Housing Bubble Bursting?

[moh malekpour]

http://biz.yahoo.com/ap/061026/bidding_on_apartments.html?.v=3

Apartment rents and demand are soaring nationwide as the economy produces good jobs and people who might have bought homes a year ago settle for apartments while they wait for housing prices to tumble.

In addition, the supply of rental housing tightened in the past year as many apartments were converted into condominiums in places like Florida and Southern California. Some of those units are now returning to rental markets at high prices as owners struggle to sell them.

 

[moh malekpour]

http://kevxml2adsl.verizon.net/_1_2...&qcat=finance&ran=12366&passqi=&feed=ap&top=1
GAO Chief Warns Economic Disaster Looms

More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. America's consumers have as much of a borrowing problem as their government does, so higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

 

[Randolph Kinney]

http://kevxml2adsl.verizon.net/_1_2S4TO1043OT7C9__vzn.dsl/apnws/story.htm?kcfg=apart&sin=D8L209C81&qcat=finance&ran=12366&passqi=&feed=ap&top=1
GAO Chief Warns Economic Disaster Looms

More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. America's consumers have as much of a borrowing problem as their government does, so higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

Just a side note about U.S. Treasury debt; the Federal Reserve does buy and sell U.S. Treasury debt in the open market. This is one way it can influence markets by increases or decreases in money supply.

However, once market participants get a sense of what is happening, if it is where the Federal Reserve is buying because there is a waning demand, they will back out or sell their holdings to the FED. Market ex-participants will have excess dollars, which they will convert into other (foreign) instruments or inflationary sensitive vehicles.

 

[Steve Owen]

Nothing since 10/29???

I just couldn't let this thread die. (No way, I want to be poster #10,001.)

http://www.kansascity.com/mld/kansascity/business/15905594.htm

 

[Terrel L. Shields]

John Shelnutt of the Arkansas Dept. of Finance & Revenue - “

The housing sector is also flashing some contradictory signals through the monthly data releases. A closer look shows more sector weakness by way of building permit data, even though housing completion rates or contract commitments are still on the rise. The story here is the same as before, we have a housing bubble in enough major markets with up to an 18 month supply of homes on the market (California and Florida) that economic drag is inevitable.

I know, myopia masks all

 

[Randolph Kinney]

Debtor Nation (part 1)

Debtor Nation

http://www.realtor.org/rmomag.NSF/pages/feature3nov06?OpenDocument

What do the chairman of the Federal Reserve, the exchange rate of the euro, and a rich investor from Shanghai have in common? All have some influence over the interest rate your buyers get on their mortgage.

The intricate interplay of foreign capital and interest rates has been the subject of discussion — and some concern — among economists in recent years. Foreigners love investing in the United States. U.S. Treasuries and other instruments, including mortgage-backed securities, provide foreign investors with a safe, stable place to rest their funds. That’s been good news for the housing industry, which has seen a steady flow of cheap mortgage money. It’s been more than four years since rates topped 7 percent. Without foreign capital, by one rough estimate, rates would be somewhere in the 12 percent range.

But whether the United States can sustain the current level of foreign investment and whether, in the long run, it’s good for the nation’s economy are questions without easy answers.

Give us your huddled masses yearning to earn

What’s certain is that foreign investment has been steadily growing. From 2001 to 2005, foreign purchases of U.S. Treasury bonds and other debt instruments, including mortgage-backed securities, rose from $785 billion to $1.3 trillion, according to U.S. Bureau of Economic Analysis data. As of last year, foreign investors held about half of all outstanding Treasuries, according to a report in The New York Times.

The prosperity of the global economy, the stability of U.S. markets, and the volume of U.S. imports of foreign goods are all factors in explaining this bonanza.

“The United States has the most well-developed capital instruments in the world. Its economy is growing, it’s politically stable, and much of foreign investors’ savings is already denominated in dollars,” in part because of the influx of dollars they get from U.S. consumers buying their goods and services, says Greg McBride, senior financial analyst for Bankrate.com.

For those benefits, foreigners have been willing to keep investing at relatively low rates of return.

To be sure, foreign investment hasn’t been the only contributor to low-interest rates. Another has been the highly accommodative monetary policy of the Fed in the wake of the terrorist attacks and tech bust in 2001. The Fed pushed down its target rate for the overnight loans bank charge one another to a record low 1 percent in an effort to ward off a feared recession.

These days the Fed seems more concerned about inflation than recession and had raised the federal funds rate to just over 5 percent as of mid-2006 to head off what it fears is a potentially overheated economy. Long-term interest rates hovered just below 6.5 percent in August, and it’s unlikely that rates will drop significantly any time soon. “We expect the 30-year fixed mortgage rate to trend upward to 7 percent by the second quarter of 2007 and hover just below that for the remainder of the year,” says NATIONAL ASSOCIATION OF REALTORS® Chief Economist David Lereah.

The result, of course, has been a chill in the housing market. “Buyers are seeing mortgage rates in relation to where they were in 2003, when they were under 6 percent,” says Beverly Rasmussen CRS®, PMN, a 25-year real estate veteran with Exit Tri-County Realty in Upper Marlboro, Md. Rasmussen says half of her prospective customers are young households waiting for rates or prices or both to come down.

“Higher rates have an impact on sales and prices, no doubt,” says David Wyss, chief economist for Standard & Poor’s, the global credit rating agency. “We’ve seen the beginning of that downward trend over the past year. We’ll be looking at more of the same if foreign investors start going away.”

Could — or should — foreign investment be curbed?

Most experts don’t anticipate a major pullout of foreign funds. At the same time, several factors make at least a partial withdrawal possible.

For example, as the population ages in capital-exporting countries like Germany and Japan, those countries will face shrinking tax bases and growing transfer payments, so those countries will have less to invest. Some foreign investors may also steer clear of U.S. investments fearing a political backlash, as happened when a Chinese energy company tried to buy the oil company Unocal Corp. (The Chinese bid was withdrawn.)

There are other, “what if” factors. For example, China could revalue its currency, which would result in fewer dollars flowing into Chinese exports and, thus, fewer dollars flowing back into U.S. Treasuries. Foreign central bankers and investors could decide to diversify their holdings in search of better returns. Changes in U.S. laws could make foreign ownership more risky or less attractive.

Some economists believe a reduction of foreign capital will be better for the U.S. economy in the long run because the huge share of U.S. liquidity controlled by foreigners heightens the economy’s vulnerability. A Sept. 25 Wall Street Journal article said the nation’s net debt stood at 20 percent of GDP at the end of 2005, compared with 15 percent on average for the 12 euro countries.

Of greatest concern is the ballooning U.S. current-account deficit. As of mid-2006, it stood at a record annual rate of more than $800 billion, or almost 7 percent of the U.S. gross domestic product. That deficit is the difference between what the United States invests overseas and spends for goods and services from other countries and what other countries pump into the United States. The current-account deficit is broader than the more familiar trade deficit — which has also been extremely high, running between $600 billion and $700 billion from 2004 to 2005 — ince the current-account deficit incorporates all investment and payments, including dividends and other remittances, flowing to and from countries.

Economists differ on the peril a rising current-account deficit poses for the United States. Some say it represents foreigners “buying up” the country. Others say it ultimately benefits both Americans and foreign investors because of the way it keeps interest rates down, allowing U.S. consumers to buy cheap foreign goods and services while helping to grow foreign economies.

Economists generally agree, though, that it’s in the interests of the United States and even the global economy for the current-account deficit to recede to about 2 percent to 3 percent of GDP from the current 7 percent. Otherwise future U.S. economic growth could be curtailed as U.S. resources increasingly go to paying off creditors rather than investing in the technology, infrastructure, and education that leads to future U.S. productivity growth.

“If you’re running a deficit in the government account, you’re crowding out private borrowing, and we’re financing that difference with foreign capital. Since that capital has to be paid back with interest, you’re also putting the squeeze on the current budget,” says Karl Case, an economics professor at Wellesley College.

The path to righting these imbalances starts with foreign investors diversifying into other countries — a painful remedy for those whose livelihood depends on low interest rates. Only when foreign investment stops flooding the United States and interest rates go higher will U.S. borrowing ebb.

Higher rates would help restrain core inflation (goods and services exclusive of volatile energy and food), which in mid-2006 was growing at a rate of about 4.2 percent. The U.S. savings rate might also improve since higher rates would attract household deposits while discouraging investment in assets such as cars and houses. Right now the U.S. savings rate is about 15 percent of the GDP, down from a little bit more than 16 percent in 1995. However, all of that is from corporate savings. The personal savings rate, which has been dropping steadily for years, is negative, and has been since early 2005.

“For the first time since the Great Depression, household spending is now exceeding earnings,” says Wyss.

Internationally, higher rates would also weaken the value of the dollar, making U.S. services and goods more competitive abroad and curtailing the attraction of foreign goods and services here. Although a strong dollar suggests a strong economy, it leads to increased imports, decreased exports, and a widening of the current-account deficit.

Realistically, however, the dollar probably wouldn’t drop as far as is necessary to give U.S. exports a major boost, economists say. Before it went too low, central bankers in other countries would likely try to shore it up to preserve the competitive strength of their exports.

“Particularly in places like Japan,” which is export-driven, says Wyss, “the dollar needs to get into the $1.50–$1.60 range against the euro to get to equilibrium.” At $1.60, U.S. exports would improve, U.S. imports would decline, and the current-account deficit would shrink. But central bankers probably won’t let it reach more than $1.29, about where it was in late August.

“In the long run,” says Wyss, “everyone [in international economics] agrees the dollar needs to get to a sustainable level, but in the short run, it’s very convenient for everyone if the dollar stays stronger.”

 

[Randolph Kinney]

Debtor Nation (part 2)

What are the odds?

In reality, any exit from the United States by foreign investors is likely to be modest. “Barring some political crisis, it would be on the order of a couple of percentage points,” says Wyss.

The relationship between the United States and foreign economies is too mutually dependent for any one side to greatly disturb the status quo, says Amy Crews Cutts, deputy chief economist for Freddie Mac.

“If foreign investors suddenly ditched their dollar investments, their economies would suffer more than ours. U.S. households wouldn’t be able to buy foreign-made products, and that would have a more immediate and deeper impact on them than rising interest rates would have on us,” she says.

A lack of investment vehicles comparable to Treasuries and other strong U.S. instruments also works in America’s favor. There are bonds denominated in euros, but Europe’s capital markets are less robust and the secondary market for mortgage-backed securities is less developed than the one in the United States.

“Quite a bit of capital is already going into euros, but the global pool of savings is so enormous that only the United States can soak up the bulk of it,” says Case.

At the same time, economic growth in much of the euro zone has been lackluster.

Foreign investors could look elsewhere. Africa, with its largely untapped potential for growth, is one option. But systemic political and economic insecurity in many countries there makes the risk premium too high for many investors.

China and other parts of Asia continue to attract capital, including a lot from U.S. investors, but the capacity of Asian countries to absorb more capital efficiently has hit a plateau. “China is actually running a current account deficit with Europe right now,” says Case.

“There really are not a lot of places other than the United States for investors to put large amounts of their dollars,” says Crews Cutts.

“A gradual shifting of foreign investment over a five- to six-year period, with a 10 percent decrease in total investment, would have an impact, but it wouldn’t be that detrimental,” says Crews Cutts.

Coming to terms with a new reality

For now, McBride and others tend to concur with NAR’s forecast that interest rates shouldn’t go above the 7 percent or 7.5 percent range. But even modestly higher long-term interest rates from an investor withdrawal will negatively impact housing. “Buyers already stretched by affordability problems would be priced out of the market,” McBride says. Others, like many of Rasmussen’s young households, would continue to sit on the sidelines.

And if first-time buyers aren’t buying, move-up buyers would be stuck in place. “The whole cycle gets disrupted,” says John Veneris, CRB, CRS®, of Realty Executives Pro Team in Downer’s Grove, Ill., and chair of NAR’s conventional financing committee.

The market is already seeing signs of this, sparked by the modest rise in rates. By August existing-home sales had cooled by 12.6 percent from August 2005 figures.

But as rates go up, sellers will eventually price downward, helping to take the sting out of the rate hikes. It’ll probably be a year into the slowdown before sellers set their prices realistically and another two years for the market to turn around, says Wyss.

By that time, even if rates exceed 7 percent, most of Rasmussen’s young buyers will accept the new realities and jump into the market, she believes.

In her mind, that’s not a bad trade-off if the alternative is to buy low interest rates at the cost of America’s future economic prosperity.

“Depending on others to make things right in our world — what does that say about our economy?” says Rasmussen.

 

[Randolph Kinney]

Renters scramble for apartments as demand soars across the U.S.

http://www.iht.com/articles/ap/2006/10/26/business/NA_FIN_US_Bidding_on_Apartments.php


Apartment rents and demand are soaring in the United States as the economy produces good jobs and people who might have bought homes a year ago settle for apartments while they wait for housing prices to tumble.

In the quarter ended Sept. 30, the average advertised rent reached $978 (€773), up 3.9 percent over the year-ago period, according to an analysis of 75 markets by real estate research firm Reis Inc. in New York. Some of the biggest increases were seen in Florida and Southern California.
Meanwhile, the nationwide vacancy rate for rental housing dropped to 5.4 percent during the quarter from 6.7 percent in the same period of 2004.

 

[Steve Owen]

All you have to do is read the first two paragraphs to know what will happen if it's true.

 

[Randolph Kinney]

All you have to do is read the first two paragraphs to know what will happen if it's true.

Rents are rising and that figures into the CPI index and the core CPI index. That means the FED is not going to lower interest rates until they absolutely see a recession.

Rising rents should help home prices.