Housing Bubble Bursting?

[moh malekpour]

He told me that a lot of doctors and young professionals were taking them to get into bigger houses than they could afford

That is exactly the purpose of Arms loan. It is like a bridge loan that gives a chance to a borrowere get in to a larger house when borrower expects income or salary increase. But those who were at the bottom of affordability used it not because they expected their income or wage increase but the house price increse and now that the house price is not going to increase, they are whatever.

 

[Randolph Kinney]

Hear that thud? It's housing, and maybe the economy too

Party time (until real estate collapses)
Meantime, plan ahead, don't lose money, go conservative

By Paul B. Farrell, MarketWatch
Last Update: 7:51 PM ET May 15, 2006



ARROYO GRANDE, Calif. (MarketWatch) -- What does an addict do just before going into rehab? Yep, party time! Every addict. Every addiction. The closer the rehab, the wilder the parties.

Like now with America the oil addict, the debt addict. It's party time. Government cannot stop spending. Consumers can't stop buying. We're partying! Spend what's left of your savings, have a great time before you're forced to stop living high on the hog. Before rehab. Yes, we all know we'll have to cut back. Just not now. It's coming, we just want one last fling!

Yes, America's in a party mood. Spend now, load up the credit cards, forget the hangover.

....

New message in old real estate cycle

The confusion reminded me of my favorite classic on the science and research of cycles. Written by Edward R. Dewey, the former chief economist in FDR's Department of Commerce. When Dewey left government he founded the Foundation for the Study of Cycles. His book, "Cycles: The Mysterious Forces the Trigger Events," is 35 years old. But in it is a fascinating chart: "The 18 1/3-Year Cycle in Real Estate Activity, 1795-1958." In eight 18.3-year cycles over 150 years, Dewey says, "the waves were too clear and too regular to be denied or ignored."

Dewey wrote that it should be reviewed yearly. But he hasn't been around to do the job since 1978. Nevertheless, that 150-year chart of real estate cycles has intrigued me since the 1970s when I worked in Morgan Stanley's real estate investment banking group. So I took a trip down memory lane and projected the 18.3-year cycle from a low point in the early '50s forward three cycles to a low point around 2007. In other words, a bottom in the real estate market is dead ahead.

Dewey's real estate cycle is also in line with economist Gary Shilling's prediction in Forbes a couple months ago: "The current housing weakness will develop into a full-scale rout ... It's clearly a bubble and is nationwide ... The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin ... and weakness in the U.S. and China will spread worldwide."

Best strategy: act now, don't lose money

If Shilling's message sounds dark, the bottom line of economist Michael Hudson's "Guide to the Coming Real Estate Collapse" in Harper's is darker. Here's how he sees the future unfolding. He analyzed 20 trends: "Taken together, these factors will further shrink the 'real' economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagflation or worse."

It's not a pretty scenario. But, the truth is, these guys could all be wrong. Still, the drumbeat is obviously getting louder and more frequent. So my advice is simple, make darn sure your portfolio allocations are markedly conservative, towing the line with Warren Buffett's No. 1 rule of investing, "never lose money." Leave some on the table if you have to, but act now so you don't lose money.

Choose to go ultra-conservative now, on your own timetable. Before it's too late when the rest of America's 95 million investors are racing for the doors, all forced into "rehab."

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BF8B9E8DB%2D7503%2D4719%2D8378%2D0E6A5729C3C2%7D&siteid=mktw&dist=nwhpm

 

[Alison Swain]

Okay, this may seem like an extremely naive question (but my 5-year career consists almost completely of refi-boom and then last year's appreciation boom):

What does this mean for us as appraisers? Will we be flush with foreclosure work or will we be living hand-to-mouth for the next few years?

 

[JSmith43]

What does this mean for us as appraisers? Will we be flush with foreclosure work or will we be living hand-to-mouth for the next few years?

Read the tea leaves. Exploit the best opportunities.

Yes, it will be rough for appraisers for about 2 years, my guess.

 

[Austin]

What This Means For The Future

As I write this I am on vacation at the beach in Brunswick County, NC with the wife and grand kids and the mom and dad. This beach house has high-speed Internet service so what would you expect an appraiser to do on vacation? I did a complete demographic class C market analysis of Brunswick County, NC. I got a real estate magazine and read pages and pages of preselling retirement homes.
Last night on the 11PM news I heard that in about the last year 20,000 subdivision lots have been approved in this county. This entire area is centered around Myrtle Beach SC 35 miles south.
Here is what the demographics show and what it portends for the future. There is a huge wave of high-income people driving this market from age 64 and up. The projected increase in the next five years is like 25% and up in this demographic. Sounds like the construction is based on sound demographics. But, if you look at the demographics from age 64 down there is a completely different story. The increase in these demographics is like a 4% increase in the next four years. What does this mean in the short and long run?
In the short run meaning about 10 years there is a high demand for upscale retirement housing. The problem is that in 20 years most of these people will be dead and gone and there is no demographic group to inherit these houses. It is a baby boom wave moving through the cycle. You can see the waves in the age demographics and if you project them into the future you can see the real estate cycle. The waves are one generation apart like the 18.5 years someone posted above.
The demographers have figured this out already. We went on a short trip yesterday with the grand kids. On the way home both had to take an emergency pee. Papa had to stop quickly. The only place along the road was an upscale cemetery with a brick wall. I pull in and mom and dad let the kids pee behind the wall. Old Papa's sat in the car looking at the dates on the gravestones. I could see the last generation that produced the present baby boomers. All of these people have to be buried so now is a time to get in the cemetery business.
Further, all of these beach houses are about 15 years old and there is a huge looming remodeling cycle about to take place. We had three splinters in the foot from the weathered deck. Remember the income tax code revision being worked out right now? You have to factor that in.
What do demographics portend for the future? Short boom in retirement houses and a future of a huge volume of empty upscale houses with no one to live in them. I can see it already. The place we visited was a large shopping entertainment area on the intercoastal waterway. There was a huge hotel-convention complex just completed across the waterway. Not one soul in sight. Looked like a ghost town and it gave me an ere feeling.

 

[Randolph Kinney]

U.S. consumer prices rise 0.6% in April; core inflation 0.3%

Energy, shelter costs push April CPI higher
Both CPI and core rate slightly above expectations

By Greg Robb, MarketWatch
Last Update: 8:33 AM ET May 17, 2006

WASHINGTON (MarketWatch) - Energy prices pushed the U.S. consumer price index up 0.6% on a seasonally adjusted basis in April, the Labor Department said Wednesday.

And higher shelter costs boosted the core CPI index, which excludes food and energy prices, to a 0.3% gain.

The increase in the CPI and the core rate were both slightly higher than forecast. Economists expected a 0.5% gain in the CPI, according to a MarketWatch survey. The core CPI was expected to rise 0.2%. See Economic Calendar.

The increase in the CPI was the highest since a 0.7% increase in January. The core CPI is up 0.3% for two straight months.

In the past year, the CPI has risen 3.5%, up from 3.4% on a year-on-year basis in March. Over the same period, the core CPI has risen 2.3%, up from 2.1% in the previous month.

For the first four months of the year, inflation is running at a 5.1% annual rate. This compared with a 3.4% rate for all of 2005.

Excluding food and energy, the core CPI is up at a 3.0% pace so far this year, following a 2.2% rise for all of 2005.

Core inflation is now at the top of the Federal Reserve's comfort zone. Policymakers have raised interest rates 16 times in a row over the past 23 months to quell inflationary pressure.

The increases in the seasonally adjusted CPI should put pressure on the Federal Reserve to keep raising interest rates instead of pausing to allow the impact of the past 16 rate hikes to work through the economy.

Energy prices, which increased 3.9%, were the main source of higher consumer prices in April. Fuel oil prices rose 5.2%, the largest gain since September 2005. Gasoline prices rose 8.8% in April.

Over the past year, energy prices are up 17.8%, while gasoline prices are up 21.5%.

Food prices were flat in April for the first time since last June.

Transportation prices rose 2.4% in April. Airline fares rose 1.6%, the largest increase since last July.

New car prices fell 0.1% in April.

Shelter costs rose 0.3% in April, and accounted for about one-half of the increase in core prices, the government said.

The core rate was also boosted by higher apparel, medical care, and education costs.

:new_popcornsmiley:

 

[Randolph Kinney]

Treasurys hit by inflation fears after CPI report

Randolph,

Neat post. From the article quiting the harvard guy:

"In contrast, Nicolas Retsinas of Harvard's Center for Joint Housing Studies says the increase in default activity coming during a time of economic growth is a sign that many adjustable-rate mortgages, or ARMs, carry too much risk for borrowers."

Now let's see...during economic growth the risk of inflation increases as unemployment goes down, and that usually translates into higher interest rates. With adjustable rate mortgages, the interest rate will follow the other rates eventually (we just came out of the inverted yield curve).

Now THERE is some quantum physics for us!

Brad

The yield curve was never that inverted for any length of time to matter. What has happened to the yield curve, it is responding to FED moves to raise interest rates to restrain growth and inflation expectation. Interest rates have increased all along the curve.

The latest reaction to the CPI report is out:

Treasurys hit by inflation fears after CPI report
Heavier-than-expected price gains offset positive producer-price report

By Leslie Wines, MarketWatch
Last Update: 9:56 AM ET May 17, 2006



NEW YORK (MarketWatch) - Treasury prices were sharply lower early Wednesday, fattening yields, after inflation fears were fueled by stronger-than-expected headline and core numbers in last month's consumer price report.

The fixed-income market abhors inflation because it eats into the value of bonds and keeps pressure on the Federal Reserve to continue lifting interest rates.

The benchmark 10-year Treasury note fell 13/32 to 99-24/32 to yield 5.156%, up from 5.107% at Tuesday's close. Prices and yields move in opposite directions.

The 30-year bond last was off 25/32 at 88-12/32 with a yield of 5.281%, up from 5.22% at Tuesday's close.

The 2-year note was under less pressure, steepening the yield curve. The note last was off 3/32 at 99-25/32, yielding 4.997%.

Kevin Giddis, managing director of fixed income at Morgan Keegan, noted that the consumer report followed Tuesday's news that producer prices rose 0.9% at the headline level and 0.1% at the core.

"This means at the core level, wholesalers are able to not only 'pass' on their costs to the consumer; they are able to do it and make a profit," Giddis said.

"This should be of great concern to the bond market because it shows that price inflation is starting to become a factor in the U.S. economy," Giddis said.

 

[Brad Ellis]

Randolph,

Actually, the inverted yield curve lasted this time for a much longer period than typical- well over a month- highly unusual.

Of course, it is, as you said, not all that important, except as we measure expectiations.

If you will recall, I did say many weeks ago that I would not be surprised if the feds raised rates more than just this last time earlier in the month. I based that upon an expectation (really just a guess) that the overall economy was actually hotter than most economists had predicted. Turns out my guess was right based upon the first quarter reports.

So, no surprise to me if they continue to raise rates until they believe inflation is under control. I am guessing at least one more and perhaps 2-3.

But now we have a twist- some economists predicting not just a slowdown but perhaps even a recession. Those few probably believe inflation is already under control. I do not see that yet.

And Randolph, we are now getting to the point where the confluence of events will drive the markets down further. Two quarters of decline in prices. Last NAR report showed a decrease in existing home prices from about $225K down to $218K nationally. Couple that with continued inflation.

I expect that to continue thru most of this year confirming the correction now under way.

What did that one report say- bottoming out in 2007? That part sounds good to me. It would also reflect the norm in real estate cycles.

I do expect some stabilization later this year and some additional decline in 2007 to the bottom. IF inflation is under control by about a year from now- I do expect that as well- then we can see some reduced pressure on rates.

But here is my question: What do you think will happen to prices once the upward interest rate spiral ends? Just stabilization or price increases?

I'll be (hopefully- if court appearances do not screw it up) to hear Schiller speak in mid June. Will post what he and the other experts are saying.

Brad

 

[George Hatch]

When have prices ever just stabilized for any period of time?

 

[john snyder]

A paraphrase from David Stockman economic guru during the Reagan Administration.

" We can no longer afford to keep financing the debt (private and public) from the equity in our housing".

The quote is as exact as I remember. Tried to find it in Stockmans writings, no luck. Quite a good writer/economist, Stockman.

The quote was from the truly hard times of the early 80's called the -Reagan Recession - brought on by "high" - to "way too high" interest rates from Volcker in attempts to control inflation. We actually went into stagflation I believe. That period when unemployment goes up along with inflation if memory serves.

However, just yesterday there were raves about the great job opportunities for new college grads, the best in five years. Certainly not the case in Michigan.

In Michigan, the rebound is two years away, with a huge financial gain looming somewhere down the road. We have this thing called water that will be our oil income in the coming years.

In the meantime, first one out the door wins.

john