The Housing Bubble - To Die or Not to Die

[Hypertiger]

Over the years people realized that calling in loans and kicking people into the street is bad or wrong. Inflation has lulled people into thinking that things are different now, we know better... That is not the case, Right now the thought that the finanical world will end and bank runs could or can take place just doesn't seem realistic, do not be fooled for a second... The only reason we can entertain fairy tails like this is because we can afford to... Debt deflation will speed up and as the Money supply shrinks the cost of being civilized or doing things by the book will slowly increase in price and will no longer be able to be justified...

 

The Top sucks from the bottom, Because the people buying homes now don't realize this they are doomed. Debt deflation will wipe out most equity in homes in the next 18 months and prices will drop and continue to drop. And it won't come back for many years (best case outcome) or decades (Almost the worst case outcome).

 

Debt deflation is gaining speed every day and once you notice it and think to yourself "Hey that Hypertiger character was right" It's too late... If you have a mortgage the bank owns your house, you are just a renter.

 

If you can make the payments fine but as debt deflation works it's magic you will be at a disadvantage as prices drop and no bank will remortgage your house for more than it is worth and wages will drop. One slip up and game over.

 

We have not even begun to suck eggs yet, next year we will. by 2004 Hyperdeflation will be in full swing... There is no escape unless you own outright and even then property taxes could finish you off (they will Hyperinflate).

 

The top will collapse once the bottom has been gang raped to the maximum extent.

 

Now is a good time sell if you want the money because soon the money/debt (Equity) will cease to exist...

[K Wave Rider]

Hyper,

 

You got it dead on.

 

I remember telling many people, when the NAZ was at about 4800, that it would go to at least 1500 and more likely below 500. Not one person took me seriously.

 

Now I get the same repsonses when I talk about 50-70% declines in RE prices.

 

Real Estate does not always go up, any more than the stock market always goes up. An older attorney friend of mine who works with very large estates, has told me stories of houses (mansions I assume) that sold for a million dollars in the late 20's, which subsequently sold for $40-50K in the midst of the depression, far below construction cost.

 

Hell, just take a look at Japanese RE for a more recent example. That happened with rates at 0% folks. So puhleeze, don't feed me the "low interest rates will keep RE prices up" load of BS.

 

Once prices start down, it will be a vicious spiral. Anyone who thinks differently has not done their history homework.

 

BTW, you can rent houses, not just apartments.

 

Oh, and one last thing, it is NOT gonna be different this time. :shocked

[Guest]

Even though I believe the housing market will collapse, I'll play the devil's advocate. Suppose The Fed decides to try to coerce another stockmarket downturn in hopes to have the long end of interest rates break their 1998-2001-2002 triple bottom by 50 basis points. Then EVERYONE is eligible to refinance again assuming credit scores and home equity levels are not an issue.

 

Combine this with a mini-capitulation to say Dow 6000 and all of a sudden you have finally raised mutual fund cash levels. Then with some timely bigtime repos and coupon passes, you have a tidal wave of liquidity...the biggest in three years.

 

Is this possible?

[Hypertiger]

This is'nt sim city eventually living breathing human beings can't take it anymore and we are many years into this process...

 

This is how ?modern? Fractional Reserve banking has worked for 100?s of years.

 

Phase/Stage 1

 

Everyone?s favorite drug INFLATION of Debt?

 

Once the maximum potential for debt inflation is reached phase/stage 2 begins. (this is where we/you are? standing at the edge of ?the good old days?)

 

Phase/stage 2

 

DEFLATION of debt, How or why?

 

Compound interest is the price to sustain inflation. As long as you can pay the price, inflation will continue and your hopes and dreams will usually come true. Once you can not afford the payment your hopes and dreams will not come true. Simple

 

The only way to pay compound interest is to borrow money/create debt. Once borrowing slows or stops compound interest can not be paid and debt deflation is the result.

 

Aren?t we just in a mild recession or ?soft spot??

 

No, In the past there was ?slack? in the economic system what is slack? ?SAVINGS?. with the introduction of computers the economists have figured how much everyone has, and marketing specialists have figured out how to get it. The charts below are some evidence that the slack is gone?

 

 

 

 

We are just in the beginning stages of deflation.

 

Phase/stage 3

 

?Bank?ruptcy

Complete collapse of all interconnected banks in the system, since the US dollar is the world reserve currency the world banking system will collapse. plain and simple.

 

Recap of the ?LIFECYCLE? phases/stages of fractional reserve banking.

 

Phase/stage 1 = debt INFLATION

 

Phase/stage 2 = debt DEFLATION

 

Phase/stage 3 = ?Bank?ruptcy

 

Simple as 1,2,3

 

The market is a very dangerous place since the Dow is being used as an indicator of economic "HEALTH"

 

About as useful as using a compass to tell time...

[EasyAl]

Here is an article on debt inflation anddeflation mechansim of fractional reserve banking system (i.e. Money Multiplier). Dr. Frank Shostak used simple language and examples to explain the mechanism very clearly.

[Guest yobob1]

subprime your assumptions are wrong regarding my particular sale. Every market is going to be different and it is up to each individual to assess the nature of their markets. In my particular cse the appreciation rate versus the national rate over the last 10 years was very low. The particular trap that was and is still developing in my market is the availability of thousands of new homes in a similar price range. The buyers of these new homes for the most part only had to have 10 cents in their pocket and a job. For that they were getting a new home complete with all appliances, including washer/dryer. Now the ante is being upped to include landscaping and fencing. It makes for a tough resale market somewhat similar to what Detroit's incentive packages have done to the used car market.

 

My particular home (1978 vintage) was in a neighborhood of similar sized and value homes. It was due for substantial improvements: $5000 new floor coverings, $1500 fencing replacement, $1,500 repaint in and out, $2,500 driveway and sidewalk replacement, $3,000 bathroom remodel, and $3,000 in kitchen contertops and cabinet refinishing. So in total it needed over $16,000 in costs poured in. Those prices assume at least some labor by the home owner. After all that my $85,000 (apprasial vs. $90,000 assessment) home in this neighborhood would have been worth $85,000. I sold it for $82,500 after 45 days of being listed for $79,900 and the first and only offer I received. I intentionally priced it 3% to 5% under similar used homes after studying what was on the market and how long thoe homes had been listed. The increase in the price over the asking was done to allow the buyers to cover their closing costs. Whether legal or not, that's what was done. I could only see increasing difficulty developing in selling a "used" home into a market of tightening credit qualifications and increasing job lossses amongst a flood of new homes.

 

As to the tax advantages, those were just about used up due to a self imposed accelerated payment plan. In reality the small benefits offered to the home owner via income tax are often offset by increased real world costs of ownership versus renting. My actual monthly outlays not including repairs and maintenance are about $200 lower now. That is just the difference in no water bill, no cable bill, no (or less) property tax (yes I know it's hidden in the rent), no lawn care and lower insurance outlay. In addition my utilities are 50% or less than previous. Factor in repairs etc., and the savings begin to add up. These are things everyone has to look at on an indivdual basis. As they say, your mileage may vary.

 

Houses are not liquid assets. You don't call someone and say buy my home and then receive a check 72 hours later. Just because last week the guy next door got 100 over price offers on his home 10 minutes after it was listed is no guarantee you will receive the same reaction next week. It's like the stock market.....things change and can change rapidly. I sold my stocks in August of 1999. Yes prematurely, but on the other hand I locked in a substantial gain and I am far better off than someone who rode out the peak and then kept waiting for the market to come back so they could get out at the top. They're still holding while I have moved on and redeployed my capital into things that have done well since then. I am a tortise. I take a long view, consider exit and entry points well in advance and reassess periodically making changes when I feel it is appropriate. I refuse to play the hare and risk getting run over trying to cross the road at ill advised times.

 

It will be far worse with housing when it rolls over simply because most won't have the option of getting out in a falling market. They will be stuck. Maybe there's a way to short your house as a hedge?

 

I perceive a fundamental change occuring in the human element. I can't put my finger on it exactly and hesitate to try and "label" it. If what I sense is occurring on a broader scale then it isn't going to matter what the interest rate is or how good the offer is, I predict increasing reluctance of consumers to "bite". I "feel" something that is different and more ominous than anything I have seen in over 30 years of retailing.

[fxfox]

here is some stuff for the "housing bubble fans":

 

http://www.ofheo.gov/house/hpi_body.html

 

since 1980 the housing prices in the USA as a whole rose 180% on average.

 

Yes that IS much, but is it a monster style bubble? Yes there will be lower prices, but will that the beginning of the end of the world?

 

Even my grandpa knows: You built a houses when interest rates are LOW, you dont built a house when they are HIGH. You go to the bank and sign a document which guarantees you the same rate for the next 20 years (you have to pay a little prmeium, but thats nothing compared to if tinterest rates would double over the years).

[DrStool]

Some of you still need to go to My Controls and reset your avatars.

 

My homeowners insurance just went from $850 to $1850 in two years. It was $350 12 years ago.

 

People have to refi, just to be able to pay the insurance bill. If you have been followin the state budget crises, you know that RE Taxes are also about to skyrocket. This is how asset inflation followed by post bubble disorder get translated into consumer inflation and asset deflation. Rising insurance and local RE taxes will force those at the margin to sell or walk away.

[assteroid]

Everyone has to take a good hard look, not just at the price of homes, demographic trends, interest rates, etc...but at the issues that the Doc and Yobob bring up. Rising taxes, coupled with increasing homeowner's insurance are showing up now and promise to be a nightmare in the future. I've posted about this a few times in the past year.

 

Mortage interest tax write-offs can't ameliorate these trends. Interest rates are so low right now, they're blinding people to the reality of what lies ahead. If you claim just once on your homeowner's policy, your insurer can drop you. Once one insurer kicks you off, it red flags your home for other insurers. A home that can't be insured won't qualify for a mortgage when you try to sell. Beware, guys. This is going to kill the value of many poorly built homes. Most of what's been built in my community recently (all the way from entry level to mcMansion) has not been built carefully enough to stand the test of time, or the scrutiny of jumpy insurers.

 

Like you Yobob, I got right out of stock early (1998), sold my extravagent house in Seattle during the run up, paid cash for a smaller, more modest place, anticipating the trend. I missed out on significant gains in the run up of stock in '99, but caught the run up in real estate just prior to its takeoff in the area where I purchased. Just sold my place a couple of weeks ago. The bear case for real estate, in most markets is, in my estimation, stronger than the bull.

 

Real estate is part of a much larger political-economic picture, and part of an even larger environmental picture. Mould is the new asbestos, and if you don't know much about the biosciences you don't know its mutating to survive and thrive in increasingly "hostile" environments. Certain forms just love moist drywall. And there's plenty of it in "energy efficient homes" where warm air and moisture are locked in. Homeowners are going to feel the entire system has turned against them, on a political, economic, social, and damn...right down to a molecular level, in many cases.

 

If you buy, look at small, slightly drafty homes with no claim history, preferably older. Check for mould very carefully. Buy in an area that is well served by public transit of one form or another. Stay away from lovely looking new suburbs, far from the action, and buslines. These are the mouldering slums of tomorrow.

 

My income, at the moment, is derived from revenue property, so I'd love to be able to argue the bull side of the coin, but that's the way the cookie (and eventually, the facade)crumbles.---Assteroid aka Threadbear.

[Hypertiger]

Fxfox

 

"Yes that IS much, but is it a monster style bubble? Yes there will be lower prices, but will that the beginning of the end of the world?"

 

That is not the plan, grabbing the unfortunate victims, of the current and unfolding economic situation in America, By the ankles and violently shaking them over wheelbarrels untill even their gold fillings fall out is the plan... Then maybe the world will end...

 

When the "shock" comes if the buffer (savings and equity) is not big enough to fill the gap it will be over, in fact it is over already... That is the problem, no buffer, except the FED and they are too busy filling other kinds of gaps. In the end there are just to many gaps... It is only a matter of time.

 

Just have to wait and see if a "miracle" will show up...

[EasyAl]

Here are some interesting view of FNM and FRE from Fed about two years ago. It seems that someone inside the fed was concerned about the GSE's aggressive expansion. Although the view is moot now as the government's surplus becomes deficit, it is interesting that it was worry the massive credit expansion of Freddie and Fanie.

 

 

WASHINGTON -- The Federal Reserve sideswiped the two big government-sponsored mortgage companies, Fannie Mae and Freddie Mac, in a newly released report.

 

The central bank said it worried that if it were to buy Fannie Mae or Freddie Mac bonds as part of its conduct of monetary policy, such a move could aggravate what it views as the economic distortions and risks to the financial system that the mortgage companies already pose.

 

The report was prepared two years ago, when budget surpluses had raised the prospect that the Fed would have to find alternatives to the shrinking supply of Treasury bonds for conducting monetary policy in the money markets. That prospect has receded with the return of government deficits, which will require the issuance of more Treasurys to finance. By buying and selling such instruments, the central bank can affect the money supply and thus interest rates.

 

But one section of the report for the first time highlights why the Fed would be reluctant to buy the debt of the government-sponsored enterprises. The Fed's purchase of such paper would "inappropriately foster the ability of the [agencies] to expand their operations," said the report, released Friday, which was written by staff and isn't a statement of central bank policy. "This expansion could further affect credit allocation and increase systemic risk." Systemic risk refers to the possibility that one financial institution's problems could, through its links with trading partners and lenders, ripple through the financial system as a whole.

 

more here (WSJ online subscription required)

[subprime]

YB,

 

You are right about different markets being affected differently. I thought initially when this topic came up 8-10 months ago that you were stating that it would be a uniform, take no prisoners collapse. While I generally agree that the housing market will, at the very least, be soft for some time and that there will be markets that do decline, I do not see owning property here in the midwest as a poor proposition. While there certainly are areas and property here that is laughably priced, this area has been among the most stable in history.

 

San Antonio and Houston are perfect examples of the rise, fall and rebirth of a city as measured by real estate prices. Timing the real estate market is as difficult as timing the stock market and a lot less liquid as you mentioned. Furthermore, if you like your home, the community and have kids in local schools what social and emotional costs do you incure? To be single or an empty nester and try to time a possible real estate implosion is one thing, a family man would be hard pressed to pull this off and if he did he better be damn sure or it could cost him a lot more than a possible lost capital gain on his home.

 

Happy Holidays to All,

 

Sub

[Guest yobob1]

sub, I still feel there will be widespread valuation corrections in housing and as I have always stated those areas with the largest gains will suffer the largest losses, sort of like the dot.bomb mania. People refuse to accept that property values can go down for long periods of time and yet all you have to do is look at markets like Japan or Hong Kong (where land is very "tight") and you can see that the "impossible" can and will happen.

 

What is most troublesome for our markets is the degree of decimation that equity has suffered throughout this rising price environment. While prices have soared, equity has fallen to the point now that the aggregate equity in all existing mortgages is now under 16% and increasingly due to larger homes, prices and sleazy credit the percentage of after tax income earmarked for housing has risen to 60% or more in a lot of recent mortgages. With equity percentages this low it doesn't take much of a drop to put people under water.

 

I understand all the social and family issues when it comes to a home sale and I have never advocated that everybody sell their house. I didn't come to my decision on a whim. I contemplated it for the last 2 years and really wrestled hard with it for 6 months before I sold. I just think everyone needs to be honest in their valuations and be prepared to accept the consequences of their decisions. You need to look around and ask yourself is the percentage of vacant housing (including rentals) rising? What are the realistic prospects for the local job market; improving, stagnant or declining? It won't matter if you are in Chanute Kansas or Seattle, if conditions are not favorable, home values may drop.

 

The primary motivator for the increase in home values has been easy credit and artificially low interest rates. What will happen when the credit tightens(it will), interest rates rise (very possible) and job losses mount (they will)? What happens when all these new 0% or 3% down home owners suddenly realize that home ownership is more expensive than renting? Foreclosure rates are already rising rapidly and soon that stealth overbuild I refer to will rear it's ugly head in most markets. Just check the number of rentals available in your market.

 

The powers to be will extend this thing as long as possible, but in the end it is a losing battle just as Nasdaq 5000 was a losing proposition. Sooner or later you run out of greater fools for one reason or another. 3% annual appreciation is not a gift from God or a birth right.

 

Joe Six Pack dove into the stock market and got his head bit off. He has been encouraged to borrow beyond any reasonable limits and consume, consume, consume. Joe has no savings, because the stock market was doing it all for him and then when stocks failed, there was Joe's house. All that juicy easy equity sitting there ready to be harvested so he could consume, consume, consume. And now Joe has no savings, no big stock winnings, no equity left in his house and at best a pile of depreciating crap and at worse a mountain of payment books. What will Joe do when winter comes to his neighborhood?

 

Perhaps somewhere tucked into a hidden corner of the corn belt is an island of sanity where people haven't treated their homes like ATM's and home prices haven't been pushed up by allowing the most unqualified to have the "right" of home ownership. Follow the yellow brick road and try and not run over Toto on your way to this mythical place.

 

OK! Enough D&G!

 

Happy and Safe Holidays to all. In the coming year take the time to smell the roses, go fishing and pet a dog. Money is an invention of man, not a necessity for life.

[fxfox]

yobob,

 

that was one of the best statements on the "housing bubble" issue in the US, which is from a german persepctive not so easy to understand.

I ever thought: "they think it is a bubble, cause prices go up since 50 years, or what? Car prices go up since carl benz did built the first car!"

 

Now i understand better. Prices will fall, because there will be not enough demand, and that is because people dont have the money anymore because they lost everything in the stock market and even worse, they lost their job.

 

But why name that housing bubble? You ever heard about florida housing market in the early 1920s? THAT was a bubble! In Galbraights classic book about 1929 there are a few pages about that bubble.

 

Prices in California are highr because everyone wanna live in a sunny area and if there is the sea than it is even better. In Arizona it is also hot, but there is no sea, so prices not that high like in California

In Montana, where fox and rabbitt say good night, prices are not that high.

 

Cote d'Azur pirces are high, higher than in Denmark.

 

Prices in east germany did go up drmamtically after re-unification, espacially in major cities like leipzig and dresden, after a while they dropped. Why? Because not enough jobs were created and espacially not enough well paid jobs, so there was not enough demand to satisfy the high prices.

 

Prices in hongKong dropped, because there is now the "backland" on chinese territory, so there is more room to built houses. So demand isnt that high anymore.

 

 

Yes, Japan was the mother of all real estate bubbles. But we cant compare that to the situation in the US, not even a bit!!!!

 

A ubble for me is something, when it explodes only a tiny rest will be there. So nasdaq was a bubble and is still today.

 

Real estate is no bubble, it is just a market where prices will drop.

[Goldilocks]

"I do not see owning property here in the midwest as a poor proposition. While there certainly are areas and property here that is laughably priced, this area has been among the most stable in history."

 

First of all let me state as a denizen of the Midwest.... ummm...ahhh... how to put this nicely? Pass that bong amigo, it must be fantastic shit!

Some examples....

My parents own a ~250k house in what used to be the #1 city in the US to live in with a population over 100k. It is now a mini-version of murder inc with yet another execution style murder last night, including the 2 kids and the grandma. This ain't Detroit folks...it's a hoighty toighty suburb.

Anyway, kitty corner to their house used to be some fallow land of around an acre. 3 years ago someone built 2 McMansions and spent a year trying to convince people to pay over 600k for the houses. Some asinine fool apparently went over 700k on one of 'em. In a subdivision with NO further growth potential. Those were the last lots. Stable? Hardly. Nor are the prices of all the homes around it since they were subsequently dragged up in 'potential price' and thus refi'd on.

 

I have family members who have paid close to 200k for small little ranches in not so desirable neighborhoods. These houses a decade ago were in the low 100's if that.

 

Stable? Hardly....

 

Oh, and another thing...... Everyone keeps harping about how the real bubbles are the most obvious ones and how that is only where the problems might be. Hogwash. Michigan is utterly dependent on the Auto industry. You think that is stable right now? All the UAW blue collar drunks... Oh...ummm.. sorry... I mean UAW blue collar workers are facing rewrites of their contracts. The last round they gouged the Auto makers. This will not be as likely this time around now will it? Yet these workers have bought McMansions, Refi'd existing homes at 110% and dutifully bought their new SUV's with 15-17 MPG city on credit. There is NOTHING stable about Michigan right now.

 

A rumor is now floating around that Chrysler is looking to sell all, or a good portion of their relatively new world headquarters. There is some truly amusing speculation that it will be turned into a mall. The freaking place is the size of a city. Underground it is a maze.

How is this stable to the local economy? Losing high paying blue collar jobs by the thousands to MAYBE be replaced by minimum wages? HA!

 

It will not take 25-30% drops in housing to crush people here. It will take far, far less. That ain't stability.

 

Oh, and uh, if you think MI going down will be a 'localized' event...... Ummmmm.... Ahhhh...... ok...sure... Pass that damn bong already!