Housing Bubble Bursting?

[Randolph Kinney]

It is official: Economists say a recession in 2008

Economists say 2008 will be year to forget

Economists gathering in New Orleans say a recession is all but certain but whether a government stimulus package can help is still in question.

NEW ORLEANS (MarketWatch) -- Gathered in this city struggling to regain its footing after Hurricane Katrina, a group of leading economists said the U.S. is getting hit by another damaging storm: the global credit crunch.

"The recession is likely to be a serious one," said Dean Baker, co-director of the Center for Economic and Policy Research.

He estimated losses in prime mortgages will be two to three times the $160-$200 billion hit seen in the subprime sector. This, he said, will lead to large losses at banks and difficulty for Fannie Mae and Freddie Mac.

Several economists at the conference said attention needs to turn to a possible government stimulus package to take the punch out of the downturn.

The likely magnitude of coming economic difficulties makes it important for Congress to take action on the fiscal side, complimenting easing by the Federal Reserve, they said.

But many analysts argued that the government may be powerless to prevent a downturn.

"My sense is that even though the government wants to be seen as reactive, there is not that much they can do at this point," Rajan said. "Monetary policy has lags of a year. It can't revive lending that isn't taking place because banks have capital constraints."

Stand by for job losses and rising defaults that are not just subprime. Home prices may fall faster and greater than any expect. Defaulting homeowners out of work with no equity in their houses may walk off in abandonment to pursue employment in other areas.

Lets everybody get the popcorn and watch this unfold. :new_popcornsmiley:

 

[Randolph Kinney]

FED economists predict prolonged falling home prices

Owning vs. renting: still not close

U.S. house prices "likely would have to fall considerably" to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.

The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.

In an interview, Mr. Davis said lower long-term interest rates can explain only a small part of the drop in the ratio. "To justify current price levels, you need rapid growth in rents." But it's hard to imagine the scenario that would justify such rapid growth in rents, he added. Indeed, it's possible rents will grow more slowly than 4%, reflecting the overhang of unsold homes that might be rented out.

Mr. Davis said the authors postulated a five-year horizon for the rent/price ratio to return to normal by looking at previous downturns. "When a downturn begins, it will last for a while."

Don't tell Brad, but, it seems the FED and other noted economists outside of NAR are predicting his definition of a bubble bursting. :laugh:

 

[Terrel L. Shields]

High valuations will lead to higher taxes and landowners are going to be forced to raise rents to cover this expense. Obviously since the property is worth more, the insurance premium will go up too.

So it is pretty predictable that rents will rise and therefore home prices might not fall as much. But if the fall is slow, its likely to last a long time. If the fall is fast, then it will be over faster...its a choice. Just not a fun one.

 

[Randolph Kinney]

High valuations will lead to higher taxes and landowners are going to be forced to raise rents to cover this expense. Obviously since the property is worth more, the insurance premium will go up too.

So it is pretty predictable that rents will rise and therefore home prices might not fall as much. But if the fall is slow, its likely to last a long time. If the fall is fast, then it will be over faster...its a choice. Just not a fun one.

To the degree that landlord can pass on those increases, yes, rents will rise. However, as a anecdotal observation, my neighbor next door is renting. The landlord wanted to raise the rent. He told her he was going to move to the other house on the same street that is cheaper. The landlord decided to keep the rent the same.

I guess it all depends on the vacancy factor and competing rental property types. Lots of foreclosure properties are being bought by investors and put back on the market as rentals. Falling house values allows for cheaper rents if competition heats up, which in turns reinforces falling values. Taxes and insurance cost will follow.

 

[Terrel L. Shields]

We've seen a lot of rentals in our area churn. Many of the Hispanics who worked the trades are moving on, but a steady supply of folks are moving in and it seems a lot of them are renting rather than buying with a wait and see attitude. A number of builders are offering rent to own sales.

 

[Ty Yu]

Nothing New Under the Sun

I came across this article today and
I believe that some of you may find it interesting.

Bad Appraisals Contribute to Housing Mess / Jan 6, 2008
http://www.azcentral.com/news/articles/0106appraiser1230.html

Have a glorious day my friends.

Be well!!!

 

[Randolph Kinney]

We've seen a lot of rentals in our area churn. Many of the Hispanics who worked the trades are moving on, but a steady supply of folks are moving in and it seems a lot of them are renting rather than buying with a wait and see attitude. A number of builders are offering rent to own sales.

I have seen rent to own sales too. One is on my street. They want $625,000 for purchase price or $2,400 a month rent to own with 100% going to the purchase price. Market rent is around $1,700 a month. Market value for the RTO house is around $530,000 to $570,000 however, prices are still dropping.

 

[DTB]

Don't know the price point of your markets but a rental increase = or less than the TOTAL cost of the move is an automatic in my book.

By TOTAL cost to tenant I mean and explain to them their costs:

1. Physical moving costs even DIY costs $$
2. Change of utilities, mailing address change notices ...
3. Half a day @ DMV to pay for a drivers' license change
4. Moving every year sure doesn't help one's FICO score or future employment prospects.
5. Chasing your deposit from me and paying a new deposit down the street.

Usually they go along with the program. The family attorney let me witness an interaction with one of his tenants when I was about 12-13 years old. He explained this program to me with the kicker; if they are 30 years old and older they are YOURS.

 

[Randolph Kinney]

People move, not because they can't afford a rent increase in all cases, but they are incentivized by the difference in monthly payments.

As you point out, there is a cost to move. Everyone has a different threshold. Some would rather pay the increase rent than hassle with what you point out plus a little more. Others won't pay more when they see competition at lower prices regardless of the hassle factor.

I think the key is what the competition is doing.

 

[DTB]

People move, not because they can't afford a rent increase in all cases, but they are incentivized by the difference in monthly payments.

As you point out, there is a cost to move. Everyone has a different threshold. Some would rather pay the increase rent than hassle with what you point out plus a little more. Others won't pay more when they see competition at lower prices regardless of the hassle factor.

I think the key is what the competition is doing.

I think, at least hope, the key is one's personal fiscal situation. I too know people who will spend 2,000 to save 500. Don't make sense to me but...

Similar to the situation of people contemplating a move which will lead to a 2-3 hour daily commute. Sure houses are cheaper, until you factor in your time, aggravation, fuel and automobile costs. But that's too much thinking for most people. Here's your sign.