New home sales tumbled 9.2 percent in January, the government reported Monday, coming in below Wall Street forecasts and raising worries about rising interest rates and the nation’s housing market.
Next pop – the bond market.
Back to Main
February 28, 2005
Pop! – Goes the Bubble
Comments
Richard Berner of Morgan Stanley agrees
Housing fundamentals, in my view, are as good as they get, and activity is likely to decline over 2005 and 2006. Among the reasons: Previously favorable demographics are turning less supportive, much pent-up demand seems to have been satisfied, soaring housing prices have made purchase less affordable, interest rates are gradually rising, and starts are slightly out of line with sales.
But he doesn´t expect a fall in housing prices, just a “rust”. There I disagree.
Last year, the real wages of hourly workers, who make up about 80 percent of the work force, actually dropped for the first time in more than a decade; hourly workers’ health and pension benefits are in free fall.
Posted by: slothrop | Feb 28 2005 17:28 utc | 3
From slothrop’s link
“The real risk lies more in stagflation than deflation.”
As the author Jane Jacobs noted:
What is stagflation? It is a condition of high prices and high unemployment. Where do we see that? Mexico would be one place. While US citizens may find Mexico’s prices cheap, Mexicans do not. For a Mexican, they are very high. This is combined with high unemployment. Mexico suffers severely from “stagflation”. This is not as bad as it gets. Belize, a place Mexicans go to for vacations (at least they did about 15 years ago when I was wandering the Gringo trail) is even more moribund.
What is stagflation? Quite simply, it is economic collapse.
Posted by: edwin | Feb 28 2005 17:53 utc | 5
It´s getting worse and worse. Did you know:
Social Security “will be bust in 10 years unless there are some changes,”
said George W. Bush at the Midland Country Club, Texas, in 1978
NYT
Speaking of Mexico, one of the strangest things I encountered during my time with Mexican exchange students was how much they bought when they were here. The clothes they bought themselves were much more expensive because of the Canadain-Mexico exchange rate, but they told me it was cheaper to buy them here then at home. I still don’t understand it.
Posted by: The Key | Feb 28 2005 18:02 utc | 8
For as long as I’ve been paying attention, very few in the US have looked at their overall finances — read CASH — and decided how much house they can afford. Rather, they ask themselves “what’s the maximum monthly payment I can make?” and work backwards from there, figuring out how much of a mortgage they can afford.
Low interest rates after 2000 helped them afford more house for the same monthly payment.
Then, that wasn’t enough to keep sales up, and banks and promoters focused hard on variable-rate loans. Thus, with an ARM, you can get even MORE house for the same monthly payment.
More recently, and even now, on the radio here in NYC, there are many advertisements for the next step: Interest-only loans. It’s a variable interest rate, and only interest payments are required for the first 10 years. EVEN MORE for the same montly payment.
Until, that is, interest rates rise, and that edge-of-what-they-can-afford monthly payment is well above what they can afford. Oh, and the house will only be worth 60% of their purchase price, if they’re lucky.
This isn’t just going to hit folks on the low end. This will extend well into the upper-middle class. How long will it take for defaults to begin? And then what happens to disaster-in-waiting FNM (Fannie Mae), which is holding most of the mortgages?
Between the above and the US dollar drop, perhaps B and others with plenty of euros in cash are going to get to go on quite the shopping spree in US real estate.
Posted by: mats | Feb 28 2005 19:25 utc | 9
b.
You sound a bit like Chicken Little with your rather negative headline. The main story did not seem all that frightening after all. I tend to agree that there will be a collapse but it simply cannot be as drastic as you expect it to be. The very wealthy will not allow this to happen. You will find some kind of bailout being proposed if foreclosures start happening in the upper middle class. It is not good business if everybody goes broke….it only works if just the poor lose their shirt(s).
If on the other hand the dollar is soon to follow the Reichsmark perhaps the only chance ordinary people have is to take a chance on owning real property, it may be expensive but it sure beats having garbage bags full of worthless paper.
Posted by: dan of steele | Feb 28 2005 19:42 utc | 10
@Dan – I don´t know if there will be a drastic fall in house prices. In some local markets it could be, others might even increase in prices.
In some areas prices have increased to much over the last years and when demand falls, prices in those areas will fall significantly. If the marginal price drops, markets will overreact.
Today folks buy homes because they expect them to appreciate and it is therby better to buy now then later. When the marginal price drops a bit, folks expect prices to fall and it is therby better to wait than to buy now.
When the expectation environment changes from rising to falling prices, this leads to dramatic self enforcing swings in markets.
It is just normal market behaviour.
@b
The question I would have for you is, why would demand fall? The US’s as well as the whole world’s population is growing. These people need/will need a roof over their heads. Land is getting scarcer, we haven’t discovered any continents in quite a while.
I tend to believe that the cost or housing will continue for a while on its upward spiral.
Posted by: dan of steele | Feb 28 2005 21:49 utc | 12
Dan and b, I believe housing prices will float along without much gain for a few years. Then prices will continue to go up for two reasons.
First, boomers will start to retire and want two homes. One in their home state and one where they winter.
Second, the largest generation since the boomers, the millenials start graduating from college this year and will start flooding into the housing market over the next twnety years. Thats 80 million people.
Add in-migration onto that and housing prices will continue to rise.
I do believe housing prices in the midwest and upper plains states will stagnate (except resort vacation areas) or go down as more people try for warm climates and the coast. But they will be back to states around the great lakes sooner or later due to water resources. The southwest and other areas are to dry to continue the water policies out west. Unless, they can commoditize the water and divert it.
Posted by: jdp | Feb 28 2005 22:20 utc | 13
Found behind a subscription wall:
the number of new one-family homes for sale in the U.S. is now greater than at any time since recordkeeping began in 1963. In addition, the ratio of homes-for-sale to houses-sold has crept back to levels not seen since mid-2000
@dan: why demand would fall: please check the Berner article I pointed to at the begin of this thread:
Previously favorable demographics are turning less supportive, much pent-up demand seems to have been satisfied, soaring housing prices have made purchase less affordable, interest rates are gradually rising, and starts are slightly out of line with sales.
Berner explains this in detail, but he thinks overall prices will not drop much. It’s an overall view on the US market. If you look at those markets that have appreciated (and matter) the most, the drop will be conciderable. Here market psychology will have the most effect just as it had when prices raced upwards.
Another (more funny argument) why the top in house prices is in, can be found in yesterdays (funny) OpEd by LA Times’ Michael Kinsley in WaPo: Bye-Bye, Housing Boom
In escence he says BECAUSE, WaPo, NYT and LA Times have recently written house prices will not fall, they will do so.
Nice contrarian thinking and he even makes fun of himself.
Dan: You know, there are literally tens of countries with a booming population, but without a house bubble. Why? Well, easy, they’re 3rd world nations and people just don’t have the money to afford McMansions.
It’s not that the demand will go away as far as people’s wishes are concerned, it’s just that with massive layoffs, increasing oil costs and other bright Bush policies, they won’t have enough money to put in the housing market.
Posted by: Clueless Joe | Mar 1 2005 1:12 utc | 15
I’m scheduled to unload my house on April 7. As I’m going to get approximately 225% of what I paid for it a mere six years ago, I’m really hoping the house will appraise high enough and the buyers won’t get cold feet before then.
So, go on, tell me there isn’t a (local) bubble.
Posted by: Tom DC/VA | Mar 1 2005 1:23 utc | 16
C’mon……McMansions are not representative!! But I found something that is verrry representative in a Bob Kuttner art. in Boston Globe last week. It blew my mind. Fully the bottom 80% of Americans have a lower standard of living than the bottom 80% of Europeans. Chew on that awhile!!
Posted by: jj | Mar 1 2005 2:32 utc | 17
Todays NYT: Speculators Seeing Gold in a Boom in the Prices for Homes
Within six months last year, Carlos and Betti Lidsky bought and sold two condominiums. Then they bought and sold two houses. They say they will clear a half-million dollars in profit, and none of the homes have even been built.
Now Mr. Lidsky, a lawyer, and his wife, a charity fund-raiser, have put down a deposit on a fifth property, a $1.3 million condo in a high-rise under construction, and are planning to sell before the deal closes, without even taking out a mortgage.
“It is much better than the stock market,” Mr. Lidsky said. “This is an extraordinary, phenomenally good result.”
When was the last time I heard such talk? DOW 36,000 anyone?
B: As a colleague said to me last year, now that the Dow is down, housing is the only thing to compete with drug trafficking if you look for high profit margin.
Posted by: CluelessJoe | Mar 1 2005 13:00 utc | 19
Some insight from and old investment professional:
Sir John Templeton
Americans were famous 30 years ago for being so thrifty. They were saving over 20 cents out of every dollar they earned. Last year, Americans saved less than 2 cents on every dollar.
All those things add up to the fact that there is almost sure to be a period of pessimism – a bear market. Not a crash, but a bear market.
The old rule of thumb for brokers was: The bear is about half as long as the bull. If I had to say when this bull market started, I would say 1990. So it’s 14 years old.
The immediate future is that there are more dangers than I’ve ever known before. It’s just more dangerous.
…
If you’re passing a newsstand and a stack of newspapers, one of which says 100,000 airplanes landed safely today and one that says one airplane crashed, you’ll buy the newspaper that says the one airplane crashed.
Terrorism warps your thinking.
It makes people think that there are a lot more troubles than there are. But there are less troubles than ever, and we don’t realize, because we read about all the problems.
To answer those who think prices will keep rising because demand is supposedly constant (because people need a roof over their heads), consider that a study recently found that a full 1/3 of homes being bought were second homes, and that 1/4 were bought as investments.
In other words, there are literally hundreds of thousands of houses being bought for no other reason than that people expect them to be more valuable tomorrow. That demand will go *poof* the moment it’s clear that 10% year after year appreciation is a thing of the past.
And as for the idea that they’re not making any more land — true, but they’re sure making more houses. I live in Costa Mesa, California, land of the $800,000 1950s crackerbox three-bedroom. It happens that many of said crackerboxes are on large lots (by SoCal standards, at least) of 8,000 square feet or above. Some of those lots are zoned for multiple units. What are smart developers doing? Buying up the old houses on big lots, which tend to be single-story and designed with inefficient floor plans, knocking them down, and throwing up little cul-de-sacs on the lots with seven compact two-story single-family houses (with virtually no yards, but that’s how most new houses down here are being built anyway.)
In short, even in built-out areas, there’s plenty of room for additional development.
Posted by: Tom the Bear | Apr 1 2005 23:05 utc | 21