Monday, August 15, 2005

Housing Bubble, RIP

Continuing the theme of predicting the end of the housing bubble, this article makes some points worth considering but really nothing new to those of us who actually think. But of course, silly me, I forgot, Marin is special. It is immune to the laws of economics. Bursting RE bubbles are things that happen everywhere else, not here. It's "God's country" after all.

Some choice quotes:
"The Fed Has Been Raising Interest Rates Now for 15 Months. To the Frustration of Fed Chairman Alan Greenspan, These Increases Have Coincided with a Continued Surge in Housing Prices and Activity."

"Greenspan needn't regard this as a conundrum. As economist John Mueller has noted, when interest rates begin to rise, there's usually a surge in housing volume and prices for up to 12-18 months."

"That's because potential homebuyers, and especially speculators flipping homes or adding second or third properties to their portfolio, rush to lock in at low rates before they move higher. Anyone with an e-mail address has been bombarded with notes urging them to "act now" while mortgages are at historic lows."

"As rates reach their top, the opposite dynamic will set in over a 2-3 year period. A top in sales volume and prices, even a modest decline for a few months, will cause would-be buyers to wait."
Surely the Fed is aware of the above mentioned dynamic. Yet, nevertheless, the fact that the Fed describes recent RE history as a conundrum possibly suggests that the Fed thinks "this time, it's different" and they expected a different response to their actions. Maybe what's different is that this RE bubble has NOT been fueled by improving fundamentals like rising salaries, better and more prevalent jobs, a brighter economic outlook, etc. and the Fed knows it and so expects a different outcome.
"The Above Trends Have Been Fueled Synergistically in Recent Months by over-the-Top Aggressiveness by the Lenders and Homebuilders. The Share of Homes Bought with No Down Payment -- Zero Money Down -- Has Surged from Below 20 Percent Two Years Ago to About 40 Percent in Recent Months. Many of These Loans Were Combined with Teaser Interest Rates of 4-5 Percent."

"Those ARM loans, and the phase out of first-year rates, will, over the next year and a half, cause the monthly mortgage payment of many homeowners to rise by between 30 and 70 percent."

"The net impact [of policy tightening and new regulation] should be to put a ceiling on housing prices, and the stock prices of homebuilders and lenders. If the housing boom picks up for one last leg, regulators will be inclined to crack down on questionable practices. If inventory surges and prices decline even modestly, they may be forced to do so, or lenders may have to curb the excess on their own."

"Either way, like generals fighting the last war, regulators and lenders will likely be behind the curve -- acting, but too late, and defensively. This was the pattern during the S & L crisis of the 1980s."

"By next summer, there will be newspaper headlines and magazine covers, and congressional hearings, demanding to know why the Fed and Treasury allowed the bubble to grow so large -- and hence, made the correction so severe."

"Prices may not decline and could even rise in the Midwest, but on the overbought East and West coast -- which are also, note, heavy users of energy, and have crazy-high property and income tax rates -- the
re should be a nice price correction of say 25 percent."

"In the short term, markets, as George Soros have observed, seem to have a need for reflexivity. They "want" to go to excess. In the long run, of course, reflexivity works both ways. What`s gone up too much is likely to come down too much."


Blogger fredtobik said...

"Prices may not decline and could even rise in the Midwest, but on the overbought East and West coast -- which are also, note, heavy users of energy, and have crazy-high property and income tax rates -- there should be a nice price correction of say 25 percent."

So a house in Marin will be worth what someone paid for it in 2003, if the 'bubble' hits tomorrow.

Tick Tock...

Aug 16, 2005, 9:09:00 AM  

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