Housing Bubble Bursting?

[George Hatch]

...to an investor group, and for longer than the lease agreements.

 

[Randolph Kinney]

WASHINGTON - The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.

http://www.optonline.net/News/Article/Feeds?CID=type%3Dxml%26channel%3D32%26article%3D19965796

I find it interesting to note NAR's projection of inventory.

Here, in my area, and specifically in my neighborhood, homes were taken off the market because that sat for more than 180 days. The inventory is declining but it is not due to improved sales rate or more closings.

Once the price decline starts, now two months in a row according to NAR, inventory is depleted because more homes will sell with lower prices. That assumes the level of inventory does not rise because of more new listings and does not acknowledge homes that were taken off market by delisting them. So NAR's forecast for declining prices and bottoms out with declining inventory looks like this:

Some how, more buyers with more money and can afford to buy homes at these price levels just magically appear and continue to chase prices up.

 

[George Hatch]

I think using the color blue for the forecast was a bit misleading. They should have used a rose color.

 

[Randolph Kinney]

Government View Of New Home Sales, Price Decline

Below is a graphic by Haver Analytics which publishes data from the government.

Notice how it differs from NAR:

NAR data looks like the following:

EXISTING HOME SALES VOLUME 2006
Jan 6,570,000
Feb 6,900,000
Mar 6,900,000
Apr 6,750,000
May 6,710,000
Jun 6,600,000
Jul 6,330,000
Aug r 6,300,000
Sept p 6,180,000

EXISTING HOME MEDIAN SALES PRICE 2006
Jan 220,000
Feb 218,000
Mar 218,000
Apr 222,000
May 229,000
Jun 229,000
Jul 230,000
Aug r 224,000
Sept p 220,000

Just wondering out loud, does NAR consider new home sale prices to have that big of an impact on existing home prices?

The median sales price of a new single family home fell 9.3% to $217,000 during September. Though the August level of prices was revised up, the year to year change of -9.7% was the worst since 1970 and it lowered prices below the average level of 2004.

Why would anyone pay more for an existing home than a new home? Or is the new home data signaling a bigger price drop coming for existing home sales as they follow the prices of new homes, down???

 

[Randolph Kinney]

Why Fed Might Keep Rates on Hold Longer Than It Did in 1995

Investors looking for a road map to the Federal Reserve's next moves on interest rates often look to 1995.


At the time, the Fed had raised interest rates steadily after a long period of unusually low rates. With the U.S. economy slowing, it paused for five months and then started cutting rates.


Many investors have been looking for that cycle to repeat itself and expect the Fed, which last raised interest rates in June, to begin cutting rates at some point in the next few months.


This year differs from 1995 in ways that suggest the Fed could stay on hold longer. One is that interest rates are lower now than back then. Another is that Fed officials' tolerance for inflation is quite different today.


"We have to watch carefully to make sure that [inflation] doesn't rise or even remain where it is," Fed Chairman Ben Bernanke said three weeks ago. In other words, it isn't enough that core inflation, which excludes food and energy, stops rising; the Fed wants to ensure it will be lower a year or so from now.

 

[Randolph Kinney]

Housing Led Recession

http://www.marketwatch.com/news/story/Story.aspx?guid=%7B35B0E4D8%2D4B35%2D4764%2D8EB4%2D56C7281CC8D7%7D&siteid=

Roubini's call for a recession sounds more real now

Analysis: Slow growth could get slower

By Nick Godt, MarketWatch
Last Update: 4:43 PM ET Oct 27, 2006


NEW YORK (MarketWatch) -- Nouriel Roubini might be among the most bearish economists on Wall Street this year, but as shown again on Friday with the release of much weaker-than-expected third-quarter growth numbers, he's also been among the most accurate.

That fact may be chilling, given that Roubini, a professor at the Sterns School of Economics at New York University and chairman of Roubini Global Economics, predicts a housing-led recession will be in place by the first quarter of 2007, or in the second quarter at the latest.

Few on Wall Street dare make that prediction. Economists employed by investment banks, of course, may have an implicit interest in being cheerleaders for economic growth. Growth implies earnings growth and stock market gains, and therefore more money for their firms. Investors won't be drawn to the stock market if they know a recession is coming.

Federal Reserve officials, likewise, continue to predict a soft-landing for the economy even as they again left interest rates unchanged on Wednesday.

Yet, the facts remain that Roubini's forecasts are amongst the most accurate - and prescient -- so far.

Third-quarter gross domestic production slowed dramatically to 1.6% in the third quarter from 2.6% in the second quarter and 5.6% in the first, the Commerce Department reported Friday.

Roubini had forecast the GDP to come in at 1.5%, while the average forecast of economists polled by MarketWatch called for growth of 2%, as did most other surveys.

And Roubini had been predicting this number since July, while at that time, economists on average expected third-quarter growth to come in at 3.1%.
Similarly, for the second quarter, economists on average had expected the GDP to grow at 3.2%, while growth came in at 2.6%. Roubini had forecast growth of 2.5%.

Now, looking forward, many Wall Street economists are forecasting a fourth-quarter rebound. "Expect today the usual spin with the soft-landing optimists - who were altogether wrong on second-quarter growth and even more wrong on third-quarter growth - having already started to spin the fairy tale of a fourth-quarter rebound," Roubini wrote on his blog Friday.

The sharp drop in oil and energy prices seen in recent months are often cited by Wall Street bulls as cushioning the economic slowdown, as they lessen pressures on inflation and on consumers' wallets.

"Unfortunately this interpretation confuses cause and effect," Roubini wrote. "Whenever the U.S. and the global economy have experienced a recession, oil and commodity prices sharply fell at the outset and during such a recession, as low global demand leads to lower commodities demand."

Similarly, the stock market expects that the Fed's rate cuts will prevent the economy from dipping into negative territory. But the current problem, Roubini says, is a glut of homes and of automobiles which, as most gluts, tends to be interest-rate insensitive.

John Maynard Keynes, the father of Keynesian economics, once famously said: "The market can remain irrational longer than you can remain solvent."

Back in March of 2001, the stock market and most Wall Street economists were still predicting that the economy would not experience a recession, while growth had already dipped in negative territory and would stay below zero for another quarter, Roubini notes.

It was only in June, when evidence of a recession was at hand, that the market sold off.

This time around, Roubini says the stock market can continue rising through Christmas based on expectations that the Fed will cut rates and stave off a recession. But he expects that the fourth-quarter GDP -- to be released in January -- will be an eye-opener, coming in at, or near, 0%, and will likely cause the market to sell off.

By then, "expect a nasty bear market in equities - in the average recession the S&P falls by 28% - once the delusional dream of permabulls leads them to wake up to the reality of the nasty and deep recession ahead," Roubini wrote.

 

[moh malekpour]

http://www.bloomberg.com/apps/news?pid=20601109&sid=aKKrpeA2NhRw&refer=home

. ``To think otherwise after a bubble is to not understand bubbles.''

http://blogs.ocregister.com/lansner/archives/2006/10/pimcos_mcculley_says_low_rates.html

housing is going to be very inelastic to falling interest rates on the way down, just as it was very inelastic to rising rates on the way up. To think otherwise after a bubble is to not understand bubbles

 

[moh malekpour]

Joint release from US.CBN, HUD & Commerce Department
http://www.census.gov/const/newressales.pdf

 

[murray stroupe]

Re

I think using the color blue for the forecast was a bit misleading. They should have used a rose color.

============
Most do use a different color than blue;
to show downtrends.

That way things are obvoiusly different;
by keeping the same color, it dulls the difference.

Like green for uptrends;
red for downtrends. Viva la difference

 

[moh malekpour]

This is a long and interesting article with several sections and a political theme. I posted it here for its real estate section but the rest of them are also interesting even though you might agree or disagree with his point of views:
http://econotech.blogspot.com/

What Would Happen Politically If the Housing Bubble Really Collapsed?

“Is this what a housing bust looks like? New home prices fell last month by the largest amount in 35 years and owners are being warned to brace for further declines, especially in formerly hot markets. After years of increases, some buyers say prices are still out of their range. The Commerce Department reported that the median price for a new home sold in September was $217,100, a decline of 9.7 percent from September 2005. That was the lowest median home price in two years and the sharpest year-over-year decline since December 1970, providing dramatic evidence of the slowdown in the once-booming housing market.” (AP, Oct 27)

“The decline in home prices after a five year real-estate boom will cause the economy to slow and force the Fed to lower rates to avoid a recession, McCulley wrote on Pimco's Web site on Oct. 19. ``To think otherwise after a bubble is to not understand bubbles.''” (Bloomberg, Oct 23)

"Moody's Economy.com projects that the median sales price for an existing home will decline in 2007 by 3.6 percent, which would be the first decline for an entire year in home prices since the Great Depression of the 1930s. 133 of the nation's 379 metropolitan areas would suffer price declines. account for nearly one-half of the value of the nation's stock of single-family homes … the rebound in prices is not expected to occur quickly." (AP, Oct 3)

“The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding. The increase in the index shows traders expect mortgage delinquencies and foreclosures to increase at a time when the number of homes for sale is at a 13-year high. The percentage of home-loan payments more than 60 days delinquent rose to 7.23 percent in July from 5.9 percent a year earlier, the fastest rate of increase since 1998.” (Bloomberg, Oct 23)

""Since the start of 2005, the inventory of unsold new homes has climbed 29 percent, while the stock of unsold existing homes is up a staggering 82 percent'' … cancellations are rising, and they aren't being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated. " (Caroline Baum, Bloomberg, Sep 29)

““I don’t think that the [housing market] boom came from a 1 per cent Fed funds rate or from the Fed’s easing. It came from the collapse of the Berlin Wall,” Mr Greenspan told a private audience in Canada on Friday … the collapse of Communism in eastern Europe and the shift towards more market-based economies in China and other parts of the developing world brought “billions of cheap labourers onto the scene”. This, he said, “brought disinflation and lowered inflation risk premiums and long-term interest rates, creating a decline in real interest rates and equity-risk premiums.” In consequence, “the real market value of assets increased faster than GDP.”” (FT, Oct 9)

""The rate of [real estate] decline is going to dramatically slow,'' Greenspan told an audience of insurance-industry executives in White Sulphur Springs, West Virginia. ``We are beginning to see some evidence that all the data are not going south,'' he said, citing statistics on mortgage applications." (Bloomberg, Oct 10)

If Greenspan fully believed his explanation of what he calls the “boom,” then why did he lower interest rates to 1% in the first place and keep them there so long?

It wasn’t just the “billions of cheap labourers onto the scene” that was key, it was the decisions to transfer to that labor by stateless multinationals advanced technology and management, developed over decades by innovative individuals standing on the shoulders of their societies’ progress, now expropriated for the benefits of the very few at the very top running those multinationals, via their stock options, and the financial hyper-speculators driving them to do so.

But I digress. The key point to be made for the purpose of this discussion is the potential political problem arising from the American middle-class not understanding and accepting what Greenspan said above.

Five or ten years ago, if you had told the American middle-class that their homes would be worth what they are today, you would have been considered insane. Everyone knew such valuations would be completely absurd based on all their prior experience, not only with their own home prices, but also with decades of stagnation of their own real incomes.

Yet today, the American middle-class very strongly believes that these previously insane valuations are normal, and more importantly politically, that they somehow earned their massive increase in home equity.

They have no real idea how it happened, magically perhaps, they don’t particularly care. They don’t fully understand the role of East Asia that Greenspan mentioned above, because no leader has ever clearly told them, no one has explained to them the so-called "Bretton Woods II" marriage of convenience between the spending Americans and the saving Chinese, implicitly agreed to by "independent" central bankers in the U.S. and CCP leaders in China.

Nor do they fully appreciate how they've benefited from massive government tax breaks of a couple hundred billion dollars per year on mortgage interest and capital gains, the latter enacted clearly to pump a bubble, huge government mortgage security subsidies, government supply restricting zoning and land use regulations, etc., all of which was not in the news report on Greenspan that I quoted above.

If the middle-class homeowners thought about it at all, they might think their huge home equity gains was the “free market” at work, and since they took the "risk," they deserve the huge capital gains, even the small number who weren't fully honest.

“the use of liar loans has become epidemic. In 2005, mortgages underwritten with minimal documentation sometimes accounted for as much as 50 percent of subprime mortgages. almost 60 percent of the stated-income amounts are exaggerated by more than 50 percent.” (sfgate.com, Oct 6)

Regardless, they know possession is nine-tenths of the law, so it's their hard-earned home equity, period, end of story. They’ve even spent a good chunk of it, via home equity extraction, which has continued even through rising rates, though at a slower pace, down from about $800 billion a year to less than $500 billion. But there’s still far more of that new paper wealth left.

The Fed is doing everything it can to maintain this mass delusion about real estate values, otherwise they would be far lower, while keeping inflationary pressures under control, at least until after the Nov election.

But what if this truly massive social “state of denial” was ever threatened, what would be the consequences? Who would be blamed? Who would the middle class lash out at, as it historically has been prone to do when its living standards are very seriously threatened? Who would pay the price, be the target, for their sublimated anger?

For three decades, as their real incomes stagnated (average real weekly earnings are still -17% below the level of 1972) working and middle class people’s lives were spindled, folded and mutilated on the premise and promise, by both political parties and the mass media, that what came to be called "globalization" would somehow ultimately pay off for them.

It did, finally, but in an unanticipated way, not through better new jobs , 1996-2000 was the only period of modestly rising real wages since 1972, but rather through the by far largest speculative bubbles in history, first in the equity markets, then more importantly in real estate in the 2000s.

Social science research gives clues as to who would be targeted should the real estate bubble significantly deflate (see the end of the Social – U.S. and Political – U.S. sections of the 10/24 news summaries link).