Housing Bubble Bursting?

[Randolph Kinney]

http://www.washingtonpost.com/wp-dyn/content/article/2007/06/16/AR2007061600056.html


SIDE NOTE: Chinese are not buying US treasury bonds as much as they used to due to the bonds low yeilds, instead they are buying US stocks. That is why both the stock market is going up while the cost of borrowing money is also going up. The bond rates need to go up in order to attract buyers as US needs to sell treasury bonds which is borrowing money for spending.

I wonder if there is more to come on rising interest rates. At what point does the mortgage interest rate impact severely enough on housing sales to cause a steeper decline? Or, how low, is low?

 

[Randolph Kinney]

Here it is - defining a correction versus a bust

When Does a Housing Slump Become a Bust?

MANY Americans fear the consequences of a housing bust, but few know what one would really look like.

Think about it for a moment. How far do housing prices have to fall before a slump becomes a bust? In the stock market, we have a pretty good idea what a crash is. Among stock market experts, there is a consensus that a 10 percent decline in a major index is a correction while a 20 percent decline is more significant: a crash or a bear market, depending on the time involved. For the macro economy, there is also agreed-upon terminology. For example, a recession means two consecutive quarters of declining gross domestic product.

But when it comes to declines in housing prices, there is no such framework. As experts debate whether we’re headed for a housing bust, you’d think that we should at least be able to define it.

The problem is that economists haven’t agreed on a definition. In part, that’s because severe declines in housing prices tend to be rare events, not a common subject for discussion. The last really big decline in national housing prices occurred more than 70 years ago, during the Great Depression. Another reason is that the data measuring the housing market is far more opaque than that for the stock market.

But let’s work with the data we have. Start with the worst housing market on record. During the 1930s, housing prices fell sharply across the nation. According to the S.& P./Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 percent from 1929 to 1933.

Two economists with the Federal Deposit Insurance Corporation, Cynthia Angell and Norman Williams, have studied housing cycles since 1978 and have come up with a definition of a housing bust. In a paper published in February 2005, they called it a decline of at least 15 percent in nominal prices, meaning not adjusted for inflation. While economists tend to focus on real prices over time, the authors argue that in housing, nominal prices are a better measure of distress because homeowners, rarely think in inflation-adjusted terms in assessing market conditions.

 

[moh malekpour]

Housing Starts Probably Declined in May: U.S. Economy Preview

http://www.bloomberg.com/apps/news?pid=20601087&sid=ad_3Ah61lcWs&refer=home

June 17 (Bloomberg) -- Residential construction declined in May to a four-month low and homebuilder confidence stayed depressed, reports this week may show, indicating the housing slump will persist even as other parts of the economy show renewed strength.

Housing starts slid to an annual rate of 1.472 million in May from 1.528 million the prior month, according to the median forecast of 58 economists in a Bloomberg News survey ahead of the Commerce Department's June 19 report.

Sluggish demand is keeping builders focused on getting rid of unsold homes before they take on more new projects. That's one reason Federal Reserve policy makers say the housing market may take longer to emerge from its slump than they previously expected.

``Housing is still trying to find its low point,'' said Lynn Reaser, chief economist at the Investment Strategies Group of Bank of America Corp. in Boston. ``Builders have a lot of inventory, and prices probably need to fall further. Housing will remain a drag on the economy as the bottoming-out is likely to take a number of months.''

Estimates of May housing starts ranged from 1.43 million to 1.59 million. The same Commerce Department report may show building permits, an indicator of future construction, rebounded in May from the lowest level in almost a decade, economists said.

Building Permits

The median forecast in the Bloomberg News survey shows building permits rose to a 1.48 million annual pace in May from a revised 1.457 million annual rate the prior month. Estimates ranged from 1.42 million to 1.56 million.

A private report on June 18 may show the National Association of Home Builders/Wells Fargo index of homebuilder sentiment held at 30 for a second month, economists predicted. The gauge hasn't been lower since February 1991.

Economists' estimates for the sentiment index ranged from 28 to 31. A reading below 50 means most respondents view conditions as poor.

``The slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,'' Fed Chairman Ben S. Bernanke said at a conference in Cape Town, South Africa, earlier this month.

 

[moh malekpour]

When Does a Housing Slump Become a Bust?

http://www.nytimes.com/2007/06/17/b...gin&adxnnlx=1182139613-NsTcCsym3LibrcGbwBce3A

MANY Americans fear the consequences of a housing bust, but few know what one would really look like.

Think about it for a moment. How far do housing prices have to fall before a slump becomes a bust? In the stock market, we have a pretty good idea what a crash is. Among stock market experts, there is a consensus that a 10 percent decline in a major index is a correction while a 20 percent decline is more significant: a crash or a bear market, depending on the time involved. For the macro economy, there is also agreed-upon terminology. For example, a recession means two consecutive quarters of declining gross domestic product.

But when it comes to declines in housing prices, there is no such framework. As experts debate whether we’re headed for a housing bust, you’d think that we should at least be able to define it.

The problem is that economists haven’t agreed on a definition. In part, that’s because severe declines in housing prices tend to be rare events, not a common subject for discussion. The last really big decline in national housing prices occurred more than 70 years ago, during the Great Depression. Another reason is that the data measuring the housing market is far more opaque than that for the stock market.

 

[moh malekpour]

Ills Deepen in Subprime-Bond Arena

http://online.wsj.com/article/SB118213138637138666.html?mod=home_whats_news_us

A few weeks ago, the market for bonds backed by risky home loans looked like it was calming down. Now, problems are quickly mounting.

At Bear Stearns Cos., a group of hedge-fund managers at the Wall Street firm spent the weekend scrambling to line up new investors or lenders to keep afloat their fund, called High Grade Structured Credit Strategies Enhanced Leverage fund. The fund, which invests in many securities that are backed by subprime mortgages, suffered heavy losses in recent months.

On Friday, credit-rating firm Moody's Investors Service slashed ratings on 131 bonds backed by pools of speculative subprime

 

[moh malekpour]

U.S. Homebuilder Confidence Declines to 16-Year Low

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3geP0rq5YV8&refer=home

June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged.

The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.

Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.

``There will be continuing declines in home building through the second half'' of this year, said Robert Mellman, an economist at JPMorgan Chase Corp. in New York. ``If rates hadn't gone up, we would have expected it would have stabilized. We've put off the stabilization in housing until early next year.''

JPMorgan Chase correctly forecast the drop in the homebuilding index. The bank's economists now project residential construction will fall at a 7.5 percent annual rate in the second half, compared with a previous forecast of a 2.5 percent drop.

The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32.

Builders are asked in the survey whether sales are ``good,'' ``fair'' or ``poor'' and to gauge prospective buyers' traffic.

 

[Randolph Kinney]

Contagion Bubble Coming Near To You

Another Asian Contagion May Be Only a Bad Currency Trade Away

Ten years after the collapse of Asian governments' overvalued currencies in 1997, the remedies they embraced to prevent a recurrence may have only traded one set of risks for another. Their ``never again'' determination has led them to new extremes: artificially low currencies, a record $3.4 trillion in reserves and export-dependent economies.

In emerging markets, central banks and governments are grappling with risks including inflation, asset bubbles and vulnerability to a U.S. slowdown. For investors, meanwhile, ``risk has been underpriced,'' Roubini says, with the result that ``this can have negative effects on bonds, currencies and equity markets.''

China, Hong Kong, Taiwan, Malaysia, Singapore, Thailand, India, Russia and Argentina still manage their currencies, generally maintaining artificially low levels. South Korea and Indonesia allow more flexibility.

Cheap currencies have led to excessive monetary and credit growth worldwide, creating asset bubbles in South Korea and China and inflating consumer prices in India, Russia and Argentina.

Undervalued currencies have also helped make Asia's emerging economies almost twice as reliant on exports as the rest of the world. ``A sharp slowdown in global demand would have major ripple effects,'' says Robert Subbaraman, Lehman Brothers' Hong Kong-based chief economist for Asia excluding Japan.

 

[George Hatch]

A couple charts showing current trends in San Diego County for NODs and foreclosures. It's not looking good.

 

[Randolph Kinney]

A couple charts showing current trends in San Diego County for NODs and foreclosures. It's not looking good.

In case Brad has not noticed, the data has past the peak set in the 1990s.

Just wait until the ARM resets peak later this year.

 

[Brad Ellis]

George,

In case Randolph does not remember- and he obviously does not- I have said all along that the San Diego market was going to have serious problems. I said that about the major markets in FL and in Las Vegas as well.

And the ARM resets are going to go on thru 2009 at least.

What will be critical- and that is something not shown on the charts- are the dates in which the mortgages were originated.

For some in default they may lose their homes over an inability to pay the mortgage- but some of these folks have not seen their homes drop to the levels at which they were bought while others surely have seen this.

What will matter in the end, for the most part, are the actual credit losses that result.

So, can you still sell a house in San Diego or a condo?

Brad