographics which I agree is a strong headwind but as the baby boomers only now are reaching retirement age and more and more are chosing to postpone due to poor planning this demand will play out over decades not years

9/04/2006 09:36:00 AM  
Blogger chicagofinance said...

Anonymous said...
9/04/2006 09:22:32 AM

The perspective I offer is less applied and more theoretical. However, you may appreciate some of this information. It is generic, but it can help you wade through the details so that you can understand the underlying mechanisms that are driving the dynamics we are observing.

Register or provide a signature so that grim can help you more efficiently.

I love promising away grim's time.

9/04/2006 09:47:00 AM  
Blogger yo me said...

5.6% is a loan i took last year fixed.
2nd $1657X120 months=$198,840.00
cost to live in the house for 10 years.(principal +interest)
$360000+$198840=$558400 total cost of living in the house for 10 years without deducting principal.
say:$198840 is all interest paid.amount owed the bank still $288000 after 10 years.sold the house for $460,000.$100,000 in my pocket.
$172,000 cash on hand
say:renting $1200.00/month for 10 years
$1200x120=$144,000 to landlord
$1600-1200=$400x120=$48000 in savings.
simple interest money will double in 10 years @ 10%.
you will have $96,000 in savings if you can find a bank will pay you compounded 7.5%
stock market dont guarantee you that growth.
factor inflation:real estate rides with inflation.$100,000 ten years from now is value ten years from now.not todays value.
upkeep:assuming mortgage paid,all interest $1657x12=$19884
property tax at $5000.
$19884+$5000=$24884 tax deductible
say:25% tax bracket. $6221 the government is giving you to up keep your home.more than 1% the pundits is saying you need a year to keep your home.
good luck

9/04/2006 10:33:00 AM  
Blogger yo me said...

This comment has been removed by a blog administrator.

9/04/2006 10:53:00 AM  
Anonymous Anonymous said...

Too many numbers...head spinning...must get to big chair with fake knobs...

9/04/2006 12:05:00 PM  
Blogger emphaticus said...

another potential market driving force is the FHA,
even though it's directed toward rural communities, can incentives like these affect the rest of the market?

9/04/2006 12:15:00 PM  
Blogger yo me said...

you are get the same effect assuming 6% on savings and
RE don't average more than 2.5% in 10 years

9/04/2006 12:16:00 PM  
Anonymous UnRealtor said...


If you believe real estate will appreciate at all (let alone not significantly decline over the next few years) you're a bit out of touch with reality:

Big housing bust currently in progress -- wait for prices to return to normal, or pay the price (in more ways than one).

9/04/2006 12:29:00 PM  
Blogger yo me said...

10 years is not a few's long term.
inflation is up
cost of materials is up
cost of labor is up(get rid of the illegal immigrants)
RE not catching up with inflation? or did inflation catch up with RE already?
the real driving force is how many over extended themselves that are forced to sell or default on their mortgage compare to the whole RE economy.right now still speculation.
a house is still tangible,up or down we all still need one to rest our tired body.numbers are just in papers until you sell.
i survive RE values late 80's when you cant get equity loan from your house.13 years later same house gave me a brand new house all paid in full by this old house.2 houses now.leveraging.can i afford the mortgage?still doing it.
RE values in US still affordable compare to other develop countries.
this is reality.more power to the ones that can afford to own one or two or three.i pity the ones can't afford to buy one.
life is survival.

9/04/2006 01:38:00 PM  
Blogger skep-tic said...

yo me,

You make some interesting points, but I think you're using the wrong metrics to determine if buying right now is a good option.

you say that real estate is tangible. yet unless you are paying 100% cash, you are always 90 days away from being evicted if you can't make payments to the bank. Moreover, even if you pay off your mortgage, you can be evicted for failing to pay your property taxes. The point is that tangible or not, real estate has risks just like all investments, and it is by no means less risky simply because you can see and touch it.

You say that RE in the U.S. is affordable compared to other developed countries. Well, last time I checked, it seemed that the RE bubble was worldwide. Just because RE might be further disconnected from fundamentals in the U.K., Ireland, Spain or China does not mean it is a sound investment in the U.S. That is like saying that Cisco was a good investment in 1999 because it wasn't as bad as

Finally, you say that you made money from the house you purchased in the late 1980s 13 yrs later. Stop and think about that for a minute. 13 yrs. Imagine how much money you might have saved if you had waited 2-3 yrs years before buying. I know hindsight is always 20/20, but don't you see the similarities between the late 1980s and today? If you were looking to buy your first home, do you really think you'd do it now?

The fact is that very few people actually need to buy, particularly in the northeast U.S. where there is a lot of rental housing. Given the risks associated with buying right now, and given that you can make 5% risk free with T-bills, it is hard to see why buying a house right now is a smart idea.

9/04/2006 02:16:00 PM  
Blogger yo me said...

before i bought my first house.i was renting $900.00 a started going up just like what it is the time rent stabled at @$1,200.00 a month in the 90's my mortgage is lower than paying rent.
point is:you need an index just like buying stock.when to buy.
? if i can buy a house that my mortgage is the same as my rent today.yes i will.
will i take a chance waiting for prices to come down (might not mean much spread to 30 yrs)to save some money while rent is going up?
just my 2 cents.thanks for all the knowledge you have given me on this blog.
regards to everybody

9/04/2006 03:06:00 PM  
Anonymous UnRealtor said...

"10 years is not a few years. it's long term."

Using the last two prior boom/bust cycles as precedent, the down-trend matches the up-trend, in both # of years and magnitude:

So, 10 years out puts you at 1996 prices. It's an odd "investment" that moves backwards.

It's your money.

9/04/2006 07:09:00 PM  
Anonymous Anonymous said...

Thanks Chicago,

One man's sopressata is another's baloney

Common Cent$

9/04/2006 07:19:00 PM  

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