Housing Froth

Awesome Asian Take on American Economic Denial

Asia Times Online :: Asian news and current affairs - US housing bubble: Economy in denial

Let it

China Business Big Picture

be Yahoo warning about advertising revenues; let it be Dell's warning that its eternal rebate programs cannot push sales any more; or let it be the automakers that sell many of their brands at prices below last year's level, yet are still unable to boost volume. All these incidents are linked to the US consumer; and US consumer spending, in turn, is very closely linked to the health of the housing market. It also comes as no surprise that so far this year, the US dollar has fallen significantly versus a basket of currencies.

Bernanke & the Bubble

Everyone wants to know how new Fed Chief Bernanke will handle what his predecessor coined as the "housing bubble". Here's one take:

Centre Daily Times | 04/24/2006 | Goldilocks economy yields to Jekyll-Hyde.

Another quarter-point rate hike at the Fed's June 28-29 meeting would push short-term rates to 5.25 percent, influencing bank loan rates for consumers and businesses.

That would complicate the housing outlook further.

The hot housing market and cheap lending rates helped fuel much of the current economic expansion. National Realtors Association data show median home prices grew 53.2 percent between 2000 and 2005.

Many economists think that steep rise reflected a speculative bubble fit to burst in the hottest markets on both coasts.

Just about every indicator now suggests a slowing housing market, especially in California and Florida. New housing starts nationwide fell 7.8 percent in March, and prices appear flat for existing homes, which are also lingering longer on the market.

"The anticipated degree of decline in starts for 2006 (6 percent to 7 percent) still qualifies as a 'soft landing' for the housing market, following unsustainable exuberance in 2005," David Seiders, chief economist for the National Association of Home Builders, wrote in his April 19 column.

"We expect much of the decline to reflect withdrawal of investors/speculators from housing markets" as double-digit gains in home prices become less likely.

New Paper from Brookings Institution Points to Bubble Formula

Here's an excellent story that covers a new paper being put forth to estimate whether there is a "bubble" in a particular market. Here's the germ of the story, "Is there a bubble? Do the math":

They concluded that not only was the Los Angeles region not in a bubble, but also that many markets others were calling overpriced, including Chicago and Boston, were probably underpriced.

Their findings are at odds with other surveys that use the relationship of home prices to income to determine whether home buyers are overreaching. Homes in Orange County were fairly priced, the Smiths found. Some cities like Dallas, Indianapolis and Atlanta were screaming bargains. Homes they surveyed in San Mateo County, south of San Francisco, were, however, overpriced by about 54 percent.

The key to their work is a paper published here:

In a paper presented at the Brookings
Institution last month, “Bubble, Bubble, Where's the Housing Bubble?” they said that even though prices had risen rapidly and some buyers
unrealistically expected the trend to continue, “the bubble is not, in
fact, a bubble in most of these areas.”

They argued that the value of a home is determined by the rent it could fetch. Calculate the future rents, subtract mortgage payments, taxes and other costs, factor in a good annual rate of return of 6 percent or more, and one should be looking at the proper price of a house or condo.

Their bottom line: “Buying a house at current market prices still appears to be an attractive long-term investment.”

See text version of the paper here.

Iceland Bubble

If you've made a recent investment in Iceland, you may brace yourself for a grimace.

With a population on a par with a midsize city and a gross domestic product of around $10.3 billion, or just below that of Rwanda, Iceland would not seem to be on the radar screen of many financial experts. But analysts from Merrill Lynch, Danske Bank, Fitch, Standard & Poor's and Moody's Investors Service and economists around the world have weighed in, some expressing concern, others saying fears of an Icelandic meltdown are overblown.

 

Nicolas Bouzou, the chief economist of Institut Xerfi, a research concern in Paris, feels that Iceland could be the "butterfly's wing" that sets off serious problems in capital markets around the world. That is because "many countries have the same macroeconomic configuration of Iceland," Bouzou said recently by telephone. That configuration, he said, included a "real estate bubble, very strong credit expansion and a very high commercial deficit." The same could be said of New Zealand, Australia and even the United States, he added. If investors lose money in Iceland, they will pull out of other countries with similar economic structures, he said.

More Naysaying in Los Angeles: No Housing Bubble

So, yeah, either the LA portion of the bubble is just puffing for a louder poof or there ain't no bubble as of Spring 2006.

Housing Prices in L.A. Aren't Letting Up - Los Angeles Times.

If this is a bubble, it's sure taking a long time to pop.

For the first time, the median price of a Los Angeles County home topped the half-million-dollar mark last month, data released Wednesday showed.

Four years ago, the median was half that. By doubling in such a short period, it's no wonder Los Angeles County appears on many lists of the nation's most-overvalued home markets.

The increasing prices comfort recent home buyers such as Brian Kite. The West Los Angeles resident waited three years to buy a house because he thought prices were too high. He plunged in about a year ago, spending slightly more than the median price for a three-bedroom home not far from UCLA. The median is the level at which half the homes are sold for more and half for less.

Some homeowners struggle to keep up with adjustable rates - Yahoo! News

Here's a window into the possible future of our variable housing bubble:

Some homeowners struggle to keep up with adjustable rates - Yahoo! News.

For 45 years, Robert and Lorraine Brown have lived in their ranch-style home in Florissant, Mo. One of their four children was even born there. But for the past eight months, the couple have been locked in a sleep-wrecking race to keep up with their rising mortgage bills. They've switched to cheaper phone service, cut back on groceries and sometimes put off ordering medicine.

When they refinanced their home two years ago to pay off some bills, Robert, now 78, was working as a deliveryman. But his employer went out of business last April. Now he and Lorraine, 72, a retired nurse, are both seeking work. The rate on their mortgage has jumped from 7% to 10.5%.

"We were having a hard time meeting bills at the time we refinanced. It seems once you get behind, you do desperate things to catch up, and you never do," says Lorraine, trying to hold back tears. "At the time of the loan, they tell you, 'Well, it may go up, but it's probably going to go down.' You want it to be so, so you believe it."

Cautionary California Tale

Here's a great personal story about people being caught when the bubble bursts.

Link: MONEY Magazine: Real Estate: The state of the bubble - Jan. 19, 2006.

NEW YORK (MONEY Magazine) - Rory Moore, semiretired and a self-described "dabbler" in real estate, bought his neighbor's house in Los Banos, Calif. last May for $499,000. Make a few fixes, he figured, and flip it a couple of months later for a six-figure profit.

But then the property, listed at $699,000 in July, failed to attract even one buyer in the first 30 days.

"I could feel it in my gut that the market was changing," says Moore, 54. "The market had been crazy here, with 25 percent appreciation in a year. I could see the handwriting on the wall." By December, Moore had dropped his asking price twice, to $565,000, and he was dangling incentives like covering a year's worth of gas or utilities and 12 months of lawn service.

He's given up the notion of making a profit on any deal. In fact, he's eager to be rid of the place: "I don't want to get stuck with a property that's a financial drain on the family. We'll do what we have to do to get it sold."

Uh-oh. Signs are a-popping that the era of explosive price gains -- 20 percent to 30 percent annually in some markets -- is kaput for at least the next few years. In the past four months, the median asking price has fallen 5 percent or more in Boston, Cleveland, Los Angeles, Miami, Phoenix and Washington, D.C., reports blogger Ben Engebreth's Housing Tracker website, which compiles weekly data on 49 cities.

Charlotte Observer | 01/14/2006 | 11,000 Dow cooling of housing, bonds = rebound for stocks

This is part of what Greenspan meant when he coined "housing froth". In a frothy world, bubbles form in one spot and burst in others. The housing market bubble popping is leading to a re-bubble on the stock market.

Link: Charlotte Observer | 01/14/2006 | 11,000 Dow   cooling of housing, bonds = rebound for stocks.

"We've already seen individual investors showing some signs of interest in the fourth quarter, and something like Dow 11,000 just increases that interest," said Jeff Kleintop, chief investment strategist for PNC Financial Services Group in Philadelphia.

Since the dot-com bubble burst in 2000-01, the housing market has taken off. The number of home sales climbed steadily since 2001. And while the Dow eventually fell to 7,286.27 on Oct. 9, 2002, home prices have doubled or even tripled in some areas, such as New York, San Francisco and southern California.

OverZellSupply

Here's what Zell hs to say:

Link: Latest Business News and Financial Information | Reuters.com.

CHICAGO (Reuters) - The risk of a housing bubble in the U.S. market is highly localized as supply is still catching up with demand in most of the country, U.S. real estate magnate Sam Zell said on Thursday.

 

"There will be a softer real estate market in some areas as a result, but I keep telling people there is no bubble," Zell told Reuters after an economic conference in Chicago. "The fact remains that even with the gains of the past five years, American residential real estate prices in relative terms are among the cheapest in the world."

Housing Bubble Lessons from our Friends in Shanghai

There's an awful lot we can learn about how to spot a housing bubble from our friends in China.

Link: A Home Boom Busts - Los Angeles Times.

SHANGHAI — American homeowners wondering what follows a housing bubble can look to China's largest city.

Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.

For the first time, homeowners here are learning what it means to have an upside-down mortgage — when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.