zamo

http://www.corante.com/mooreslore/ar...tate_wreck.php

If this is true, peeps with ARMs will get a hit.

Jeez, I do not wanna see what I've already seen back home. Home value depreciation of up to 40%

CrockPot

tell us something we don't know.

zamo

I already did

doopstr

I wish it would hurry up and crash so I can buy a new house.

Red-CL

fdl

He brings up some interesting points but ignores the fundemental reality of supply and demand, which is the biggest factor in large urban centers.

ccannizz11

Spoiler!!

moeronn

Man, I watched your rant smiley for a while. Probably the longestsmiley around - took about 20 seconds from start to "end".

fdl

are you on drugs?

moeronn

Uhhh... no. If you want, I can fill a cup for you. Should look about the same color as your avatar I was just surprised with how long long the loop sequence was. It's actually quite amuzing.

ccannizz11

On a serious note...

my mom's in real estate and I've heard her talk about this a few times. It makes sense to me, but it's always difficult to predict the future..... how or why something will happen

zamo

Correct; well the article talks about recession which translates to low demand which translates to excess supply, which translates to lower prices.

But there is always money coming from foreign countries, and that can help the demand staying high.

dallison

house prices seem too inflated now and almost unattainable

riceboy

i still say its better than paying rent

LegendC

ARM's are ok....granted the rates are going to go up....but they will still be affordable.

Interest Only loans are in REAL trouble though....because they never earn equity by paying off the principal, only on the increased value of the real estate.

dallison

yer not paying someone elses mortgage

Zapata

Silver™

Since the Great Depression real estate on a national level has never fallen. That is nearly 80 years of appreciation. I for one don't believe there will be a national bubble that will pop, some regional markets will see a decline, but that happens every year, as a whole real estate is still a safe bet.

mt6forlife

And even when bubbles do burst, the only people who get screwed are the ones who sell right after. Back in the early 90's, SoCal real estate "collapsed". Everyone remembers those as dark days. Prices fell something like 25%. But even if you'd bought the day before the peak, you'd be waaaay ahead today. If you're trying to flip houses and make fast cash, now's probably a good time to cash. But if you're buying a house to live in and know you'll be there a while, you should be fine.

Fibonacci

Riotous Real Estate
by Mike Davis

Last February the sirens howled in Hollywood as the LAPD rushed reinforcements to the 5600 block of La Mirada Avenue. While a police captain barked orders through a bullhorn, an angry crowd of 3000 people shouted back expletives. A passerby might have mistaken the confrontation for a major movie shoot, or perhaps the beginning of the next great L.A. riot.
In fact, as LAPD Captain Michael Downing later told the press: "You had some very desperate people who had a mob mentality. It was as if people were trying to get the last piece of bread."

The bread-riot allusion was apt, although the crowd was in fact clamoring for the last crumbs of affordable housing in a city where rents and mortgages have been soaring through the stratosphere. At stake were 56 unfinished apartments being built by a non-profit agency. The developers had expected a turnout of, at most, several hundred. When thousands of desperate applicants showed up instead, the scene quickly turned ugly and the police intervened.

A few weekends after this tense confrontation in Hollywood, another anxious mob -- this time composed of more affluent home-seekers -- queued up for hours for an opportunity to make outrageous bids on a single, run-down house with a cracked foundation in a nearby suburb renowned for its good schools. "The teeming crowd," wrote Los Angeles Times columnist Steve Lopez, "was no surprise given the latest evidence that California's public schools are dropout factories."

Los Angeles' under-funded, overcrowded, and violent schools, according to a recent report by Harvard researchers, currently fail to graduate the majority of their Black and Latino students, as well as one-third of whites. Parents, as a result, are willing to make extraordinary sacrifices to move their children to suburbs with functioning public education. This gives the old adage that "location is everything" in real estate a new twist: Housing in Southern California is universally advertised and graded by the prestige of local school districts.

The Southern California housing crisis, of course, has a sunnier side as well. In the last five years median home values have increased 118 per cent in Los Angeles and an extraordinary 137 per cent in neighboring San Diego. Homes, as a result, have become private ATM machines, providing their owners with magical, unearned cash flows for purchasing new sports utility vehicles, making down payments on vacation homes, and financing increasingly expensive college educations for their kids. Second mortgages and home refinancings, according to a Wharton Business School survey, have generated an astounding $1.6 trillion in additional consumption since 2000.

The great American housing bubble, like its obese counterparts in the UK, Ireland, the Netherlands, Spain, and Australia, is a classical zero-sum game. Without generating an atom of new wealth, land inflation ruthlessly redistributes wealth from asset-seekers to asset-holders, reinforcing divisions within as well as between social classes. A young schoolteacher in San Diego who rents an apartment, for example, now faces an annual housing cost ($24,000 for a two-bedroom in a central area) equivalent to two-thirds of her income. Conversely, an older school bus-driver who owns a modest home in the same neighborhood may have "earned" almost as much from housing inflation as from his unionized job.

The current housing bubble is the bastard offspring of the stock-market bubble of the mid-1990s. Housing prices, especially on the West Coast and in the East's Bos-Wash corridor, began to rocket in the second half of 1995 as dot-com profits were ploughed into real estate. The boom has been sustained by sensationally low mortgage rates, thanks principally to the willingness of China to buy vast amounts of U.S. Treasury bonds despite their low or negative yields. Beijing has been willing to subsidize American mortgage borrowers as the price for keeping the door open to Chinese exports.

Similarly, the hottest home markets -- Southern California, Las Vegas, New York, Miami, and Washington, D.C. -- have attracted voracious ant columns of pure speculators, buying and selling homes in the gamble that prices will continue to rise. The most successful speculator, of course, has been George W. Bush. Rising home values have propped up a stagnant economy and blunted criticisms of otherwise disastrous economic policies.

The Democrats for their part have failed to address seriously the crisis of millions of families now locked out of home-ownership. In a bubble city like San Diego, for instance, less than 15% of the population earns enough to finance the cost of a median-value new home.

Accordingly, if "values" were the basis for the Bush victory last November, they were property values not moral principles or religious prejudices. In the face of the perverse housing bubble, the Kerry campaign, as with healthcare costs and the export of jobs, was simply running on empty. It offered no compelling alternative to the status quo. But the Republicans have more serious things to worry about than Democrats. As the real-estate bubble reaches its peak, George Bush may discover that he has been surfing a tsunami and that a towering cliff looms ahead.

The bubble has already burst in San Francisco, and the April 11th issue of Business Week headlined fears that a general deflation – perhaps of international magnitude – is nigh. What will life be like in the United States (or Britain or Ireland) after the home-equity ATM shuts down?

The business press, as always, reassures passengers that they are headed for a "soft landing," a slowdown rather than a crash, but even a mild jolt may be sufficient to end the current anemic recovery and throw all the dollar-pegged economies into recession. More ominously, some eminently respectable Wall Street economists, like Stephen Roach of Morgan Stanley, have been warning of a dangerous negative-feedback loop between the foreign-subsidized housing bubble and the huge U.S. trade and budget deficits. ("The funding of America," he has written, "is an accident waiting to happen.")

At the end of the day, American military hegemony is no longer underwritten by an equivalent global economic supremacy. The housing bubble, like the dot-com boom before it, has temporarily masked a mess of economic contradictions. As a result, the second term of George W. Bush may hold some first-class Shakespearian surprises.

Mike Davis is the author of Dead Cities and the forthcoming Monster at the Door: the Global Threat of Avian Influenza (New Press 2005).


http://www.commondreams.org/views05/0419-22.htm

SpeedyV6

mt6forlife

Its the same here. I could have never bought a house on my own. It now takes two full time incomes to buy anything at all. Three would be better.

Fibonacci

Homes: U.K. went cold; U.S. could too

U.S. homeowners can learn a lot from the housing slowdown in the U.K. market.
May 4, 2005: 4:58 PM EDT
Sarah Max, CNN/Money senior writer


SALEM, Ore. (CNN/Money) ?Americans aren't the only ones who've gotten rich off real estate. In fact, home price gains in the United Kingdom dwarf those of the United States.

Between the fourth quarter of 2000 and 2004, U.K. home prices increased 88 percent, on average, according to the Halifax house price index. U.S. home prices, meanwhile, increased 35 percent during that time, according to the National Association of Realtors.

The U.K. housing market started to gain steam in the late 1990s, beginning with the higher-priced properties in London and spilling over to virtually every region and every type of housing. "Buy-to-let" became all the rage as investors shifted funds from their traditional portfolios into rental properties.

"Every week there were stories in the paper about people making more on their property than going into the office," said Ed Stansfield, property economist at Capital Economics in London.

Then, with little warning, the market cooled.

"It was rising at a 20 percent annual rate and then suddenly stopped in its tracks," said John Calverley, chief economist and strategist of American Express Bank in London and author of "Bubbles and How to Survive Them."

While economists disagree on whether the U.K. is experiencing a temporary lull or the beginning of a housing bust, buyers there seem to be waking up to the idea that double-digit price gains can't last forever. Prices overall have been flat, with small increases in some areas and declines in others.

Speculators seem to be having second thoughts. Sellers are wondering where all the buyers went. Retailers say that "house rich" shoppers are sitting on their wallets.

"My sense is that the U.K. market is two or three years ahead of the U.S. market," said Calverley. Every market has its own dynamic, but there are lessons to be learned from what's playing out across the pond.

Lesson: Rising rates do take a toll
During the U.K. housing heyday, most experts agreed that higher interest rates would probably dampen buyer enthusiasm. As in the United States, many argued that the effects wouldn't be drastic because higher rates usually go hand-in-hand with an improving economy.

Yet, U.K. buyers -- who typically finance with monthly adjustable-rate loans -- did eventually take notice after the Bank of England started raising rates. By most measures, housing prices started declining in June 2004 after the bank's third quarter-point rate increase.

The Federal Reserve's eight quarter-point rate increases have done little to scare away U.S. buyers, who unlike their U.K. counterparts have the option of getting a fixed-rate mortgage. In the priciest markets, however, many buyers are resorting to interest-only loans in order to afford the monthly payment. These buyers are most vulnerable to the double-whammy of rising rates and declining home prices.

"In the U.S., the markets that are most risky are those where there is a higher proportion of buyers using adjustable loans and interest-only loans," said Thomas Skinner, managing partner of Redbrick Partners, a U.S. investment management firm that invests in single-family housing and is modeled after similar U.K. firms.

Lesson: Speculators are a fickle bunch
Investors who bought property with the idea of flipping it for a quick profit or renting it out played a key role in driving up U.K. housing prices.

Now they appear to be on an extended holiday.

According to the Council of Mortgage Lenders, lending to "buy-to-let" investors dropped 18 percent between the first and second half of 2004 ?compared with only a 3 percent drop for owner-occupied buyers. During that time, the number of such investors unable to meet their mortgage payments increased 50 percent.

"People were buying thinking they'd rent it out and make 15 or 20 percent appreciation, but now they're left with only the rental yield," said Stansfield at Capital Economics.

Investors haven't rushed out to sell property, he said, but demand for the type of property favored by investors is quite weak. If prices remain flat or decline, "you'll probably see a round of investors who decide they're overexposed and need to unload some of their property."

Lesson: Supply isn't so limited after all
A year ago, everyone believed the supply of houses for sale simply could not keep up with demand. It was a sellers' market.

"There was a view that prices would keep going up forever," said American Express' Calverley.

Today, it appears buyers have the upper hand. According to the Royal Institution of Chartered Surveyors, the supply of houses for sale in March is fully a third greater than it was a year ago.

"In these markets there is a herd instinct where people rush out to buy but then as soon as people think differently suddenly there are no buyers," said Calverley.

There is a backlog of property for sale, more is coming up for sale and so sellers ?who usually prefer to keep houses on the market rather than lower their asking price ?are starting to rethink that strategy.

The impact of psychology on the housing market is slower than in the stock market, Redbrick's Skinner added. But if people are buying with the expectation of prices going up 15 percent, he said, demand will drop off the moment the expectation changes.

Lesson: When the going gets tough, some foreclose
When the U.K. market was hot, said Stansfield, lenders became increasingly lenient in their credit standards, allowing for higher debt-to-income ratios, smaller down payments and more creative financing.

"The mortgage industry took great pleasure in the fact that the number of people in arrears was very low and possessions (foreclosures) were at an all-time low," he said.

But as rates rise and double-digit price gains disappear, borrowers are starting to feel the squeeze. As of February, the number of mortgage repossession actions in the courts was at the highest level in five years, and many expect it to rise further.

"What we're seeing now is the first signs of stress," said Stansfield.

Lesson: Housing woes affect the rest of the economy
The U.K. housing market hasn't gone bust. But homeowners can no longer rely on double-digit price gains to prop up their standard of living -- and that reality is trickling through to the rest of the economy.

According to an article in the Financial Times, High Street retailers are finding a "sober mood" among consumers, while demand for big-ticket items, such as cars, has dropped off sharply. Households have suffered from a "money illusion," said one economist quoted in the article, and are only now realizing that they actually aren't richer.

"You have a lot of people here [in the United States] consuming housing wealth," said Skinner explaining that some homeowners are either spending their home equity or saving less because they assume their rising property values will fund their retirement for them. "Even just a slowdown in appreciation would probably impact spending," said Skinner.


http://money.cnn.com/2005/05/03/real...sons/index.htm

zamo

One day it will STOP and adjust itself. Historically, nothing continues to grow at a very high pace. I will assume that some locations will see home depreciation.

Dfreder2

My generation, the baby boomers, (I'm 53) is larger than the generation that follows us, generation X. As the baby boomers die off, their houses will become vacant, and subject to a smaller pool of buyers. Hence, the decrease in home values.

Supply and demand. Pure and simple.

Fibonacci

Not only that, but your generation was the direct beneficiary of long term secular trends in the interest rate cycle. In 1975, when my parents bought their first home, their mortgage rate was in the low teens...over the next 30 years -- for a variety of factors (too long to list here) long term rates marched lower. Obviously, we all know that low interest rates increase affordability and also pump up asset prices.

The problem is that with ballooning Federal and State Deficits, not to mention the impending health care and pension crisis...long term rates will inevitably go higher.

Silver™

I think we have had this discussion before.

Anyways, you are leaving out immigration. Between now and 2050 the US population will grow by +100 million people, something like 2/3 of them will be immigrants and children of immigrants born here. 100 million new people = a lot of homes that will need to be built.

And while Generation X is smaller than the Baby Boomers, Generation Y is bigger than the Baby Boomer generation. And Generation Y is more affluent and now starting to get into the housing market.

Also, between now and their deaths, Baby Boomers are still going to move, still buy vacation homes, etc...

Fibonacci

I'm pretty sure immigrants won't be able to afford million dollar homes, thus it is natural to assume some degree of home deflation, primarily in the current "hot" markets.

Silver™

It's safe to assume that few people can afford million dollar homes.

Even if they buy the cheapest homes, that allows other to sell and buy better homes.

Silver™

I would not call the trend "marching lower"


1972 7.38
1973 8.04
1974 9.19
1975 9.04
1976 8.86
1977 8.84
1978 9.63
1979 11.19
1980 13.77
1981 16.63
1982 16.08
1983 13.23
1984 13.87
1985 12.42
1986 10.18
1987 10.20
1988 10.34
1989 10.32
1990 10.13
1991 9.25
1992 8.40
1993 7.33
1994 8.35
1995 7.95
1996 7.80
1997 7.60
1998 6.94
1999 7.43
2000 8.06
2001 6.97
2002 6.54
2003 5.82
2004 5.84

http://www.federalreserve.gov/releas.../data/a/cm.txt


And even when rates were into the teens people still bought and there was still price appreciation.

Dfreder2

Just trying to point out that this is a cyclical trend.

Silver™

I agree that the housing market is cylical.

But I just disagree with your theory that the aging Baby Boomers will lead to price declines, the last time national home prices fail was the Great Depression, before any Baby Boomer was even born...

Fibonacci

Those who don't learn from history are doomed to repeat it.

jdone

Many folks are clearly confused with that "fact" about national home prices not falling since the Depression. Remember, that's a national average, prices in your particular area are what count. In the 80's Houston had a crash of over 30% and NY had a crash in the early 90's of over 25%. Yeah, they eventually came back over the years, but what if you have to sell sooner.

Silver™

I don't think anyone is confused. But when talking about a national housing bubble, national housing prices/trends are what is most important.

I don't think anyone isn't aware of regional housing downturns, I think most people have lived through them at some point. There were I believe about a dozen markets in the US where the average price declined last year. But nearly all the regional downturns were precipitated by specific economic events/regional recessions. In Houston it was the Texas oil industry suffering major loses and in SoCal it was the military reductions after the cold war that cost several hundred thousand high paying jobs.

Fibonacci

Bubble, bubble, housing market's in trouble, author warns
By Lyn Millner, Special for USA TODAY
In March 2000, when our stocks and our sensibilities were tripping through the stratosphere, Yale economist Robert J. Shiller tried to yank us down to Earth. His first edition of Irrational Exuberance pointed to a bubble in the stock market.
Some of us covered our ears with our hands and sang "la-la-la-la-la." Others pooh-poohed him outright. Then the market headed south. And it didn't rebound.



Irrational Exuberance, Second Edition, by Robert J. Shiller; Princeton University Press, 304 pages, $28.


And Shiller went from being Chicken Little to Paul Revere.

His book was a best seller.

Now, Shiller has seen fit to update Irrational Exuberance. In this new edition, he warns that there's a bubble in home values. We haven't lost the irrational exuberance Greenspan chided us for in 1996, he writes. We've redirected much of it to real estate.

Did someone say "real estate"? Oh, can we please talk about real estate? Because we are obsessed with it. Home values are skyrocketing, people are profiting mightily and all of us are yammering with everyone (friends, neighbors, strangers, kindergartners), everywhere (cocktail parties, elevators, gyms, Jiffy Lube waiting rooms). Just as stocks were in the '90s, real estate is the public conversation. We are ravenous for more information.

And we are irrational. That's what causes bubbles, Shiller points out. Our irrationality is fed and amplified by optimistic forecasts from analysts, by the media, by the perceived effects of the baby boom and the rise of an ownership society. We rationalize the boom with new-era thinking and the theory of efficient markets.

Shiller covered all of this in the first edition. In fact, the lion's share (bear's share?) of this edition is lifted straight from the first. There's the added chapter on real estate, and some updated examples from the stock market.

Why a whole new edition? Why didn't Shiller pen some magazine articles instead, discussing the dangers of real estate speculation? Because we're listening — perhaps even more than we did in 2000 — and he knows it. And this edition feeds our howling appetite for all things real estate.

So. On to the juicy chapter, which opens with a chart of U.S. home prices from 1890 to present. Beginning in 1998, the line shoots skyward. Cue the dirge music.

When it comes to real estate, Shiller writes, we cling to the myth that home prices always rise. It's not true. Shiller shows that, since 1890, real home prices have been flat or declining.

The only dramatic increases are confined to two brief periods — right after World War II and the current one. The World War II boom was caused by actual demand and a corresponding shortage of housing to fill that demand. Today's boom is driven by speculation.

Before you cover your ears and start singing, consider Shiller's cogent arguments. Could the run-up in home values be the result of rising construction costs? Nope. Charts show that these two increases are vastly disproportionate.

What about the population surge that has created a land shortage? Shiller's charts show that population growth in the USA has been steady. And, he adds, "We didn't just run out of land since the late 1990s."

Speculation is what is driving prices upward. And it's "more entrenched on a national or international scale now than ever before."

Real estate prices are rising much more rapidly than incomes. People are stretching themselves thin to pay their mortgages, many of which have adjustable interest rates. And rates are headed up.

When will the bubble burst? Shiller is too smart to try to predict that. And how bad could it be? Pretty bad. It might set off a worldwide recession. That scenario is "not inevitable, but it is a much more serious risk than is widely acknowledged."

What should we do? Shiller has a few suggestions.

Mortgage lenders should tighten their standards to prevent individuals from borrowing beyond their means. Investors should increase their savings and diversify into bonds. (Stocks are still overvalued, he argues, compellingly enough that even the most bullish readers may shift some money into bonds.)

Shiller also presents a recommendation for Social Security reform, and he argues that monetary policy and opinion leaders can and should act as stabilizing forces.

The big problem with this book is the writing. It is snooze-inducing. Shiller's topic — the volatility of markets — is dangerous. But his book conveys none of the suspense. And that's not good, considering that it will be on lots of nightstands. Reading it may help many people, but not in the way Shiller intends. Someone as bright as he is has a responsibility to make his expertise more accessible.

The first edition of this book was widely read because of its timing.

This one, too, seems perfectly timed, coming when we're starting to fear we've been fooling ourselves. Again.

"There are times when an audience is receptive to optimistic statements and times when it is not," Shiller writes. And he seems to know that our tolerance for optimism is low.

Who should read this book? Anyone who didn't read it the first time, including fund and endowment managers, lenders and individual investors.

There's a world of important information for everyone.


http://www.usatoday.com/money/books/...uberance_x.htm

BigPimp

It feels like right now it is not stopping but rather picking up steam. People are typically the most bullish at the beggining of a bear market and the most bearish at the end of a bear market. Popular media is getting into coverage of the Real Estate Boom. Prime explamples, Fortune cover "Real Estate Gold Rush" and CNBC did a whole day last Friday on the boom.

This is basically the middle of the end. Now, as general public, ie less savvy gold rushers, get into this, pumped up by the media, the prices will keep going up, only to blow up. However, I am yet to figure out the catalyst to bring the prices down. I have a general idea, but it's too long to formalize right now.

SpeedyV6

The Fed Starts to Show Concern
At Signs of a Bubble in Housing


In the debate over whether the housing market is a bubble about to burst, the crowd that argues it isn't has been able to cite reassuring utterances by Federal Reserve officials. But there are proliferating signs that the housing market is looking a bit frothy. And now the U.S. central bank is beginning to worry more about it.

It isn't only that housing prices keep rising faster than almost anything else, up 10% on average nationally in 2004, according to the U.S. Office of Federal Housing Enterprise Oversight, and up 25% or more in the hottest markets in California, Florida and Nevada.

It isn't only that the clever mortgage industry keeps coming up with new ways to lend people money to buy houses that involve ever-more leverage and little -- or sometimes no -- down payment.

It's that more people are buying second and even third homes, expecting that prices will continue to rise so they can sell the houses quickly at a profit -- and that is drawing the Fed's attention. The National Association of Realtors says its surveys find that 23% of all homes purchased in 2004 were for investment, and a further 13% were vacation homes. It's as if Americans got tired of the stock market, and decided to look elsewhere to try to lose money.

For a long time, Federal Reserve Chairman Alan Greenspan dismissed suggestions that the U.S. was in the early stages of a housing bubble. He talked about the extraordinary demand for houses among hard-working immigrants. He emphasized that housing, unlike stocks, is a local market, so it's almost impossible to have a national housing bubble. He explained that it's hard to speculate in a house that you own because to sell it you have to move out.


But there has been a little more concern creeping into his commentary in the past few months. "We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," he told a House committee in February. Mr. Greenspan speaks to the Economic Club of New York at lunchtime tomorrow. If housing comes up in his remarks or if he is questioned on the subject by one of the prominent economists there, look for the Fed chairman to mention -- as Fed Governor Donald Kohn did recently -- the upturn in people buying vacation homes, second homes or other homes on the risky bet that housing prices will continue to rise as they have lately.

Mr. Greenspan hasn't yet hit the "irrational exuberance" gong, the phrase he used to warn about the stock market in December 1996. The Fed and other bank regulators, however, this week warned banks to take more care with home-equity loans, noting that such loans are "subject to increased risk if interest rates rise and home values decline." (Did you say decline? Gulp.) Even a slowing of the pace of increase in housing prices probably would dent consumer spending, which, for the past couple of years, has been helped by Americans tapping their home equity.

Other Fed officials have begun to express some anxiety. In a speech last month, Mr. Kohn said, "A couple of years ago I was fairly confident that the rise in real-estate prices primarily reflected low interest rates, good growth in disposable income and favorable demographics." Mr. Kohn was a longtime adviser to Mr. Greenspan before his appointment to the Fed board.

No longer. "Prices have gone up far enough since then relative to interest rates, rents and incomes to raise questions; recent reports from professionals in the housing market suggest an increasing volume of transactions by investors, who...may be expecting the recent trend of price increases to continue," Mr. Kohn said.

A surge in the number of people buying houses as a speculative investment is the contemporary equivalent of the story about Joseph P. Kennedy, father of the late president. According to the tale, he sold his stocks a week before the 1929 crash because he heard a shoeshine boy named Billy touting U.S. Steel and RCA. When the shoeshine boy starts giving you tips, he is supposed to have said, it's time to get out of the market.

The Fed, which contributed to the housing boom by keeping short-term interest rates so low for so long -- and encouraging the bond market to do the same with the long-term rates that determine mortgage rates -- doesn't expect a collapse of housing prices or an economic calamity. Mr. Kohn's worst case is "an erosion of real house prices" -- translation: an increase in house prices that falls short of the overall inflation rate -- "rather than a sudden crash."

Americans who have owned their homes for the past few years have a lot of equity in their homes: $9.62 trillion worth at the end of last year, up 13% from a year earlier, according to the Fed's tally. Even if house prices fall a bit, homeowners still will have significant equity -- except for those who have hocked nearly all the increase in home values with frequent refinancing or large home-equity loans.

But if house prices stop climbing, it won't be pleasant. Americans will feel poorer -- and they'll spend less as a result.

Write to David Wessel at capital@wsj.com8

URL for this article:
http://online.wsj.com/article/0,,SB1...837423,00.html

Fibonacci

Greenspan Says Housing Market `Speculation' Is Unsustainable
2005-05-20 14:47 (New York)


By Craig Torres and Alison Fitzgerald
May 20 (Bloomberg) -- Some regions of the U.S. housing market
are showing signs of unsustainable ``speculation'' and ``froth''
based on fast turnover of existing homes, Federal Reserve Chairman
Alan Greenspan said. The price surge may ``simmer down'' as
housing becomes less affordable, he said.
``It's pretty clear that it's an unsustainable underlying
pattern,'' Greenspan said in response to a question after a speech
on markets to the New York Economic Club. ``People are reaching to
be able to pay the prices to be able to move into a home.''
``There are a few things that suggest, at a minimum, there's
a little froth in this market,'' Greenspan said. While ``we don't
perceive that there is a national bubble,'' he said that ``it's
hard not to see that there are a lot of local bubbles.''
Combined sales of new and existing homes, townhouses and
condominiums have set four straight annual records, aided by low
mortgage rates. The median existing home selling price will rise
7.1 percent this year to $198,400, according to the National
Association of Realtors' latest forecast. Sales of new and
previously owned homes are expected to total 7.87 million this
year, trailing only last year's record.
There is no national bubble because homes purchases are too
expensive and complicated to foster that kind of investment,
Greenspan said. Because the U.S. real estate market is composed of
individual regions with different pricing trends, a collapse that
damages the overall economy is unlikely, he said.
Shares of homebuilders fell or extended losses after the
remarks, including Toll Brothers Inc. of Horsham, Pennsylvania,
and Pulte Homes Inc. of Bloomfield Hills, Michigan. The Standard &
Poor's Supercomposite Homebuidling Index declined 1.1 percent as
of 2:30 p.m.

Investors

Fed economists have determined that second home purchases are
partly responsible for driving up the ratio of sales to the
existing housing stock, Greenspan said. Because buyers wouldn't
face relocation costs, the Fed chairman said the more rapid pace
of second home purchases may reflect speculation in some markets.
A survey the Realtors group released March 1 found that 23
percent of homes sold in 2004 were purchased by investors.
``When you get speculation, there are only a couple of ways
for it to end, and they are not good,'' said Jay Mueller, senior
portfolio manager at Wells Capital Management, a Menomonee Falls,
Wisconsin-based division of Wells Fargo & Co. ``We are nowhere
close to income growth matching house price appreciation.''
There's a risk that consumer consumption may decline if the
housing market slows, Greenspan said. ``If it occurs, and
eventually it will, it will reduce the fairly large and still
accelerating degree of extraction of equity from existing homes,''
he said. ``This has been a major force in financing consumption
expenditures.''

`Simmer Down'

While Greenspan didn't explain why he expected the surge in
home prices to ``simmer down,'' he noted that buyers have to
resort to unusual financing techniques, such as interest-only
loans, to afford homes now.
Earlier this week the Fed and other banking regulators warned
banks that they should tighten controls on home equity loans that
they said are too often offered with no documentation of a
borrowers assets.
Long-term interest rates have added fuel to the home price
surge. Yields on U.S. government 10-year notes stand at about 4.12
percent, down from about 4.7 percent a year ago.
David Berson, chief economist at Fannie Mae, said in a report
this week that the affordability of homes in some regions is at
its lowest level since the mid-1980s because of huge prices
increases. Nationally, housing affordability, a function of
prices, mortgage rates and income growth, is in the middle of its
10-year range.

Median Prices

The median selling price of a previously owned home rose to a
record $195,000 in March, the latest statistics from the Realtors
group showed. Compared with the same month in 2004, which was a
record year for home sales, the median price has increased more
than 11 percent. Previously owned homes account for 85 percent of
the residential real estate market.
Three metropolitan regions in Florida led the nation in price
growth, according to the group. The strongest price increase was
in Bradenton, where the first-quarter median price of $275,000 was
46 percent higher than the same period in 2004.
In the San Francisco Bay area, the nation's most expensive
region for homes, the median price was $689,200.
``Low mortgage interest rates are drawing new households into
the market, but some are disappointed by their inability to find a
home that meets their needs,'' said David Lereah, the Realtors
group's chief economist, in a May 12 statement.
The average rate on a 30-year fixed mortgage this year has
averaged 5.78 percent, close to the four-decade low of 5.21
percent that was reached in 2003, according to mortgage purchaser
Freddie Mac.
``Continuing low rates will keep the housing industry
abuzz,'' Frank Nothaft, chief economist at Freddie Mac, said
yesterday. ``It is remarkable how mortgage rates have remained so
low for so long.''

jdone

I'm not sure why we pay much attention to what Alan Greedspin says. Remember, he was the guy in 1996 who warned us that the market was overpriced-then the Dow went up another 80% and the Nas. 200%. This was a guy who entered government service because he was a failure in the private world. This is also a guy who kept interest rates insanely low for way too long, causing the value of the dollar to collapse and the price of oil in dollars to skyrocket.

For my money (and yours), His Lordship Sir Alan has way overstayed his welcome!