Fibonacci

So you're going to blame Alan for American's appetite for cheap consumer goods and for driving gas guzzling SUV's too? Or how about let's blame Alan for globalization and for China and India assimilating some of the best domestic born, US educated back to their home countries...Or let's also blame Alan for American consumers running up record debt loads and let's also blame Alan for the shitty vehicles coming out of Motown.

You're giving one guy way to much credit.

jdone, you are done.

Fibonacci

So you could say that the people who lost during the bear market of 2001-2002 when the NASDAQ declined 70% were adequately warned.

I think you can also say the the people who are chasing real estate riches at the top are have been forwarned too.

Home prices in metro areas soar
By Sue Kirchhoff, USA TODAY
WASHINGTON — Home prices keep going up.

A home for sale in San Francisco, one of the country's most expensive real estate markets.
By Jeff Chiu, AP

A record number of metro areas showed double-digit appreciation in median existing-home prices from the first quarter of 2004 to the first quarter of 2005, according to the National Association of Realtors. The group's list shows 65 of 136 cities had double-digit price increases; six had modest price declines.

CHARTS

Q1 median home prices, alphabetical list
Q1 median home prices by percentage change





Florida was the most frenzied market, with Bradenton, Sarasota and West Palm Beach-Boca Raton leading the nation in price growth. In line with recent trends, the strongest price gains were on the East and West coasts. Overall, the median existing single-family home price rose 9.7% to $188,800 in the first quarter, from $172,100 in the first quarter of 2004.

David Lereah, chief economist for the NAR says that the price gains were driven in part by tight supplies in some markets, adding that the price situation could improve next year if interest rates rise. But several economists, including members of the Federal Reserve, say the record housing market can't be explained by such factors as a growing economy, tight supply or low interest rates. They're warning that some markets are ripe for a price slowdown or fall.

"I thought the housing market was overdone two years ago, but I think it's through the roof now in many places," says Mark Zandi of Economy.com. "I said it with lots of caveats and I wasn't screaming very loudly, but now I scream loudly. Our clients are very concerned; they're looking carefully."

There is evidence of speculative buying in hot markets. Real estate firm DataQuick Information Systems at the request of USA TODAY analyzed how often buyers are flipping houses — reselling after owning for less than six months.

Flipping now makes up 11.5% of current home sales in Las Vegas, compared with 2.4% five years ago. In red-hot Phoenix, quick resales are 5.2% of sales, from 2.9% five years ago. In Los Angeles, however, such activity has decreased to 4.1% from 4.3%. For the nation as a whole, the flipping figure is 3.7%, compared with 2.4% five years ago, DataQuick says.

While the NAR report covered existing home sales, home builders also see rising sales and prices. They expect the trend to continue, given the difficulty of buying land and clearing zoning hurdles on the coasts.

"Business is just as good as it's ever been. I expect it to moderate over time, but I don't expect it to come crashing down," says Steve Hilton, co-CEO of Scottsdale, Ariz.-based Meritage Homes. "Housing is a basic need; its not necessarily an elective."

http://www.usatoday.com/money/perfi/...nar-usat_x.htm

doopstr

Looks like is pumping up the market.

http://www.msnbc.msn.com/id/7964489/

Existing home sales surged in April

Record gain of 4.5 percent seen raising bubble fears
Updated: 11:09 a.m. ET May 24, 2005

WASHINGTON - Sales of existing homes rose 4.5 percent in April to the highest sales pace on record as low mortgage rates continued to fuel a housing boom, a national trade group reported Tuesday.

Is your Enterprise GOOD To Go? Go to www.good.com to learn more.
The National Association of Realtors reported that sales of single-family homes and condominiums climbed to a seasonally adjusted annual rate of 7.18 million units last month, the fastest pace on record.

The increase was far above the small 0.2 percent advance that had been expected and was credited to further declines in mortgage rates.

The strength in sales last month was accompanied by further upward pressure on home prices. The median price for an existing home sold last month rose to a record $206,000, up 15.1 percent over the median price a year ago.

That represented the biggest 12-month gain in home sales prices since November 1980 and was certain to add to concerns that the housing industry could be experiencing a speculative bubble similar to the stock market bubble which popped in the spring of 2000.

David Lereah, chief economist at the Realtors, said he agreed with concerns expressed last week by Federal Reserve Chairman Alan Greenspan, who said that while he did not believe there was a national housing bubble certain local markets were exhibiting characteristics of unsustainable price increases.

Certainly there are some select areas where there could be some froth,” Lereah said in releasing the new report.

The new report said that the 7.18 million sales rate in April compared to a revised 6.87 million sales pace in March and was the highest pace on record, surpassing the old mark of 7.02 million sales at an annual rate last June.

By region, sales were up 7 percent in the South, 5.8 percent in the Midwest, 4.3 percent in the Northeast and were unchanged in the West last month.

Reddly9007

Honestly, this can't keep up! Wages are not rising that fast! Up 15% from last year is unbelievable! If this keeps up the avg median home will be in the low 230k and almost in the 270k range with in two years! What the hell is going on in this country, i'm going to have to move to a remote area in order to buy a freakin house. FHA first time buyer loans max. at 219k I think and that would be like living in the ghetto soon. I really need to hit the lotto or something

fdl

Mania over real estate spurs fears of a crash

Mania over real estate spurs fears of a crash
As housing markets overheat, economists forecast a plunge that will burn indebted

By SHAWN MCCARTHY

Tuesday, May 24, 2005 Page B7

NEW YORK -- Playboy's Miss May, Jamie Westenhiser, may well be to the 2005 real estate bubble what the ubiquitous cabbie with a stock portfolio was to the 1990s dot-com frenzy: An indication it's time to get out.

The 23-year-old former Hooters girl told the magazine that she wants to abandon her modelling career to take up real estate investing, after she uses her Playboy earnings to pay off her debts.

Ms. Westenhiser hails from Hollywood, Fla., one of the hottest real estate markets in North America. And she is clearly not alone in her ambition to get rich by investing in real estate.

As with the dot-com bubble in the late 1990s, speculators are now fuelling overheated housing markets in many cities across North America. And as interest rates climb this year, many economists forecast that the inflated prices will crash back to earth, badly burning heavily indebted latecomers and speculators.

"Prices are likely to fall in places where they have been booming the most, and where people are having trouble affording the houses," said Yale University economist Robert Shiller, who has published a second edition of his book, Irrational Exuberance, which covers the housing market boom.

California and Florida lead that list, along with cities such as New York, Boston, Las Vegas and Phoenix.

"I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history," he said in a telephone interview yesterday.

Last week, U.S. Federal Reserve Board chairman Alan Greenspan denied there is a national real estate bubble, mainly because there is not a "national" housing market. But he acknowledged that "there are a lot of local bubbles."

He added that, in many key markets, there is an "unsustainable pattern" of speculation and reliance on mortgages that require little or no down payment to buy a home.

Mr. Greenspan argued that house prices -- which have risen at double-digit rates for several years in many U.S. cities - will soon "simmer down" but are unlikely to fall because there is a natural demand for housing, unlike technology stocks.

David Rosenberg, chief North American economist for Merrill Lynch & Co., yesterday begged to differ with the revered Fed chief. Prices "can and will fall," Mr. Rosenberg said in an interview.

Mr. Rosenberg said that despite Mr. Greenspan's somewhat reassuring comments, the Federal Reserve has signalled it is aware that key housing markets are experiencing unsustainable price increases.

He said that with the exception of Vancouver, Canadian real estate markets have not experienced the same speculative excesses as many U.S. cities, although house prices have climbed significantly.

The National Association of Realtors reports that a record 66 of 136 metropolitan areas had double-digit first-quarter increases in the median housing price this year compared with 2004.

In Orange County, Calif., the median price for a house sold was $657,000, a 15-per-cent increase from the first quarter of 2004, while the New York area saw an 18-per-cent increase in the median price, to $435,000. (The median is the mid-price point, with half sold above and half below.) At the same time, more buyers are purchasing homes as investments, often with little or no money down, or using mortgages on which they pay only interest. The realtors' association recently said that 23 per cent of homes sold in 2004 were purchased as investments, with such sales up 14.4 per cent from 2003.

Economists are worried that a downturn in the housing market will spread to the broader economy because U.S. homeowners borrow so massively against their home equity to finance consumer spending.

Mr. Rosenberg said U.S. homeowners boosted their liquidity by about $700-billion (U.S.) in 2004 through mortgage refinancing, home-ownership loans and capital appreciation.

Mark Zandi, chief economist with Economy.com, said he's worried about the vulnerability of the mortgage-backed securities industry, where hedge funds and other investors have made huge bets. That derivative industry funds many mortgages for home buyers, particularly for low-equity loans.

Problems in the mortgage-backed securities market could result in a credit crunch for would-be home buyers.

Mr. Zandi said his concern about the broader economy would escalate if the speculative interest in the real estate markets continues unabated, as he believes it will.

"If things continue on as they are for another year or even six months, the potential for price declines is that much greater and the risk to the economy is much more significant," he said.

http://www.theglobeandmail.com/servl.../TPRealestate/

DJDZ

What!!!!

The population in the US and all over the world continues to grow. Especially in the more desireable and high growth areas. Not to mention immigrant fluctuation in the coming years. One thing is for sure, land is fixed in quantity. There is only so much to go around. Supply and demand is true. But there will always be more demand for housing than the quantity of avaialble homes supplied. This, coupled with low interest rates have caused the increase in home prices.

Since we know there will always be a demand for homes, the driving force behind any reduction in home prices will be an increase in mortgage rates. If ths does not happen, don't expect a reduction in home prices,

Fibonacci

You might want to check your population growth tables...much of the growth in population is in third world countries, which last time I checked aren't buying million dollar McMansions on tiny suburban lots in the USA.

Fibonacci

Mmmmm, bubblelicious....


Million dollar homes double since 2000

California leads states with the most million-dollar homes and highest median home value.
May 24, 2005: 4:56 PM EDT


NEW YORK (CNN/Money) - As U.S. housing prices continue to creep higher, more and more of them are enjoying the elite status of a million-dollar home, according to a government report released Tuesday.

Since 2000, the number of homes across the country valued at $1 million has nearly doubled, the Census Bureau reported. The government estimates that one percent of all American homes are now worth a cool seven figures.

The study asked home owners to provide an estimate of their home value if it were on the market. California was at the top of list. The state had the highest concentration of million-dollar homes, with approximately 4.1 percent or 1-in-25 homes meeting the $1 million mark.

Connecticut, the District of Columbia, Massachusetts and New York followed California as the places with the largest percentages of seven-figure homes.

The survey also indicated that the national median home value, the middle point among housing values, has risen almost 16 percent since 2000. It now hovers around $140,000.

California also boasted the highest median home value across the country with $316,600, while Hawaii took second place with $302,300. Massachusetts and the District of Columbia also posted some of the highest median home values nationwide, the report said.

Housing values in West Virginia were the lowest across the country, with the median value at $78,201.


http://money.cnn.com/2005/05/24/real...ex.htm?cnn=yes

Silver™

Forget the part where he said "all over the world". The US population in 2000 was 281,000,000, by 2050 it will be approximently 420,000,000.

And that population will not be all old people in the 90's who don't move and buy new homes and vacation homes :killer:

The average age in the US in 2000 was 35.5, by 2050 it is estimated that the average age will only increase to 39, but the average lifespan whould increase by a deacde.

Fibonacci

Yes, and O' wise Silver, who will generate the 130,000,000 new residents of the good 'ol US of A?

Yes, that would be mostly Mexicans. Illegal and otherwise. They will drive demand in starter homes - but not million dollar McMansions - especially since rates are still at historical lows currently, but will most likely be higher in decades henceforth because of boomers drawing on the social welfare system.

Silver™

And who has caused a good portion of our population growth during the last few decades? Those same immigrants. We are not talking about illegal immigrants, but legal immigrants that make up the backbone of this country, who will account for a little over 1/3 of our population growth during the next 50 years.

And while they may not be buying the "million dollar" mansions, as you link above shows that accounts for only 1/100 of the housing market anyways.

Also, mortgage rates were over 13% back in the early 80's, yet somehow homes still sold and prices still increased

If the demand is there (and 140 million new people will ensure that) then there will continue to see prices increase, certainly not at the same rate of the last few years, but still solid increases...

Fibonacci

Count me as one legal immigrant who comprises a portion of the backbone.

Check your numbers again, during the 80's - the country did not experience any 'real' increase in real estate gains.

Silver™

Real Estate Median Sales Prices of Existing Single Family Homes

1980 62,200 11.67%
1981 66,400 6.75%
1982 67,800 2.11%
1983 70,300 3.69%
1984 72,400 2.99%
1985 75,500 4.28%
1986 80,300 6.36%
1987 85,600 6.60%
1988 89,300 4.32%
1989 89,500 0.22%

http://www.realestateabc.com/graphs/natlmedian.htm

Fibonacci

Thanks for providing median sales prices of existing single family homes.

Now, kindly do a google search and calculate "real" rate of return.

http://www.google.com/search?hl=en&q...%2C+definition

zamo

Very good point Those numbers should be readjusted with inflation.

riceboy

http://news.yahoo.com/s/ap/20050524/ap_on_bi_ge/economy

Silver™

Try being more specific next time.

But gosh, I guess everyone should rent and forget about the benefits of homeownership

Silver™

Will low mortgage rates remain around long enough to keep housing prices inflated?

It's a question worth asking amid new talk of a possible housing bubble even in the face of continued strength in the real estate market.

Friday, Federal Reserve Chairman Alan Greenspan said the nation's housing market showed signs of "froth", adding he didn't believe there was a nationwide housing bubble nationwide but that some local markets may be experiencing one.

Still the National Association of Realtors on Tuesday reported a record pace of sales of previously owned homes in April, with sales coming in at a 7.18 million annual pace. That's up from a 6.87 million sales pace in March, and it topped forecasts of a 6.90 million rate from economists surveyed by Briefing.com.

The median home price was up nearly 7 percent from March.

On Wednesday, the government is set to report on new home sales. That reading is expected to show a drop to 1.3 million in April from a record pace of 1.4 million in March.

The strong real estate market continues to be supported by low mortgage rates.

Mortgage financing firm Freddie Mac put the average 30-year fixed-rate mortgage at 5.71 percent last week. While that was higher than some weeks over the last year, it's still below any annual average rate since Freddie started tracking the numbers in 1973. And it's below the rate last June, when the Fed started raising short-term interest rates.

While the Fed rate hikes have led many in the housing market to say mortgage rates will soon rise, there is a small but growing number of experts who now say that long-term rates, including mortgage rates, won't necessarily rise as far or as fast as many had projected.

Last week Bill Gross, manager of the world's biggest bond fund, wrote a commentary predicting long-term bond yields would hold at or near their current low levels for several more years.

"If we had to forecast (and we do), we believe a range of 3.75 to 4.5 percent for 10-year nominal Treasuries will prevail during most of our secular time frame," said Gross, meaning three to five years.

Mortgage rates often follow the direction of long-term Treasuries, such as the 10-year, although not always in lock step. Frank Nothaft, chief economist for Freddie Mac, shares a similar view that mortgage rates can stay low along with the Treasury yields.

Nothaft says the 30-year should stay below 7 percent through the end of 2006, and not rise much past that in 2007. If that pans out, it would give the mortgage a five-year run below 7 percent, the longest stretch below that level since the six years ending in 1968. The loan last averaged above 7 percent in March 2002.

Nothaft said that low inflation expectations have kept long-term rates low even as the Fed has raised its target for the federal funds rate, an overnight bank lending rate, eight straight times, to 3 percent from 1 percent.

"The Fed has been very successful in wringing inflation out of the expectations of investors," said Nothaft. "Today's (rate environment) feels very much like the mid-60s."

Doug Duncan, chief economist with the Mortgage Bankers Association, admits he's also surprised by how low rates are, but he too sees them staying low. His group has forecasted 30-year mortgage rates at 6.75 percent at the end of 2006. He said in addition to low inflation expectations, strong demand for Treasury bonds and other U.S. debt from overseas has been a powerful force keeping interest rates low.

"Look around the world and ask where else you would rather have your money," he said. "It's hard to find a lot of places that can compare to the U.S."

But some economists who are less sanguine say they still see a housing price bubble. Dean Baker, the co-director of the Center for Economic Policy Research, admits he's been wrong about when mortgage rates would rise, but he still expects them to top 7 percent as soon as year's end. And he said that even if mortgage rates don't start to climb, he expects home prices to start coming down, sooner rather than later.

"We're building at a 2 million-a-year pace, which is more than demand, and we're going to keep building at that pace until home prices correct," said Baker. "It's already showing up in the rental market, oversupply is pushing down rental prices."

Baker, who last year sold his condominium and started renting an apartment in the same neighborhood, said he might be wrong about how close prices are to peaking, but he's convinced that current prices cannot be sustained, given the run-up in recent years.

"Even if rates stay low, the bubble will burst," he said. "I'll be surprised if can keep doing this for another year or two and not see downward pressure on prices. If rates go up, the fall will be faster."

But Duncan at the Mortgage Bankers Association said he believes even if mortgage rates jump, he's not convinced there will be a drop in home prices.

"I think it'll take a couple of (percentage) point move to make a substantial change in the market," he said. "I haven't seen an instance in the past when interest rates themselves brought home price declines in a local market.It's taken a combination of rising unemployment," and people moving out.

http://money.cnn.com/2005/05/23/real...rtgage_bubble/

Silver™

The blazing-hot topic at suburban cocktail parties this spring is whether there's a bubble in the residential housing market. No wonder. In 2004, existing home prices rose faster than in any year since the 1970s. Some markets are going bonkers. Alexandria, Va., is up 31% in 12 months; San Bruno, Cal., 25%; and parts of Manhattan, more than 50%. A front-page New York Times story featured a Florida couple who had bought and sold four properties -- two condos and two houses -- in the space of six months, clearing $500,000. And none of the homes had yet been built! "It is much better than the stock market," says Carlos Lidsky, who, with his ebullient wife, flipped the houses much as investors in the late 1990s jumped in and out of high-tech IPOs.

The power of fear. But while such signs of speculation are troubling, there is little solid evidence that a real estate bubble is puffing up. One reason for optimism is that so many people are worried. Fear puts a lid on prices.

Another reason is history. Since 1950, according to data gathered by Freddie Mac, which provides financing for mortgage lenders, U.S. home prices overall have never declined over the course of any year. By contrast, even the broadly diversified Standard & Poor's 500-stock index dropped in 12 years since 1950, and Treasury bonds fell in 17 years.

Certainly, individual housing markets can suffer boom-and-bust cycles. (Look at Houston during the 1970s and California during the 1980s.) But real estate prices as a whole have been remarkably stable. The housing market has characteristics, such as sales commissions and transfer taxes, that tend to dampen volatility. Skipping in and out of a house in a day or two isn't particularly feasible, and the vast majority of home buyers, unlike stock buyers, are in for the long haul.

As a result, though existing-home prices rose faster in 2004 than in any year in a quarter-century, they were up just 8.3%, according to the National Association of Realtors. Since 1950, residential real estate prices have increased an annual average of 5%, says Freddie Mac. That's only a little more than 1% per year after inflation.

In other words, if you buy a house expecting to get rich, you're a fool. Real estate is very different from stocks. With stocks, you get a high reward as a payoff for high short-term volatility. With real estate, you get a lower reward but a smoother ride -- a good thing because most people own just one home at a time, so they don't get the risk-dampening benefits of diversification.

No free shelter. But let's be clear: The house you live in is not an investment. It's an asset that produces nontaxable personal income, in the form of comfort and joy. When you sell your home, you have to buy another one. By contrast, if you sell your General Electric stock, you can do anything you want with the cash. And selling a home when prices are relatively high inevitably means buying a home when prices are relatively high.

Of course, you could sell your house and rent, which The Economist prescribed, only slightly tongue-in-cheek, in a recent editorial. Yes, rentals are cheap these days compared with home values. Owning your own house, however, provides not only extra security (the landlord can't boot you out when the lease is up) but also tax breaks.

And don't forget the consumer's best friend: the glorious 30-year fixed-rate mortgage. You can get a loan that's only slightly above the rate at which the U.S. government borrows. (As I write, the average 30-year fixed-rate mortgage costs 5.5%; the 30-year T-bond, 4.8%.) Unlike the Treasury, you have the option of refinancing your loan to take advantage of a decline in rates.

Getting back to bubbles: In his book Bubbleology: The New Science of Stock Market Winners and Losers (Crown Business, 2002), economist Kevin Hassett defines a bubble as "a period when the price of an asset (stocks, real estate, tulips, etc.) suddenly soars for irrational reasons and then collapses." The key word is irrational. Prices often rise for good reason. For example, the price of a share of eBay rose from $8 in 2001 to $32 in 2003. A bubble? Not at all. The increased value was rooted in fundamentals. Revenues nearly tripled over that period, and profits quintupled. In fact, eBay kept rising and now trades at $38.

What can you afford? In a bubble, prices get divorced from reality -- though reality, in financial terms, is often in the eye of the beholder. One measure is affordability. "If people are paying a realistic portion of their income for housing," Marc Louargand of Babson Capital writes in a letter to clients, "it is hard to see conditions as a bubble."

Louargand cites the housing-affordability index calculated by Economy.com. If the median family income in a market is exactly the amount needed to qualify for a loan to buy a house at the median resale price, then the index is 100. If the median income is more than sufficient, then the index rises above 100. Louargand found that of the 318 metropolitan areas tracked, only 29 had affordability indexes less than 100. "In fact," he writes, "the average index value as of year-end 2004 was 180, which indicates that the median family income can qualify for nearly twice the median home value."

How can so many Americans afford houses at a time of rising prices? High incomes and low interest rates. Rates may rise, but they won't necessarily cause prices to tank. As Louargand points out, "The last time we had high interest rates [in the 1970s], home prices were soaring." High interest rates indicate inflation, which tends to be good for hard assets like real estate. And even if rates jump a full percentage point, the number of sub-100 markets would rise from 29 to 43 -- still a small number.

Even in places where prices are soaring, worries of a bubble could be overblown because higher prices appear grounded in good old fundamentals. Garrett Thornburg, who heads Thornburg Mortgage, pointed out to me that in hot markets, such as San Francisco and Aspen, Colo., "it is difficult to bring new product online." Environmental regulations, zoning restrictions and a shortage of land create limited supply, he says, "so if you want to be there, you have to pay up." Freddie Mac's data also show lean inventories of both new and existing homes.

On the demand side, purchases of second homes are rising as baby-boomers get close to retirement, and "the rapid influx of new immigrants has enlarged the home-buyer pool," writes Value Line Investment Survey's William Ferguson.

Investing alternatives. I am, however, annoyed and concerned when I hear my friends, who have made big, unrealized profits on their condos, talk about putting together pools to buy and sell real estate. As if it's so easy! Sure, consider buying a few rental properties for income and holding them for 20 years. But making money in real estate is no cinch. You're up against some very smart competitors who do it for a living. If you're convinced that prices will continue to climb, it's better to join the experts than to try to outsmart them.

You can, for example, buy stock in homebuilders, a course I've advocated for several years now. Ferguson notes that many of these builders "have strong balance sheets" and own "a large supply of land in a relatively land-constrained business." The home-building sector ranked number one in early March among the 98 industries Value Line covers.

Among the stocks rated 1 for timeliness by Value Line are Beazer Homes USA (symbol BZH), which concentrates on entry-level and first-move-up buyers; KB Home (KBH), because its PEG ratio (the price-earnings ratio divided by the rate of earnings growth) is just 0.6, and anything below 1.0 is generally considered a bargain; and Ryland Group (RYL), which has seen its share price triple in two years but still trades at a P/E of 10.

The REIT alternative. One warning, however: Although homebuilder P/Es are low compared with the market as a whole (the S&P 500 has a P/E of 20), they've escalated significantly in the past few years, from about 8 to about 11. As a hedge, it may be time to look at the sector that ranks 96th on Value Line's list: real estate investment trusts. If housing prices start to weaken with rising interest rates, then rentals will come back into fashion, and apartment REITs should benefit. Among them: Archstone-Smith (ASN), AvalonBay Communities (AVB), Equity Residential (EQR) and United Dominion Realty Trust (UDR). Each of these REITs currently carries a dividend yield of 4% to 5%.

But the main question about a real estate bubble is, why should you care? If you own a house for the right reason -- to live in it -- then short-term fluctuations are meaningless. If you are thinking about a first purchase or a trade-up, then the main issues are whether you can afford what you want on your income and whether you want to spend the dough on a house or on something else. If you do buy, don't expect the value of your house to rise much faster than inflation. Remember, it's not an investment. It's something better.

http://www.townhall.com/columnists/j...20050523.shtml

Silver™

The U.S. housing market may appear frothy, with prices still notching double-digit gains in many areas, but it's not a bubble set to burst, economists and industry executives argue.

In fact, many economists say worries that housing looks a lot like the toppy stock market of the late 1990s are misguided and ignore the fact that real estate is a local market, not a national one, driven by local employment conditions.

"The housing market is local, local, local by nature," said Frank Nothaft, chief economist with mortgage finance company Freddie Mac (FRE.N: Quote, Profile, Research) . "So if the local economy is doing lousy, I can assure you that the housing market is not going to do well either."

Nationally, the supply of housing available for sale is far outpaced by homebuyers' demand. In fact, the oversupply conditions that Nothaft calls a prerequisite for a bursting bubble are absent.

"Generally, the housing market is very well in balance," he told a U.S. Chamber of Commerce event on Wednesday.

The U.S. housing market has defied expectations for years. Economists' have made annual bets that the sector will begin to ease, but home prices continue to climb more than 10 percent a year in many regions and statistics tracking new construction and home sales hit record after record.

"We have run out of adjectives to describe the housing market," Nicolas Retsinas, director of the Harvard University Joint Center for Housing Studies said at a recent mortgage bankers event. "Last year in the top 150 metropolitan areas, not a single one had a nominal price decrease."

Economists and other housing industry watchers keep a keen eye on price appreciation versus income growth, as well as the inventory of homes available for sale.

Prices have climbed much faster than family income over the past four years, but that has not pinched demand because buyers are spurred on by borrowing costs that remain near historic lows and mortgage products that keep very expensive houses affordable -- such as interest-only mortgages that lower monthly payments in the initial years of a loan.

What's more, the supply side cannot keep up with demand.

Economists say the inventory of homes available for sale is lean, standing at 4 months' worth for existing homes and 3.6 months' worth for new homes, according to data from the National Association of Realtors and the U.S. Commerce Department.

LOCAL CONCERNS

"Do we see a home price housing bubble that's going to burst? No. Do we see some individual markets that we get concerned about? I think so," Thomas Lund, interim head of single-family mortgage business at Fannie Mae (FNM.N: Quote, Profile, Research) , said at a recent Mortgage Bankers Association event.

Indeed, some markets look riskier than others, according to industry watchers.

Just as layoffs in the manufacturing and textile sectors have kept home prices lower in sections of the U.S. Midwest and South, military base closures planned throughout the United States may pressure prices in some towns and cities over the next few years, Freddie's Nothaft said.

But in some of the priciest markets, a strong job market will support buyer demand.

In the Washington, D.C., area for example, where the unemployment rate is less than 4 percent compared with a national rate above 5 percent, home price appreciation is not expected to ease much, economists and real estate analysts say.

"Ultimately, the level of home prices has to be consistent with income growth," said Lund.

"In those markets where job growth may not be as strong or income growth isn't as strong, house prices cannot rise at the rate we've seen in the past decade," he said. "In those markets where you continue to see job growth, I think you'll see strong house price appreciation."

http://www.reuters.com/financeNewsAr...toryID=8534898

Fibonacci

When was I not specific?

Cut and paste'o'rama...Silver, always has to get the last word.

There are tax benefits as well as many other benefits of homeownership - I've never stated that owning a home is bad. To the contrary, homeownership has been great for many Americans, myself included.

But, surely even you can recognize the dangers of a herd mentality.

Silver™

Long Treasurys bottomed at 4.05 percent last week as the GM-Ford-junk-derivative-hedge mini-panic faded; they are now 4.13 percent, mortgages mostly holding 5.626 percent.

The economic data were benign: core producer prices rose .3 percent in April, but core CPI was unchanged. The nominals, up .6 percent and .5 percent were dismissed as residuals from now-fading energy costs; oil stayed under $50/bbl all week. Industrial production was on the weak side, minus .2 percent, and capacity in use fell .2 percent to 79.2 percent.

However, housing starts and new permits in April roared back from a weak March, up 11 percent and 5.3 percent, which leads to the following Housing Bubble rant.

The financial press is now on official Bubble Watch; CNBC might as well have a bubble ticker scrolling along with stock prices, and the Wall Street Journal last week ran four prominent Bubble-related stories. One had some merit, arguing The Bubble as an artifact of too easy mortgages.

The first aspect of too easy is too low, as in rates. In the last four years, fixed-mortgage rates have been on a centerline of 5.75 percent, down from 7.75 percent through the 1990s. Thirty percent of a $100,000 annual income committed to a mortgage payment ($2,500/mo., less $350 for TI = 2,150 for PI) at 7.75 percent used to borrow $300,000. Today, at 5.75 percent, it's $368,000. That 20-ish percent increase does not explain the 49 percent increase in U.S. home prices since 1999.

However, convert to interest-only, increase the TI to $400 for a more expensive house, and the $2,100 remaining for interest at 5.75 percent will borrow $438,000. That 30 percent interest-only increase, even with post-90s income growth, does not explain the 102 percent five-year run in California, or 112 percent in D.C., 99 percent in Rhode Island, and 75 percent in Florida.

How about no-proof-of-income lending as supercharger? If that were so, we would have seen a surging entrance of buyers previously shut out of the market. Not so; rates of home ownership are steady.

I have no doubt that low rates and easier underwriting (enlightened, says here) are the cause of some of the price run-up; nor doubt that interest-only loans are now facilitating higher prices. However, to be a bubble, home prices must be unsustainable; for foolish mortgage terms to be the culprit, mass default would have to be in prospect.

There is no evidence whatever that home prices are unsustainable, nor any evidence of widespread default. The bubble is in commentary coming from the financial markets, and the gas inside is envy.

After foolish lending and borrowing, the market types' critique of housing: too many investment and second-home purchases. Must be dangerous speculation. Prices are unsupported by buyer income or market rents. Tisk, tisk. The Fed should put a stop to this. Call in the regulators.

That line of argument sets a record for hypocrisy. You stock-market guys, the ones who gave us the biggest bubble in financial history, are suddenly the Bubble Cops? High prices versus lower incomes and rents? That's what you call a "healthy price-earnings ratio." Riding prices up is a crime? In your market, you call the same thing a skill, "momentum investing," and "market timing." Millions of American families are taking advantage of an epic demographic mis-match of land versus 3 million new Americans every year; you call them irresponsible Bubbleheads, while the exact same behavior among yourselves is called "value investing."

Financial-market people have a fit when clients announce they are withdrawing capital to put it in real estate: "Uh-oh. Bubble!" Say the same thing to them about their products and they will hang up on you. Stocks have staggered in their tracks since 1999; it is the soul of prudence to re-allocate some assets to a better market.

The truth hated most by stock-jockeys: invest in a home, and even if you're wrong about prices, you get to live in it. Try that with an Enron stock certificate.

http://realestate.yahoo.com/realesta...23/20050523701

Silver™

Funny coming from you. Can you go a day without cutting-and-pasting from PIMCO or Bloomberg.



Sure, and factor that into your return on investment.



Yes, but this is not the equivalent of the dot-com bubble that so many want to make it out to be.

Fibonacci

Silver asks, and he shall receive....


There Goes the Neighborhood
Why home prices are about to plummet--and take the recovery with them.

By Benjamin Wallace-Wells
--------------------------------------------------------------------------------




In Washington, where words are the currency, where imprecise verbs threaten the loss of a political career and misapplied nouns can doom a movement, there remain a few figures who get a general pass not just for a certain degree of verbal imprecision, but for a fairly deep-seated degree of intellectual wackiness, a penchant for regularly saying very odd things. Newt Gingrich is one of these public figures, Robert Byrd another; Helen Thomas has her moments, too.
You'll be sitting in the audience listening to a sensible speech by, say, Gingrich, and all of a sudden you get the notion that aliens have captured his brain. Befuddled, you'll turn to your friend next to you, the libertarian true-believer, and he'll shrug his shoulders and whisper back: "Oh, it's just Newt." And then, a few minutes later, the speaker's episode will subside, the aliens return the brain, and the speech continues on its before-we-were-so-rudely-interrupted track. No one says a word. The capital's press gives these folks a pass from its usual lawyerly scrutiny because they are regarded as sages who can be relied upon to speak some kind of unusual and valuable truth, whose occasional episodes of profound intellectual oddness are thought to stem from the same deep source as their general brilliance.



One of these spells flared up during the last week in February, when Greenspan recommended that the home-owning public take a good hard look at switching from fixed-rate mortgages, under whose terms payments stay the same no matter what interest rates do, to adjustable rate mortgages (ARMs), where payments fluctuate along with interest rates--which, right now, makes close to zero sense. Interest rates are lower than they've been in 30 years, and, with all economists predicting a general economic upturn, and Bush's budget deficit and the weak dollar sucking up capital, little doubt exists that interest rates must rise, in which case, switching from a fixed-rate to adjustable-rate mortgage would be pretty costly for any family naďve enough to take Greenspan at his word. The episode did not pass completely without critical notice. It was "the strangest bit of advice ever to be proffered by an American central banker," Jim Grant, publisher of Grant's Interest Rate Observer, told the San Francisco Chronicle. Then the press moved on: "Oh, it's just Greenspan."

But sometimes wacko ideas can betray deeper truths. It is tempting to ask what stake the chairman might have in trying to convince millions of people to do something so contrary to their own interest. One theory floated by Fed-watchers is that the chairman is trying to help out his classic institutional constituency, the big banks, which hold trillions of dollars in fixed-rate mortgage paper. There may be something to that theory, but there is almost certainly a deeper and more important motive behind this curious advice. Quite simply, Greenspan is trying to keep a wobbly and fragile recovery alive--and using mortgage refinancing to do it.

There are many strange things about the choppy recovery we're in, but among the most curious is that it is being fueled largely by consumer spending. Why consumers should continue to spend, and why they've done it throughout the recession, is not immediately obvious. After all, average income growth has been puny in the last few years. There's been a big falloff in jobs. Health care and tuition costs have only been going up. And the stock market has spent the last three years unsuccessfully huffing and puffing to get back to the level where it was in early 2001. Why have consumers been spending so much?

Economists have advanced two main reasons. One is that Americans have so lost their moorings that they've had few qualms about going deep into debt. That's certainly true. The average person's debt as a percentage of his income is now higher than it's ever been. But there's another reason, too: Americans have been using their homes as ATM machines, refinancing their mortgages in order to fund their spending. This, of course, makes sense. The one sector of the economy that has consistently swelled has been housing prices. This has intrigued and surprised many economists, because housing is supposed to operate in sync with the economy, expanding during flush times and contracting when things go poorly. But even in a down economy, prices have soared.

Because of these rising prices, people have felt that despite all the ups and downs in stocks and salaries, that their overall situation was okay. Homes are the biggest asset most families own, and their value has been rising nicely. For that reason, Americans have felt more comfortable buying big-ticket items, from SUVs to new computers to Disney World vacations. Much of that spending has gone right onto the VISA card. But that debt has been kept somewhat manageable by another factor in housing prices: mortgage refinancing.

With home prices rising and the Fed keeping rates low, a mortgage refinancing industry that barely existed 15 years ago exploded into one of the fastest growing sectors of the financial services industry. Last year, one-third of all homeowners used cash-out mortgages to refinance their homes, a rate roughly consistent over the past five years. Savvy investors, says Harvard economist William Apgar, are likely to have refinanced "two or three times in the last two years." Each time they do, they have either been able to lower their monthly payments, or walk away with a chunk of cash. And where does that extra cash go? The ubiquitous Ditech TV ads say it all: "I just refinanced my home and paid off my credit cards!" American homeowners have gained $1.6 trillion in cash from refinancing in the last five years, and those gains have flowed almost wholly into purchases of consumer goods. The resulting spending, says Wharton's Susan Wachter, is "propping up" the American economy.

Greenspan has played enabler to this boom. But with the Fed fund's rate at 1 percent, the chairman can't do much more to sustain it. Tens of millions of Americans have already refinanced their mortgages, and at current rates, can't be induced to do so again. This small window is closing, fast: For six months, refinancing has been tapering off, and economists expect it to narrow further--many economists have argued the gains from refinancing are likely to halve ths year. Moreover, as soon as interest rates rise (as Greenspan himself has said they will within the next year), virtually all refinancing will cease.

Greenspan's rather ham-handed effort to get them to go for ARMs, is a sign not of the chairman's own eccentricity or advanced age, but, instead, of the economy's current unsteadiness. Greenspan knows, perhaps better than anyone, that this economy is perched nervously on top of a wobbly, Dr. Seuss-like tower. Our recovery is propped up by consumer spending, which is in turn propped up by mortgage refinancing, and if that refinancing dries up before more props can be put in, the whole edifice could fall. "Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM," Peter Schiff, president of Euro Pacific Capital in Los Angeles told the San Francisco Chronicle.

Let's assume for a moment that enough people get fooled, and the refinancing boom gets extended for another year. Then what? The real problem hits. Because if you think Greenspan's being cagey on refinancing, the truth he's really avoiding talking about is that we're in the midst of a huge housing bubble, on a scale only seen once before since the Depression. Worse, the inflated housing market is now in an historically unique position, as the motor of the rest of the economy. Within the next year or two, that bubble is likely to burst, and when it does, it very well may take the American economy down with it.

House bound

Whether or to what extent American home prices will plummet soon is open to some debate, but not much. Even the professionally optimistic housing economists employed by the real-estate industry are now admitting that the good times may be over: "What we would ask for is kind of a slow slowdown," Jeff Culbertson, president of Coldwell Banker-Northern California, told Knight Ridder at the beginning of March. Virtually every housing economist is concerned that prices may be unstable, and growing numbers are becoming outright alarmed. To understand why that is--and why warnings of a coming housing collapse haven't been front-page news--just look at the numbers.

Truth is, in most of the country there's no housing bubble. Perhaps the crucial ratio from which economists determine whether housing markets are out of whack is the ratio of home prices to annual income. In most of the country, it is modest, 2.4:1 in Wisconsin, 2.2:1 in Kentucky, 2.9:1 in Illinois.

Only in about 20 metro areas, mostly located in eight states, does the relationship of home price to income defy logic. The bad news is that those areas contain roughly half the housing wealth of the country. In California, the price of a home stands at 8.3 times the annual family income of its occupants; in Massachusetts, the ratio is 5.9:1; in Hawaii, a stunning, 10.1:1. To some extent, there are sound and basic economic reasons for this anomaly: supply and demand. Salaries in these areas have been going up faster than in the nation as a whole. The other is supply: These metro areas are "built out," with zoning ordinances that limit the ability of developers to add new homes. But at some point, incomes simply can't sustain the prices. That point has now been reached. In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. In the late 80s, the last time these eight states saw price-to-income ratios this high, the real estate market collapsed.

By other measures, too, the market is badly bloated. One index of housing inflation is the difference between house prices and rents. In a healthy market, driven by demand, rents and sale prices ought to track roughly together. But while sale prices have soared, rents have stayed flat; and in some of the most overheated markets, like San Francisco and Seattle, they have actually been declining. Such a gap, the economist and New York Times columnist Paul Krugman has written, suggests "that people are now buying houses for speculation rather than merely for shelter," evidence that he called a "compelling case" for a housing bubble. "Within the next year or so," The Economist argued in a May 2003 editorial, these regional "bubbles are likely to burst, leading to falls in average real home prices of 15-20 percent" across America. And, of course, in the most heated markets the drop is likely to be steeper yet.

When housing bubbles burst, they can hurt more than their sector of the economy. Studies have shown that they exercise twice the effect on consumer spending as comparable declines in stock prices. So, a 20 percent drop in housing prices would have the same, shriveling effect on the economy as a 40 percent crash in the stock market. When investors lose value in their houses, many of them pull money out of other investments, like stocks. Then, too, jobs in construction, real estate, and other fields that depend on new home sales die off.

What can Alan Greenspan or anyone else do about this? The answer is, not much. Prices are so stratospheric that even modest hikes in long-term interest rates could burst the bubble. And with federal deficits soaking up so much capital, interest rates are likely to rise as the economy heats up and demand for capital increases. Of course, Greenspan could argue for rescinding some of President Bush's tax cuts, which he's long defended, to bring down the deficit. But even that probably won't forestall a collapse in home prices.

Given the lateness of the hour, and the near-inevitability of the coming crash, there's really only one thing left for concerned citizens to do. Start assigning blame.

Blowing bubbles

Fortunately, the bad actors responsible for this manic inflation are pretty easy to recognize. They look remarkably like the ones who puffed up the tech bubble in the late 90s. In both cases, the unfettered optimism of the buying public was fueled by a brokerage industry almost wholly concerned with making a sale, independent analysts with an incentive to hype prices, and major accounting fraud.

What drives most appreciation in housing prices is the universal human desire to own a slightly larger and more expensive place than one can really afford; a desire restrained in normal times by the universal desire of those who lend money to get paid back.

Getting a home loan used to be a particularly nerve-wracking and unpleasant process. A stern loan officer behind a big mahogany desk would pore over your income and credit, suspiciously probing your portfolio for weaknesses. And sensibly enough: The bank that lent you the money would have to collect on the mortgage for the next 30 years and had to make sure you were really good for it. It hired independent appraisers to make sure the price was in line. This process was a little stingy, and meant some people on the low end of the income scale couldn't buy a home and many others got less home than they might have wanted, but the system usually kept prices in check.

The one exception to this general process was mortgages sold on the secondary market. In the 1930s, Congress created the Federal National Mortgage Corporation (Fannie Mae) to encourage banks to make loans to low-income Americans by agreeing to purchase those mortgages from the banks. In 1970, Congress created a second agency, the Federal Home Loan Mortgage Corporation (Freddie Mac), to do much the same thing. By the late 1980s, these two entities, which belong to the category known as Government Sponsored Entities (GSEs), were buying up and reselling 30 percent of new mortgages and packaging the mortgages to be sold as securities.

Fannie and Freddie's market share was limited by their ability to attract investment capital. But in 1989, Congress instituted some modest-seeming technical changes that made Freddie and Fannie much more attractive to investors, and able to draw much more capital. Under the new rules, for instance, they were allowed to customize securities at different levels of risk and return to meet more precisely the demands of different sectors of the capital market. Then, too, bank regulators let pension funds and mutual funds class Fannie's debt as low-risk. As a consequence, during the 1990s, investors practically threw money at Fannie Mae and Freddie Mac, which became enormously, steadily profitable. The GSEs used the new capital to buy up every mortgage they could, and banks were only too happy to sell off the mortgage paper. The price cap on the mortgages Fannie and Freddie could insure was raised. As a result of all these changes, Fannie and Freddie went from buying mostly mortgages for low-end homes to those of the middle- and upper-middle class. And the share of the nation's conventional mortgage debt which they insure has swelled, to more than 70 percent today, double its share in 1990.

This shift has had two crucial, if under-appreciated, consequences. First, in little more than a decade, Fannie Mae and Freddie Mac have gone from handling one trillion dollars in mortgages to four trillion, with virtually no changes in oversight. Second, their dominance of the mortgage market has profoundly undermined the discipline that once kept housing prices in check.

Once banks knew they could automatically hand off the mortgages they wrote to Fannie and Freddie with basically no risk, the old incentive system dissolved. "Banks and other mortgage lenders are not watching home prices carefully because they rarely hold onto the mortgage paper they create--they just sell it upstream to mortgage investors," John R. Talbott, a housing researcher at UCLA's Anderson School of Business, has argued. "It is a dangerous situation indeed when neither home buyers nor the institutions that finance them are concerned with the ultimate price being paid for the housing asset."

In most markets, buyers and sellers rely on independent experts to bring sanity to prices. In the stock markets during the 1990s, that role had traditionally been played by stock analysts, whose opinions were famously bought off by the investment banks they worked for. Something similar has happened to appraisers, the independent contractors banks hire to determine the worth of a home for the purposes of a mortgage loan. In a recent survey conducted by the October Research Group, more than half of all appraisers said that they personally felt pressured to overstate loans, and "nearly all" said they knew a colleague who had actually done so. The pressure to inflate, October's publisher Joe Casa said, "is much worse now than it's ever been." Industry analysts have estimated that between 15 and 30 percent of houses nationally are over-valued.

It's not just the discipline of banks that keeps people from buying more than they can afford, but also the buyers' own fear and guilt. But in an environment where home prices continue to spiral up, fear and guilt are replaced by a sense that you're a fool not to buy the most house you can possibly get away with.

A particular kind of speculative frenzy ensues, captured in a recent story in The Washington Post which detailed a new phenomenon: home buyers camping out overnight for the chance to be the first in the next morning's open house, ready to buy $700,000 houses in built-out, lush-lawned suburbs like Arlington. The phenomenon has created temporary, yuppie tent cities. The story's authors interviewed several buyers in the tented line who planned to sell their purchases back into a steadily rising market, and concluded, dryly: "There is an element of speculation to the lines."

What makes the current frenzy especially dangerous is that every relevant institution has an incentive to play along. Who, after all, is likely to say stop? Not the realtors. Not the banks, any longer. Not Fannie and Freddie or the private secondary-mortgage operators, who are turning vast profits on the backs of the bubble. Certainly not the Federal Reserve or the Treasury Department, while the economy depends on a sustained housing boom.

By 2000, some acute observers, like Jane D'Arista, a former chief economist for the House Financial Services committee and now a federal funds researcher with the Financial Markets Center, had begun to warn that the situation was untenable. By 2002, a few major players, like Steve Roach, Morgan Stanley's chief economist, had picked up on the concerns about a bubble and Fannie and Freddie's sprawling influence. But Greenspan, Treasury, and GSE officials, in interviews and testimony, denied that housing inflation posed a problem. And, sure enough, in the next year, not only did the bubble fail to deflate, but it also expanded--the housing sector posted its best year ever.

Then, last summer, came a warning no one should have missed: news of major accounting fraud at Freddie Mac. In stocks, corporate accounting scandals appeared after the market plunged, too late to signal danger. But the fraudulent accounting at Freddie Mac was, or should have been, a wake-up call, though the details of this scandal were distinctly different. Instead of hiding losses, as happened at Worldcom and Enron, the accountants at Freddie Mac had been hiding embarrassingly large profits. They feared that higher-than-expected returns might incite more risk-taking and a more volatile housing market than investors in Freddie Mac would like. A number of senior executives were canned, and spooked foreign investors sold off Freddie and Fannie's debt. A sense was emerging, among politicians as well as economists, that Fannie and Freddie were not just running amok, says Tom Stanton, an attorney specializing in government sponsored enterprises, but that they "were showing a combination of high leverage, fast growth, and weak oversight of just two companies that held or guaranteed several trillion dollars of mortgages between them and posed potential systemic risk to the American economy."

Testifying before Congress on July 16, Greenspan did not discuss any of this, nor did he mention a bubble. Instead, he chose to praise the economic benefits of low interest rates and home refinancing. The boom continued unabated. By October, homebuyers were able to refinance to a 30-year fixed-rate loan with a rate of just 4.99 percent.

Eleventh-hour warnings

Still, the accounting scandals, carrying with them a vague, unsavory whiff of Enron, made reforms in the housing market impossible to ignore. Even Franklin Raines, Fannie Mae's chairman, admitted that the GSEs needed to be reined in. In the fall, the House dipped its toes into the water, with a bill that established a single regulator in the Treasury Department with broader authority to make sure the GSEs had their finances in order. At the White House's behest, the Senate Banking Committee began hearings on the same issue in February. The goal of most of the debate in Congress has so far been how to ensure the GSEs financial viability; there has been very little talk about how to reduce their role in the housing markets.

That job fell to Greenspan: Finally, on Feb. 24, testifying before the Senate Banking Committee, he came clean about the risks of the housing market, in a speech reminiscent of his 1996 warning about "irrational exuberance" in the stock market. In his familiar, glum posture, his bald head slouching low over the table, he warned that the GSEs weren't just unstable, but also posed a "systemic risk" to the economy of the United States. He suggested debt caps, to reduce Fannie and Freddie's role in the market, and urged stricter regulation.

The chairman's proposals were both brave and right, the best plan for resolving the structural problems with GSEs that's been put forward yet. But given the political situation, his reforms won't be enacted anytime soon. The day after his testimony, his suggestions were brushed off by everyone from Fannie and Freddie's chief executives to Republicans and Democrats on the Hill. Oh, it's just Greenspan.

Both political parties have bought into the idea that a vast, unfettered Fannie and Freddie are good for the country, and have only amplified the GSEs' "American Dream" rhetoric. Republicans are still invested in the deregulation of Fannie and Freddie they helped engineer in the late 1980s. Democrats, generally the party of more regulation, have historically been Fannie and Freddie's best friends, and the GSEs' lush executive suites are packed with former Democratic staffers: Raines was Clinton's director of the Office of Management and Budget, and his predecessor, James A. Johnson, a longtime aide to Walter Mondale, is now leading John Kerry's search for a running mate. In the hearings on the Hill, neither Democrats nor Republicans have seemed favorably disposed to strict regulation of Fannie and Freddie, and American Banker has concluded that the GSEs' lobbying power is strong enough that no regulatory bill will pass without their okay.

Greenspan, of course, knows all this. He knows his reform initiatives stand little chance politically right now, and he knows that even if, miraculously, they were put into place, they likely won't keep the housing market from crashing. Why even bother to bring it up? Two reasons, say Fed-watchers. First, though he didn't explicitly warn against the housing bubble, Greenspan wants to be able to claim, after the bubble bursts, that he gave fair warning, even though these warnings came at the eleventh hour. But at a less cynical level, the chairman knows that in the American political process real reforms only get put into place after a crisis and not before, but that you stand a better chance of getting them if you publicize them early.

So, why then didn't he bring these issues up even earlier? The answer may be that he simply couldn't afford to--he was relying on a supercharged housing sector to get the economy as a whole through the recession. Indeed, he still is. On the very day that he suggested his reforms of the secondary market, he was trying to squeeze a little more juice out of refinancing with his bizarre advice to consumers about ARMs. And that, ultimately, is the ironic and uncomfortable position that this economy has forced Greenspan into. To get out of the recession, he had to rely on, stay mum about, and even encourage a housing bubble. Now, that very bubble may be the thing that destroys the recovery he has sought to create.


http://www.washingtonmonthly.com/fea...ace-wells.html

Fibonacci

The oracle speaks

Warren Buffett and Charles Munger warn of real estate 'bubble,' the risk of terrorist nukes.
May 2, 2005: 9:22 AM EDT
By Jason Zweig



OMAHA (CNN/Money) - It was below freezing here early Saturday morning, with frost silvering the golf courses and rolling lawns of the city where Warren Buffett's Berkshire Hathaway Inc. is headquartered.

But the atmosphere was warm inside the Qwest Center arena, where roughly 20,000 shareholders gathered from around the world to hear Buffett and his vice chairman, Charles Munger, answer questions for nearly six hours.

Not a single individual shareholder asked whether Berkshire might be implicated in the widening scandal about alleged earnings manipulations at American International Group – and even the money managers in the audience whose questions touched on the subject approached it gingerly. (Buffett announced at the outset that, at the request of the investigators who are exploring the AIG case, he could not discuss what he or other Berkshire executives might have revealed about AIG to the authorities.)

Buffett's shareholders are true believers; to them, the idea that he could have done (or known about) anything wrong is absurd.

In his answers to shareholders' questions, Buffett made it clear that he remains concerned about the trade deficit and the U.S. dollar, although he is bullish on the long-term strength of the U.S. economy. But he and Munger issued stern new warnings about the residential real estate "bubble," the destabilizing effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States.

They also warned that they do not see a clear future for pharmaceutical stocks, that GM and Ford face severe trouble over pension and health costs, that hedge funds could wreak havoc in a market decline, and that the New York Stock Exchange is doing a disservice to investors by going public.

As always, Buffett spoke in elaborate paragraphs when replying to shareholders' questions, while Munger spoke in terse, tart sentences. The two often disagree about political and social policy, but for much of this meeting they sounded like identical twins. What follows is an edited and approximate transcript of their remarks.

Buffett and Munger on:


Real estate


The trade deficit and the value of the dollar


The threat of terrorism


The overall climate for investors


The auto industry


The NYSE's merger with Archipelago


Whether pharma stocks have become bargains

On real estate
Buffett: "A lot of the psychological well being of the American public comes from how well they've done with their house over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]....

"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."

Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, D.C."

Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre."

Munger: "I know someone who lives next door to what you would actually call a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on."

The trade deficit and the value of the dollar
Buffett: "That really is the $64,000 question. It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists will still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these....

"There are more people [like hedge-fund managers] that go to bed at night with a hair trigger than ever before, it's an electronic herd, they can give vent to decisions that move billions and billions of dollars with the click of a key. We will have some exogenous event, we will have that. There will be some kind of stampede by that herd....

"When you have far greater sums than ever before, in one asset class after another, that are held by people who operate on a hair-trigger mechanism, then they lend themselves to more explosive outcomes. People with very short time horizons with huge sums of money, they can all try to head for the exits at the same time. The only way you can leave your seat in burning financial markets is to find someone else to take your seat, and that is not always easy...."

Munger: "The present era has no comparable referent in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. It has happened in the past that there came bad consequences."

Buffett: "I have no idea on timing. It's far easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences."

Munger: "A great civilization will bear a lot of abuse, but there are dangers in the current situation that threaten anyone who swings for the fences."

Buffett to Munger: "What do you think the end will be?"

Munger: "Bad."

Buffett: "We're like an incredibly rich family that owns so much land they can't travel to the ends of their domain. And they sit on the front porch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can't see. They trade away a little piece every day or take out a mortgage on a piece.

"That scenario couldn't end well. And we, also, keep consuming more than we produce. It can go on a long time. The world has demonstrated a diminishing enthusiasm for dollars in the last few years as they get flooded with them – every day there's $2 billion more going out than in. I have a hard time thinking of any outcome from this that involves an appreciating dollar.

[But, Buffett later added, he is not predicting an end to U.S. economic power.] "If you have a good business in this country that's earning dollars, you'll still do okay. Twenty years from now, a couple percentage points of GDP may go to servicing the deficit, but you'll do fine.... I don't think trade deficits will pull down the whole place; the country will survive those dislocations. I'm not pessimistic about the U.S. at all.... We have over 80 percent of our money tied to the dollar. It's not like we've left the country."

The threat of terrorism
Buffett: My job is to think absolutely in terms of the worst case and to know enough about what's going on in both [Berkshire's] investments and operations that I don't lose sleep. Everything that can happen will happen.... It's Berkshire job to be prepared absolutely for the very worst. A few years ago we did not have NBCs [nuclear, biological and chemical attacks] excluded from our exposure, but we do now....

"If you go to lastbestchance.org, you can obtain a tape, free, that the Nuclear Threat Initiative has sponsored, that has a dramatization that is fictional but is not fanciful. We would regard ourselves as vulnerable to extinction as a company if we did not have nuclear, biological and chemical risks excluded from our policies. There could be events happening that could make it impossible for our checks to clear the next day."

The overall climate for investors
Buffett: "If the [stock] market gets cheaper, we will have many more opportunities to do something intelligent with money. We are going to be buying things [like stocks and other financial assets] for as long as I live, just as I'm going to be buying groceries for the rest of my life. Would I rather have grocery prices go up or down?

"The stock market works the same way: If I'm a net buyer, obviously I would rather have prices go down than up. Charlie and I spend no time talking about what the stock market is going to do, because we don't know. We're not operating on basis of a market forecast. We don't make a list of the good things that are happening, or bad things.

"Overall, I'm an enormous bull on the country. This is the most remarkable success story in the history of the world. It does not make sense to bet against America. I do not get pessimistic about the country. The real worry is what can be done by terrorists or governments that may have access to nuclear or other weapons....

"If you had to make a choice between long-term bonds at around 4.5 percent and equities for the next 20 years, I would certainly prefer equities. But if people think they can earn more than 6-7 percent a year, they're making a big mistake. I don't think we're in bubble-type valuations in equities -- or anywhere close to bargain valuations.

"If you told me I had to go away for 20 years, I would rather take an index fund over long-term bonds. You'll get a chance to do something extremely intelligent with your money in the next few years. But right now there doesn't seem to be a clear enough direction to conclude anything dramatic."

http://money.cnn.com/2005/05/01/news...ks/#realestate

Silver™

I never asked for an article over a year old


@ "Why home prices are about to plummet..."



Nor did I ask for you to repost the same quote from Buffet

Fibonacci

This article is even more timely now than ever...

This article appears in the June 21, 2002 issue of Executive Intelligence Review.
'Fannie and Freddie Were Lenders':
U.S. Real Estate Bubble Nears Its End
by Richard Freeman
(Tables and Figure for this article appear in the print version of EIR and in PDF format in Electronic Intelligence Weekly.)

The U.S. financial system is now dependent to an unprecedented degree upon one prop: the greatest housing-real estate bubble in human history. A hyperinflationary spiral has sent home prices shooting up by 10-40% annually in recent years—depending on the region of the country—and artificially pushed the price of millions of homes into the $400,000 to $1 million range or above. Already in 2001, one out of every ten homes for sale in the United States was priced at $1,000,000 or more. Since then, prices, assessments, real estate taxes, and mortgage credit volume have continued to spiral upwards, even as the productive economy staggered downhill. Many homes today are simultaneously glorified shacks—with plastic exteriors and gold-plated faucets in the bathroom—and yet unaffordable to most American families.

This housing bubble is without precedent, far larger than the 18th-Century Mississippi Bubble of Venetian-Scottish agent John Law. In 1717, Law established the Mississippi Company and issued shares to the public, initially against the supposed wealth to be drained from France's Louisiana Territories in North America, and eventually against the value of all of France's colonial trade. These were shares, effectively, against ground-rent. In 1719, the value of the Mississippi Company's paper shares rose to 40 times their original value, and many times the wealth that possibly could back them up. In 1720, the shares collapsed, bankrupting the nation of France. The U.S. housing bubble's stated ground-rent value is 1,000 times greater than that of the Mississippi Bubble. Unless corrective measures are taken, the inevitable collapse and the ensuing devastation will destroy millions of families.

The cumulative value of all homes in America is now an astounding $12.04 trillion, which is only $3 trillion less than the hyperinflated value of all the stocks traded in America. People have been deluded into buying homes in the $250,000 to $500,000 range, on the grounds that if they can hold on to them for two to five years, they will be able to re-sell them at an even higher price; or, alternatively, that these are the only homes available, and that if they don't buy them now, however overpriced, prices will go even higher and become further out of reach. Millions of families are spending 35 to 50% of their annual income on mortgage or rent payments.

There is a physical constraint on their ability to pay, and thus, ultimately, a constraint on the housing bubble itself: These families are one or two missed paychecks, or the loss of a job, away from defaulting on a mortgage. Default rates on mortgages insured by the Federal Housing Administration—used primarily by families of middle or modest income—have recently reached 10% in some urban areas of the United States. As a wave of cumulative mortgage defaults spreads, the housing market will implode, wiping out trillions of dollars in housing values.

In testimony on April 17, before Congress' Joint Economic Committee, Federal Reserve Board Chairman Alan Greenspan foolishly denied that there is a housing bubble, and asserted that housing conditions are "scarcely tinder for a speculative conflagration." Greenspan's statements fall under the heading of "he doth protest too much."

On May 28, the 2004 Presidential pre-candidate Lyndon LaRouche told an international webcast audience: "We are sitting on top of a real-estate bubble collapse in the United States today; the Fannie Mae/Freddie Mac bubble is about to blow. What day it's going to blow, I don't know. But it's going to blow. People are going to find that houses which they have listed as mortgages at a half million [dollars] or so, plus or minus, in the Washington, D.C. area, or the New York area, these shacks will probably be lucky to go for $100,000 redeemable value. People are going to be wiped out. Jobs are going to be wiped out. Firms are going to be closed down."

The Two 'Golems' of the Bubble
The housing bubble has been developing for two decades, and it has been undergoing accelerated growth since 1995. It is under the control of Fed Chairman Greenspan, acting on behalf of the Wall Street-City of London oligarchical financiers. Greenspan depends upon the huge sums of liquidity pumped in by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Loan Corporation (Freddie Mac), through the secondary home real estate market, which they control. Fannie Mae and Freddie Mac—which are private corporations, not government agencies—are the linchpin of the housing bubble; without them, it could not exist. The City of London-Wall Street financiers' objective, and also that of Fannie Mae, is to inflate housing prices through increases of "fictitious value," thereby increasing the size of mortgages needed to buy the houses at inflated prices, and thus, increasing the principal and interest-rate cash that can be gouged from households. It is an unadulterated looting operation.

Without the huge margin of Fannie- and Freddie-generated liquidity, the housing mortgage market would not be the size that it is, and without an enormous mortgage market, there absolutely could be no housing bubble.

Since 1995, the housing bubble has required between $400 to $600 billion per year in new mortgages to finance homeowners' purchase of new and existing homes at inflated prices. Between 1995 and 2001, banking institutions (including savings and loan institutions) lent $2.25 trillion in new housing loans to prospective home-buyers. But during the same interval, banking institutions lent only $1.29 trillion in loans of all types, including to commerce and industry, to consumers (for car purchases, etc.), and for housing. This seems impossible. How could banks lend more for housing, at $2.25 trillion, than they lend to the entire economy, at $1.29 trillion, when the latter includes housing as a sub-sector? The answer: the great Fannie Mae and Freddie Mac lending machine. Between 1995 and 2001, Fannie and Freddie (and a few similar, smaller agencies) acquired almost three-quarters of the $2.25 trillion in new mortgage loans that all banks had made. Upon getting cash from Fannie and Freddie, the banks made new housing loans. Since 1995, Fannie and Freddie, et al., accounted for almost three-quarters of all housing mortgages.

The housing bubble can only function if it pushes home prices up; the home price can only go up, if there is a mortgage to purchase the home at the increased price. Without Fannie Mae and Freddie Mac, the home mortgage market would have been only one-quarter as large as it actually was. A housing bubble could not exist in that framework.

Fannie Mae and Freddie Mac have raked in huge profits from the housing bubble. But they have also concentrated in themselves, an enormous exposure to mortgage debt—a concentration even greater than the 35% of all financial derivatives contracts sitting in one bank, J.P. Morgan Chase—and have issued some obligations which are very risky. Thus, it is ironic that the housing market depends on Fannie Mae and Freddie Mac, which are in such rotten condition that they could puncture the very housing bubble which they are called upon to support.

How It Grows
To understand the importance of Fannie Mae and Freddie Mac, one must understand the rudiments of the housing financing market. To buy a home, a prospective purchaser must have the financial means: Either the purchaser is wealthy enough to buy the home in cash, or—in most cases—the purchaser takes out a mortgage loan. Commercial banks, and savings and loan associations are the financial institutions most likely to originate a mortgage loan. The primary mortgage-lending institution can hold that loan until maturity—30 years, for example—collecting, during this time, interest and principal payments.

However, the primary mortgage-lending institution can exercise a second option: After originating the mortgage loan, it can sell it off. Two of the leading corporations that could buy the mortgage from the primary institution—known as secondary market corporations—are Fannie Mae and Freddie Mac. As a result of Fannie Mae and/or Freddie Mac buying the mortgage from the primary lending institution, that primary institution now has cash, which it can use to originate a new mortgage.

This process can be, and is, repeated several times during the course of the year, for each primary-mortgage lending institution in America. Thus, Fannie Mae and Freddie Mac act as a spigot pouring liquidity into the U.S. mortgage market.

There is another step to this process. When a primary mortgage lending institution offers to sell a mortgage loan it has originated, Fannie Mae or Freddie Mac can do one of two things. They can, as described, buy the mortgage loan outright and hold onto it (Fannie and Freddie issue bonds in their own names, and use the proceeds from the bond sale to buy mortgage loans). Or, they can pool several mortgage loans together, into a derivatives-like instrument, called a Mortgage-Backed Security (MBS); put a guarantee on it; and sell it to a third party—such as a mutual fund, a pension fund, or an insurance company. In the latter case, the pension fund or mutual fund end up owning the MBS, which gives them a claim to the underlying principal and interest stream of the mortgage. Thus, it is the cash from the pension fund, or mutual fund, etc., which is going into the housing market, having been drawn into that market by Fannie Mae and Freddie Mac as issuers of securities.

Volcker Destroys Traditional Home Financing
In the post-World War II period to 1963, when a previous generation of Americans bought their homes, the purchase cost reflected the cost of construction, such as materials and labor, plus a moderate, but fair profit for the homebuilder. It also reflected the cost of the land, which was not high. For financing, a traditional relationship existed with savings and loan institutions, so that the home purchaser could readily obtain a 30-year mortgage, usually at a 5-6% interest rate which would make the mortgage affordable. As late as the 1950s, the median price of an American home was less than $15,000.

In the mid-1960s, the financier oligarchy moved America away from a producer to a consumer society, by introducing the "post-industrial society" policy, which also shattered the workable housing relationships. There were a few key benchmarks in this process.

In 1979, then Federal Reserve Board Chairman Paul Volcker instituted the New York Council on Foreign Relations' policy of "controlled disintegration of the economy," so that the commercial banks' prime interest rate reached 20.5% by December 1980. This policy intentionally shattered manufacturing, agriculture, and infrastructure, and built a gigantic speculative bubble. It also crushed the savings and loan associations, which were the mainstay of the housing industry. They then had to pay interest rates of 15-18% to attract and hold depositors, but they were earning only about 5% on the mortgage loans they had previously made. The negative spread of 10-13% caused the S&Ls huge losses.

In 1982, the disastrous Garn-St Germain law, which deregulated the banking system, was approved, removing the wise and longstanding restrictions which had severely limited the amount of money the S&Ls could invest in commercial real estate. Advised to invest in commercial real estate to make up the losses that Volcker's policy had created in housing, the panicked S&Ls lost more than a quarter of a trillion additional dollars. The bailout of these losses in the mid-1980s, became known as the S&L debacle.

In 1986, the Tax Reform Act was passed, which created tax breaks for speculative shelters in real estate. By this point, the bankers thought it timely to introduce the full speculative virus into the home real estate market. Home prices rose, although there was a downturn in the 1989-91 period. By 1995, Fed Chairman Greenspan, who had been nurturing the housing bubble since he was ensconced in that post in 1987, let out all the stops to pump up the bubble. Fannie Mae and Freddie Mac began priming the bubble with hundreds of billions of dollars in funds per year.

Today, the basic characteristic of the housing market has been altered so that it is entirely different from what it had been in the mid-1960s. The home's principal function is no longer shelter and development of a family, obtained through the instrument of the mortgage market; rather, the home has become the mere instrument of the housing market bubble. The home price is a function of whatever the hyperinflationary housing spiral can drive it up to.

For the banks, the objective is to create fictitious value in a home, through a fake appreciation in price. To comprehend what fictitious value is, consider the example of a home built in 1992, and sold then for $100,000, which is now priced on the market for $225,000. The $125,000 increase in the home's price represents fictitious value. In real physical construction terms, the home has depreciated for ten years, and is worth less; even if there were home improvements made to keep the home at the same functional level, it is worth, at most, $100,000.

Take any other useful entity, such as a car or a machine tool. One could not put ten years of wear and tear on it, and then sell it for twice what it was worth ten years ago. However, this is what is done with housing.

The process is the same in the case of a McMansion, which sells for $400,000, but is made of the shoddiest material, and is only worth $125,000. The difference of $275,000, between what it sells for and what it is worth, is fictitious.

For the banks, the aim is: If the price of a home can be fictitiously doubled, say to $400,000, then the market value of the mortgage attached to the home can be fictitiously doubled to $400,000, and the income cash flow stream of principal and interest payments that can be looted, can be doubled. The banks pre-figure what principal and interest cash stream they want to realize from a mortgage, and then set the price of the house at a level that will allow them to extract, through an attached mortgage, that principal and interest cash stream.

This is the system that the banks put into place during the course of the 1980s, and which Greenspan and Fannie Mae have geared up full force since 1995. It is completely unsustainable and unstable.

Explosion in Home Prices
There is an explosion of home prices since 1995, but especially since 1999, in the hot markets in New York, Florida, California, and Greater Washington, D.C.—the last of which may be the hottest market in the nation. Greater Washington includes Washington, D.C. proper; Arlington and Fairfax Counties in northern Virginia; and Montgomery County in Maryland. Table 1 and Table 2 show, respectively, the average and median prices of homes in this region.

In Washington, D.C. proper, in 1999, the average price of a home was $264,668. Now, less than two and one-half years later, it has jumped to $367,676, a compounded annual rate of increase of 16%. (During this time, the median home price increased at a compounded annual rate of 15%.)

Elsewhere in the area, the pattern is the same. In Fairfax County, in northern Virginia, between 1999 and the present, the average single family home price skyrocketed from $132,667 to $341,680, a staggering compounded annual rate of increase of 38.4%. In Arlington County, in northern Virginia, the average price of a home has jumped to $416,579. In the Greater Washington, D.C. region as a whole, the average single family home price is above $340,000, and rising at an incredible rate.

During 2001, home prices for the entire states of California, Florida, and Massachusetts, rose by more than 10%, and in portions of New York, by more than 15%.

This explosion in home prices increased the collective valuation of all household-owned home real estate in America. Figure 1 shows that since 1950, the value of all U.S. households' home real estate holdings rose steadily. Then it rose more rapidly during the 1980s, reaching $6.608 trillion by 1990.

But between 1990 and 1995, the collective value of all homes rose only by $1 trillion. However, since then, under the deliberate manipulation of Alan Greenspan, nurtured by the Fannie Mae-Freddie Mac money-pumping machine, it shot upward: Just between 1999 and 2001, the collective valuation of all households' home real estate holdings increased by $2.084 trillion to $12.04 trillion, a rise of 20.9% during those two years.

The increase in the collective valuation of all household-owned homes achieved the bankers' prime objective: Against that valuation, a tremendous amount of mortgages and secondary forms of mortgage-based debt could be floated, thus increasing the rate of looting through interest and principal mortgage streams, as we shall show.

The sharp jump in the collective valuation of all household-owned homes, makes it, along with derivatives, the chief element of the dynamic that is holding up the U.S. speculative bubble. Figure 2 shows the trajectory of the collective valuation of households' home real estate holdings versus that of the capitalization of all stocks traded on stock markets in the United States. With the rupturing of the New Economy stocks, between 1999 and 2001, $4.5 trillion of fictitious valuation of stocks has been wiped out. The collective value of U.S. households' home real estate holdings is now just $3 trillion less than the stock market capitalization of all U.S. firms.

According to EIR's estimation, $6 trillion of the $12.04 trillion valuation of household-owned home real estate is fictitious, debt and liquidity artificially forced into the housing market over the past few decades, especially since 1995. This gives an estimate of the amount of hot air which will be wiped out in this market in a collapse of the bubble, driving home prices down with explosive impact.

Cost and Quality
Two other characteristics distinguish the new housing market.

First, the cost of homes has reached a dangerous multiple of average income. Figure 3 shows the ratio of total home real estate valuation to total disposable (after-tax) personal income, complied by Ian Morris, an analyst at HSBC Securities. It now has reached 1.62, its highest level in this 50-year series. However, the cost of a home becomes even worse, when the mortgage interest costs are figured in, which will be examined shortly below.

Second, the quality of homes. The homes of today have several glaring problems. The new homes that sell for $300,000 to $750,000 are frequently made with the shoddiest material. They are built with doors made of cardboard cores instead of wood; no cross-braces under the joists of floors to support them and prevent shaking; and the proverbial 2-by-4 piece of wood shaved down to 1.5 by 3.5 inches. Whereas 50% of the siding in houses in the 1970s was made of brick, today less than 30% of housing siding is made of brick.

Thousands of homes, priced at one-half million dollars and up, have their elegant looking facades made out of—stryofoam. The Maday family, for example, of Reston, Virginia, moved into a $522,000 home in late 1996, having been told they had an exterior of stucco (a mixture of cement and limestone), which is typically @c6 to 1 inch thick. They found that their house had a Ľ inch coating of styrofoam. The styrofoam trapped water and developed a "99% moisture reading," and as a result, the walls rotted away. An Aug. 29, 2001 Boston Globe article exposed the fact that thousands of McMansions from northern Virginia, to Connecticut, to Illionis have been constructed with styrofoam fronts.

Figures 4 and 4A document, since 1950, the increase in the volume of U.S. household home mortgage debt outstanding. This grew steadily up to 1980, and then afterward, at a faster rate. Starting 1995, the banks, collaborating closely with Greenspan and the money-pumping of Fannie Mae and Freddie Mac, caused the level of mortgage debt outstanding to grow at an accelerating rate: Just between 1999 and 2001, it jumped by nearly $1 trillion, to reach $5.757 trillion.

The more a home costs, the more cumulative interest a mortgage borrower must pay, and the more interest the bankers collect, even if the interest rate remains the same.

Figure 5 shows for the period 1963-2001, the total cost to purchase a new home, on a 30-year mortgage. The purchase price used for this demonstration, is the nationwide median cost of a new home, as reported by the National Association of Realtors. The interest rate is the fixed interest rate prevailing for that year. In 1963, the median cost of a new home was $18,000. The total cumulative cost to buy the new home on a 30-year mortgage, was $34,616: $18,000 paid in purchase price (which is broken down into down payment, and principal), and $16,616 paid in interest. In 2001, the median cost of a new home was $174,000. The total cumulative cost to buy a new home on a 30-year mortgage leapt to $393,986: $174,000 paid for the median purchase price, and $219,986 paid in cumulative interest. So, today, the mortgage-payer must pay nearly a quarter of a million dollars in interest. The cumulative interest cost, which in 1963 was somewhat lower than the purchase price, in 2001's "low-rates" market was nearly 1.3 times greater than the original $174,000 purchase price of the house.

According to the U.S. Department of Housing, the total monthly "home cost" should not exceed 28% of a household's gross income. The "home cost" consists of the mortgage interest and principal payment, plus the home insurance payment, plus the home property tax due.

How able are home-purchasers to finance the mortgage? Let us utilize a strictly standard arrangement. If a household were to buy a new home, at the median price of $174,000 (in the above example), on a 30-year mortgage, putting the (now standard) 10% of the home purchase price down in a down-payment, and financing the rest in a mortgage at the prevailing fixed interest rate of 7.04%, then its mortgage payment of principal and interest, would be $12,553 per year ($1,046 per month). On such a home, the home insurance and home property tax would be approximately $1,920 per year. Thus, the total "home cost" would be $14,473 on an annual basis. If, according to HUD, the "home cost" should be no more than 28% of total household income, then $14,473 is 28% of $51,689. A household would need an annual income of $51,689 to afford the "home costs" of a median priced home of $174,000.

Sixty percent of American households do not have an annual income of $51,689. Three-fifths of American households could not afford to purchase and live in such a home.

Rising Market, Falling Living Standards
How is it possible for families to buy these homes, and for Fannie Mae to constantly boast that the rate of home ownership, including among minorities, is rising?

Millions of households have bought homes by "getting in over their heads." They are paying 35%, 45%, and even more of their annual income, on the home mortgage. This makes them dangerously vulnerable. Some think that if they own the house for 2-5 years, it will rise in price by $100,000-150,000, and they will sell to the "next guy," in a rising real estate market. Soon there will not be a next guy. Many, many families hold two, two-and-one-half, or three jobs among the family's members to pay for the home. The next round of layoffs that wipes out one of these jobs, will leave them unable to pay their mortgage, leading to default.

Some other families bought homes in the $350,000 to $1 million range, because they earned money from stock capital gains, stock options, bonuses in the financial and high-tech industries, etc. That is drying up on a large scale.

For some households, the fact that they can borrow new money against the value of their home, each time the value of their home rises, keeps them in the game.

Overall, Greenspan has engineered relatively low interest rates, both to keep the financial markets going, but in large measure to keep the housing bubble afloat. The need to raise interest rates, for example, to prop up the collapsing U.S. dollar, would destroy the interest rate environment that is essential to keeping the housing bubble alive.

The key constraints, which govern everything, are living standards and the real physical economy's productivity. For the lower 80% of the population, living standards, measured by market baskets of consumer and producer goods, are falling. They appeared to be, falsely, propped up by stock capital gains, and the like. One cannot long increase home prices, such as in the Greater Washington area, by 15 to 38% annually, and increase the mortgage interest income streams which are to be extracted, by a similar percentage, from households whose living standards, in reality, are falling by 1 to 2% per annum.

If one clears away all the clutter, home prices have gotten much more expensive. One measure that EIR has developed is straightforward. The U.S. Department of Labor's Bureau of Labor Statistics provided information on the value of the weekly paycheck of the average non-agricultural worker. If this worker were to buy a new median-priced home, how many of his paychecks would it take for him to pay off the home, including the interest costs on a 30-year mortgage? The answer is shown in Figure 6. In 1963, it required 388 paychecks; in 2001, it required 804 paychecks. In terms of the employee's paycheck, the home is 2.07 times more expensive. The reason for this has to do with the fall in living standards, but also with the shooting-up of home prices.

In earlier periods, such as around 1980, in which the number of paychecks required to buy a home rose, this was due to a spike (Paul Volcker's deliberate spike) in interest rates. Today, when interest rates are relatively low, the fact that it requires a large number of paychecks to buy a home, indicates just how serious the problem is.

The Intervention of Fannie and Freddie
What has kept the housing bubble functioning, especially since 1995, is the massive role of Fannie Mae and Freddie Mac.

One must know how these agencies work. Fannie Mae presents itself in its public relations campaign as "Building the American Dream." It holds big events with legislators, in particular black and minority legislators, spending lavish amounts of money around the country. It puts more ads on the radio and in the newspaper, than almost any major corporation. It probably has one of the biggest patronage machines in the nation, reaching deep into every state.

What does one expect of a private corporation, which, if it were a bank, would be the third largest bank in the world, and which makes money hand over fist in the real estate market?

Fannie Mae is positioned as the key prop in the housing bubble (what is said of it applies as well to its smaller cousin, Freddie Mac). But Fannie Mae has as much "radioactive" financial risk as any institution in the world. Fannie Mae built up this financial risk in the process of constructing the housing bubble.

A crucial bank that has shaped the agenda of Fannie Mae is Lazard Frčres investment bank, a powerful cog in the international Wall Street-City of London oligarchy. Fannie Mae Chairman Franklin Raines spent ten years working at Lazard. Lazard counts in its network the Graham family that owns the Washington Post. (In 1995, Franklin Raines, working with the Post's Katharine Graham, established the Financial Control Board, which destroyed Washington, D.C.)

Fannie Mae had started out in 1938, not as an instrument of speculation, but as part of President Franklin Delano Roosevelt's New Deal. As the accompanying box shows, in the short run, its function was to get the lagging home mortgage lending started again, and more broadly, to contribute to the growth of a financial market to make it possible to purchase affordable housing.

In the beginning, Fannie Mae existed as a government agency. In 1954, it was turned into a mixed, part-private, part-government agency, and in 1968, it was transformed into a totally private corporation, issuing its own stock, which was bought by private investors, and eventually became listed on the stock exchange. For the most part, all through this period, up to the mid-1970s, Fannie Mae fulfilled its original function: It brought liquidity into the housing market in moderate quantities, and functioned as a subordinate agency in that market.

However, starting in 1979-81, at precisely the time that then-Fed Chairman Volcker instituted the policy of "controlled disintegration of the economy," new lending policy changes were made at Fannie Mae. These changes were intended to bring eventually a flood of money into the housing market, from both outside "third party investors"—using the derivatives-like instruments called Mortgage-Backed Securities—and from the corporation itself. The seeds of the housing price explosion planted in 1979-81, came to fruition from 1995 to the present.

Prior to the late 1970s, there had been two principal forms of lending; this transformation added a third.

The first and simplest form of lending is the primary mortgage loan. The second form is that involving Fannie Mae: A mortgage-lending financial institution makes a mortgage loan, but instead of holding onto it, it sells it to Fannie Mae, and uses the cash to make a second loan. It can repeat the process, of selling the second loan to Fannie Mae, and make a third, fourth, and so on, loan. In this manner, a mortgage-lending financial institution could make five loans for $150,000. It sells the first four loans to Fannie Mae (which buys them with proceeds from the issuance of its bonds) and keeps the fifth loan. At the end of the process, the mortgage-lending institution has one loan totalling $150,000 on its books, and Fannie Mae has loans totalling $600,000 on its books.

These were the only two types of lending up to 1979-81, when the third type was introduced: Fannie Mae began creating Mortgage-Backed Securities. As the risk on the MBS became greater, the risk that Fannie Mae had became greater. But this is part and parcel of how the mortgage market, and thus the mortgage-bubble, expanded.

The Mortgage-Backed Security
In the case of the MBS, Fannie Mae gathers its purchased mortgages from different mortgage-lending institutions, and pools them together. For example, Fannie Mae may bundle a thousand 30-year fixed-interest mortgages, each worth roughly $100,000, and pool them together into a $100 million Mortgage-Backed Security. Fannie Mae puts a loan guarantee on the MBS, for which it earns a fee. Fannie Mae promises that in case there is a default on the MBS, Fannie Mae will pay the interest and principal "fully and in a timely fashion." The MBS, once it has Fannie Mae's guarantee on it, is sold to outside investors in denominations of $1,000 and up. The insurance funds, pension funds, and so forth, become the owners of the MBS, but if anything goes wrong, Fannie Mae is responsible.

From the standpoint of those building the mortgage bubble, the MBS taps into a broader layer of funds to be used for housing, on the order of additional trillions of dollars. The sources of funds that can support the housing bubble have been extended very far into the U.S.—and international—financial markets.

In 1979-81, the Volcker polices caused Fannie Mae some losses, like those of the S&Ls. In 1981, David Ogden Maxwell became chairman of Fannie Mae. Maxwell overhauled the corporation and began issuing MBS, which had not been issued except in minuscule volumes before then. Maxwell's career path led into the circles of Lazard Frčres investment bank: Today, Maxwell is on the board of Washington's Urban Institute, which is run by the Graham family of the Washington Post, itself part of the Lazard network.

However, not satisfied with "plain vanilla" MBS, Fannie Mae found that it could take these securities and pool them once again, into an instrument called a Real Estate Mortgage Investment Conduit (REMIC) (which is also known as "restructured MBS" or a collateralized mortgage obligation [CBO]). These REMICs are derivatives, of increasing complexity. They are pure bets, although they are also sold to institutional investors, and individuals, to draw money into the housing bubble.

There are many types of REMICs; we will look at two of them. There is a REMIC called a STRIP, in which the interest payments on the mortgages underlying the REMIC, are stripped from the principal, and the interest stream is sold separately as one REMIC instrument, and the principal amount is sold as another. In fact, the principal amount itself can be broken up into several instruments reflecting different time-periods during the life of the mortgages, called tranches, each of which is sold separately, and has a different level of risk. There is a REMIC called a "floater," in which the interest rate on the instrument floats in direct proportion to the movement—up or down—of the international interest rate called the London Interbank Offered Rate (LIBOR); there is an "inverse floater," in which the interest rate of the instrument floats in inverse proportion to the LIBOR.

Approximately half of all Fannie Mae's MBS have been transformed into these highly speculative REMIC derivative instruments.

Thus, what started out as a simple home mortgage, has been transmogrified into something one would expect to find at a Las Vegas gambling casino. Yet the housing bubble now depends on precisely these instruments as sources of funds.

The 1995 Bubble
By 1995, Fannie Mae had been transformed, the MBS and REMICs were widely marketed and in use, and the housing market had been totally changed. The old days of the financing of a home at an affordable price were gone. The plan of the banks, and Alan Greenspan, was to create a bubble: to finance homes at increasingly fictitious prices. Simply put, to realize a fictitious increase in home price, say from $100,000 to $250,000, there had to be an increase in mortgage size, and not just one mortgage, but tens of thousands of mortgages. This, in turn, required a gigantic inflow to the housing market, of funds which had had nothing to do with its functioning.

During the bubble period 1995-2001, the volume of mortgage loans in the United States increased by $2.249 trillion. But the volume of mortgage loans by the primary mortgage-lending institutions, such as commercial banks and S&Ls, which they held on their books, only increased by $592 billion. They generated only one-quarter of the increase in the volume of mortgage debt during this period. The remaining three-quarters of the loans were conveyed to Fannie Mae, Freddie Mac, and cousins like the Federal Home Loan Bank Board. Fannie Mae took the dominant role, accounting by itself for 35.5% of all the money that flowed into home mortgages since 1995. But this was not an act of largesse: During this period, Fannie Mae raked in $25 billion in profits, and the financiers achieved their purpose of setting off a hyperinflationary housing bubble.

Yet, by its very "success," Fannie Mae turned itself into a time-bomb, completely contaminated by the cancer of housing speculation it made possible.

To understand the root of its crisis, look at the rapid growth of its four key parameters. Figure 7 shows Fannie Mae's ownership of mortgages, which it purchased from mortgage lending institutions; by the end of 2001, this stood at $705 billion. Figure 8 shows Fannie Mae's debt, mostly its bonds, which it principally incurred to raise the cash to buy the mortgages it now owns; by the end of 2001, this reached $764 billion. Figure 9 shows the Mortgage-Backed Securities that Fannie Mae created through pooling of primary mortgages; by the end of 2001, this reached $859 billion. Finally, Figure 10 depicts the "regular" derivatives obligations Fannie Mae contracted, such as interest rate swaps (but not counting the above MBS), and which it claims are necessary for doing business; by the end of 2001, this reached $533 billion.

Of the four parameters, the first is the only one that represents an asset for Fannie Mae. It represents a steady stream of interest and principal payment that Fannie Mae collects. The other three parameters represent obligations, which are very risky. These three types of obligations fed, and fed off, the housing bubble's constant rapid growth of the last six years in particular.

But a wave of mortgage defaults is inevitable. As that occurs, the three risky obligations amplify the crisis, and threaten the bankruptcy of Fannie Mae, and the housing market bubble which depends on Fannie, Freddie, et al.

The Threat of Leverage
Consider the first of the three risks: Fannie Mae's bonds, which make up over $700 billion of its outstanding debt total of $764 billion. The sole source of income, from which Fannie Mae can pay the interest and principal to its bond-holders, is from the interest and principal that it collects on the mortgages that it owns. If a portion of these mortgages goes into default and ceases to pay interest or principal, Fannie Mae will not have sufficient cash to pay the holders of its bonds. If the situation worsens, Fannie Mae will default on its bonds.

So, whereas before one had one economic catastrophe—the default of some mortgages—because of the way the housing market is structured, this produces a second catastrophe—the default of Fannie Mae's bonds. Fannie Mae's bonded debt is at least ten times greater than that of any corporation in America. No company in America has ever defaulted on as much as $50 billion in bonds, and Fannie Mae has over $700 billion. With a bonded debt of that magnitude, a default would put an end to the U.S. financial system, right then and there.

Yet a second obligation compounds the problem. In addition to the mortgage bonds, Fannie Mae has put its guarantees on $859 billion of Mortgage-Backed Securities. In a crisis in the housing mortgage market, Fannie Mae could never meet the terms of its guarantee, that it would pay "the full and timely interest and principal," on the mortgages to which it gave a guarantee. By the time it made payment on $5 to $10 billion of the principal and interest of the MBS which it guaranteed, Fannie Mae would go bankrupt from this source, if it had not already defaulted on its bonds. The pension or other funds which had bought the MBS on its guarantees, would suffer tens of billions of dollars of losses.

Finally, Fannie has derivatives obligations: $533 billion in hedges, allegedly to protect it from risks, which themselves could go into default against its bank and other financial counterparties.

Fannie Mae's three risky obligations total over $2 trillion, vigorously used to inflate the housing bubble. Now, an increased default level among the $5.757 trillion in home mortgages, which by itself were not enough to bring down the whole housing market, would create a radioactive reaction inside Fannie Mae, causing it to bring down that market by defaulting on hundreds of billions of obligations.

While Fannie Mae was building up its risky obligations, so was its crony Freddie Mac. Freddie Mac's total of these three risky obligations is $2.91 trillion. (The smaller Freddie Mac's total is bigger than Fannie Mae's, because it has a much bigger derivatives portfolio.) Other institutions which perform functions similar to Fannie Mae, such as the Federal Home Loan Bank Board and private issuers of MBS, have approximately another $0.7 trillion in risky obligations. Thus, the total of housing-related high-risk obligations is roughly $5 trillion.

It should be kept in mind that if one starts with $5.757 trillion in mortgages, these $5.0 trillion in risky obligations are distinct from and in addition to the mortgages, and a total of $10.757 trillion is laden onto the homes and attached to the incomes of America's homeowners. A Mortgage-Backed Security is an instrument with its own risks, independent of those of the underlying mortgages. For example, a dramatic change in interest rates or even a significant increase in pre-payments of mortgages can wipe out MBS value, quite as efficiently as the increase in mortgage defaults. In the case of the REMIC portion of MBS, this risk is considerable. Fannie Mae's financial paper is a ticking time-bomb threatening to bring the whole leveraged operation down.

Mortgage Financing Props Up Consumer Bubble
This is already far too dangerous, but the financier oligarchs decided to extend the housing bubble to do double duty, to support consumer spending, to halt the rate of economic decline. It thus serves now not only as a bubble for housing values in their own right, but the Wall Street-City of London circles are encouraging homeowners to borrow against the increases of fictitious value in their home to extract "wealth" with which to engage in consumer spending. This is known as the wealth effect.

While it is commonly thought that stock market capital gains have held up consumer spending, a recent study by a team led by Yale economist Robert Shiller, shows otherwise. In the study, entitled "Comparing Wealth Effects: The Stock Market Versus the Housing Market," Shiller shows that for every 10% gain in the stock market, there is a 0.2 to 0.3% gain in consumer consumption; while for every 10% gain in the housing market, there is a 0.62% increase in consumer consumption. Whether or not the numbers are precise, the rough comparison of boosts in consumer spending, is two to one in favor of the housing bubble.

Households are finding two ways to get their hands on some of the fictitious value of their homes: cash-out refinancing, and home equity loans. Under cash-out refinancing, a homeowner takes out a new, larger mortgage on his home, whose value has been artificially pumped up by general speculation. With the new cash, he pays off his first mortgage, pays off his credit card debt, and has money to buy a spate of consumer goods. According to Fannie Mae, in 1993, homeowners extracted approximately $28 billion in cash, from cash-out refinancing; but this tripled to $80 billion in 2001. With an equity loan, the homeowner borrows against a portion of the equity existing in his house (rather than refinancing the entire mortgage, as with cash-out refinancing).

The amount of home equity loans outstanding stagnated between 1990 and 1995, only rising from $235.9 billion to $289.3 billion. Then, as "Bubbles" Greenspan et al. pumped the bellows, the amount of home equity loans soared, reaching $701.5 billion in 2001. The amount of home equity loans is larger than all borrowing by credit cards in the United States.

A Federal Reserve Board economist told EIR that half of the value of all home equity loans does not go for home improvements, but for consumer expenditures and paying down credit card debt. Others indicate that as much as 60% of home equity loans—over $400 billion a year—is for consumer cash and credit card expenditures.

The banks have made it very easy to get home equity loans since the mid-1990s, and now promote "home equity lines of credit," where the homeowner borrows, not a fixed amount—as was the case with the old home equity loan—but an almost unlimited amount of credit.

Write It Down Before It Falls Down
The housing bubble, represented by $12.04 trillion in homeowner home real estate valuation, and $10.757 trillion in original home mortgage and secondary housing market paper, is the biggest such bubble in history. It has more than doubled its size since 1995.

Signs now exist of an increase in mortgage problems: In the first quarter of 2002, more than 4.65% of mortgage loans nationwide were delinquent (30 days past due), the highest level in ten years, and the rate of mortgage defaults is rising. Fannie Mae has taken extraordinary measures to roll over troubled homeowners' mortgages, in order not to have the level of defaults show up. But the housing bubble cannot be sustained. The principal boundary condition is reality: Households with declining real standards of living, are not able to take out of their incomes what is necessary to pay rising home prices, and the demands of ever larger mortgages.

Lyndon LaRouche has proposed putting the financial system through Chapter 11 bankruptcy reorganization, as part of the process of a New Bretton Woods monetary system. That would include writing down a good part of the mass of U.S. housing paper. If that is not achieved, as mortgage defaults increase, beyond the ability of Fannie Mae and Greenspan to control them, the leverage that has been built into the housing market will come undone, with lightening de-leveraging of the entire market. Six trillion dollars of fictitious real estate value will deflate rapidly. Mortgage defaults will intensify, and millions of families will be devastated. The grand payoff is that the housing bubble's puncture will bring down consumer spending, and the U.S. financial system which Greenspan et al. built it to sustain.


http://www.larouchepub.com/other/200...annie_mae.html

Silver™

3 year old article.

@ "U.S. Real Estate Bubble Nears Its End"

You sure have some spot on accurate articles.

Fibonacci

Non-related, but still plays into my stagflation theory, ala guns'n' butter...

This article appears in the March 18, 2005 issue of Executive Intelligence Review.
GMAC Is a Big Soft Spot
In Global Debt Bubble
by Paul Gallagher

General Motors Acceptance Corporation (GMAC)—the huge $300 billion credit finance company, sitting at the valve between the overblown U.S. real estate bubble and the deflating auto sector—is facing big debt trouble in 2005-06. The trouble is driven by the falling dollar, rising interest rates, and falling auto sales. GMAC is far larger than all the other combined parts of its parent General Motors; its debt, at about $260 billion, is bigger than that of any other American corporation except the huge government-sponsored Federal National Mortgage Agency (Fannie Mae), whose mortgage debt it invests in. During 2005, GMAC will be caught simultaneously in a shrinking real estate bubble, in the tar pit of falling global auto sales, and possibly in the unpaid obligations of General Motors' pension plan. GMAC could play a major part in a collapse of the dollar and dollar credit markets.

"GM Decline to Junk Shows Waning Confidence in Automaker," headlined a long, March 8 Bloomberg News analysis of the fallout from February's sharp drop in U.S. auto sales. During 2004, General Motors tried to pump up its sales with circus-level rebates for auto buyers of more than $5,000 per vehicle (the entire U.S. auto sector gave an average $2,700 rebate on every vehicle in 2004, but GM's doubled those of the other makers). When, at the beginning of 2005, it tried to reduce the rebates somewhat, while oil, gasoline, steel, and industrial commodity prices were zooming up and total auto sales were falling, GM hit a wall; its January sales were 9% below a year earlier, and February's were 13% down despite its having suddenly lowered prices in mid-February. Its bonds' credit rating is now just one notch above junk, with a "negative outlook" from Fitch rating agency pointing the way to junk-bond status within weeks or months.

'Thunderstorm Over Detroit'
With recent years' ruinous "rebate battles," depending in turn on the Greenspan Fed's extremely low interest rates of 2001-04, auto has become, like textiles and other globalized industries, a race for cheaper wage and pension costs to overcome falling net revenue. GM, which owns Vauxhall in Britain, Saab in Sweden, and Opel in Germany, also lost $2.6 billion in Europe last year. GM is laying off 12,000 workers across Europe; where strikes and demonstrations have slowed this down, as in Opel's plants in Germany, GM is getting wage cuts instead. Other European automakers are also losing sales, and waging price battles; they have joined everyone else in competing primarily to export cars to the United States.

But in the deindustrialized U.S. economy, the auto workforce has shrunk by 70% since 1980—at an accelerating pace since 2000—and in the hundreds of smaller firms of the auto parts/auto supply industry, is becoming increasingly a non-union, low-wage, and even minimum-wage sector (see Interview). It now has far more pensioners than working employees. Michigan UAW local president Eugene Morey cites Henry Ford's famous principle—auto workers have to be readily able to buy the cars they make—and points out that this principle can't be violated across the auto sector, without paying the consequences in the whole economy.

"Thunderstorm Over Detroit," was the Swiss Neue Züricher Zeitung's headline Feb. 26, forecasting "dramatic turbulence" as GM tries to prepare to refinance or pay $44.7 billion in debt in 2006, and Ford to refinance or pay $37.1 billion on its $174 billion total debt. Tensions rise on corporate bond markets, as new debt is used to pay large volumes of old debt amid rising interest rates and rapidly falling credit ratings. Neither GM nor Ford, "financial firms now producing cars as a hobby," are Faraday Cages, safe from being struck by lightning—in 2006, the Swiss daily wrote. But it could strike earlier.

The London Financial Times, in a March 5 article on "Renewed Concerns Over GM's Creditworthyness," reported that "bond traders are now concerned about the fundamental outlook of the company." With that massive refinancing lying ahead, it is already having to pay 3-4% higher than Treasury bond rates. For comparison, on 10-year corporate bonds: Pharmaceutical giant Merck paid 4.65% in early March on a $1 billion issue; GM would pay about 7.45% with its current rating, and 8.25% or higher if and when it falls to junk. Bond analysts are not forecasting bankruptcy now; but, says one at Credit Suisse, "If their borrowing costs rise very quickly and they can't generate the cash they need for new products, then it becomes a vicious cycle."

GM replaced the top officials of its sales division on March 4. Its primary parts maker Delphi (which was a division of GM until 2000) fired its chief financial officer on March 5, and its president is in process of resigning as an "Enron-style" accounting scandal makes its financial situation far worse. Delphi's credit rating was knocked down two notches to below junk in early March: on March 8, it notified 4,000 of its salaried (i.e., non-United Auto Workers-member) retirees that it is ceasing to pay into their healthcare plan, and they are on their own. This desperation move was supposed to save Delphi $500 million a year. The same day, GM itself increased its new indefinite layoff announcement in Lansing, Michigan—where it is closing both a Chevrolet/Pontiac plant and a Delphi parts plant—to 3,700; the layoffs were moved up to May 9.

Most suppliers for both GM and Ford were already at or below junk-bond grade before the latest sales reports, and are now being further downgraded—i.e., they cannot borrow from anyplace but GMAC to stay in business. Delphi and Visteon, Ford's biggest parts supplier, are demanding airline-style "givebacks" from the United Auto Workers (UAW), and defaulting on benefits. In 2003 and 2004, both companies got the UAW to agree to the despised "two-tier wage" system where newly hired workers earn $14 an hour, while the UAW contract calls for $25. The same conditions obtain all through the chains of auto suppliers.

The Pension Collapse Threat
There is an additional threat: GM's pension fund is underfunded by $17 billion (funded at only 80% of its obligations), and the Bush Administration is pushing new "pension reform" legislation which will heavily penalize companies with underfunded plans, and with damaged credit ratings. "Auto will probably be the next sector [after steel, and now the airlines] whose pensions may collapse" one expert told EIR. If GM goes to junk-bond credit status, "a lot of things change respecting its pension funds," he said, both under existing pension regulations, and more so if the Bush Administration's "reform" of the Pension Benefit Guaranty Corporation (PBGC)'s rules passes Congress. The PBGC insures and regulates private corporate pensions. The "things" that change in junk-bond status, all mean requiring from the company, both much higher PBGC premium payments per worker, and much higher payments into the pension fund itself. GM would have to assume the obligation, for example, that each one of its workers will retire at the earliest possible point, and take his or her entire pension as a lump sum at retirement.

U.S. Airways has used bankruptcy to shed these pension obligations; United Airlines is close to doing the same; like the steel companies and many other sectors before them.

If General Motors were to attempt the same, the whole $300 billion debt bubble of GMAC would be up in the air.

In fact, on Jan. 13, GM announced that it wants to separate from its huge credit finance subsidiary, "to try to protect GMAC from GM's sinking credit rating," the Detroit Free Press reported. GM wants to create, before the end of 2005, a new holding company called Residential Capital Corp., to include GMAC—much of whose assets now are in mortgages and mortgage-backed securities—and another GM subsidiary called Residential Funding, Inc. GMAC debt is now just two notches above junk, but they obviously think it would improve if detached from General Motors. Unsaid, is that this could prepare GM (the auto company) for a declaration of bankruptcy, followed by an attempt thereby to "lose" its UAW pension fund.

But the Pension Benefit Guaranty Corporation, itself already more than $23 billion in deficit, could not simply absorb the obligations to GM's hundreds of thousands of pensioners, plus the loss of its pension insurance premium payments. It would defend itself, with a government lien against—GMAC.

Standard and Poor's credit rating agency already assessed this threat in an August 2004 analysts' report, "Assessing the Risk of Pension Plan Terminations on U.S. Auto Lease Securitizations," which specifically discussed GMAC. "Standard and Poor's is concerned with the following scenario," the analysts wrote: "The corporate sponsor [of the pension plan, GM in this case] files for bankruptcy; the sponsor or the PBGC terminates the pension plan...; and the PBGC attaches a lien to whatever assets are available.... The titling trust [GMAC, holder of hundreds of thousands of auto loans and leases] therefore, as a bankruptcy-remote entity, and a part of the sponsor's controlled [corporate] group, could be ... a target of lien attachment by the PBGC." And they noted, "Standard and Poor's assumes the risk of a GM and GMAC insolvency is high" because of the low credit ratings (which have gotten lower since the analysis was written).

Thus, a pension blowout like that of the 1990s in steel and the last four years in airlines, is one of the threats of the "thunderstorm" over the U.S. auto/finance companies' huge debt.

http://www.larouchepub.com/other/2005/3211gmac.html

Fibonacci

Thanks for stating the obvious....now you're gonna say next that Greenspan was wrong when he declared Irrational Exuberance 4 years early...


http://bigpicture.typepad.com/commen..._the_we_1.html

Fibonacci

COMSTOCK PARTNERS, INC.
The Bubble, Deflation, and Implications for Real Estate
by Charles Minter & Martin Weiner


We have written many research pieces and daily comments describing what we believe to be the highest probability outcome from the most outrageous financial mania in all history. We concluded that the excess capacity and record debt levels that were associated with the mania would produce deflation here in the U.S. and possibly worldwide. This paper will discuss each of these areas and also direct your attention to the implications for real estate and housing prices.

The Bubble

The mania that took place during the 1990's will go down as the largest bubble in all of financial history. At the peak price earnings multiples were unfathomable with the NASDAQ trading at 245 times earnings and the S&P trading in excess of 35 times earnings. The 245 times earnings of NASDAQ were unprecedented since the NASDAQ traded in a range of 15 to 30 times earnings from its inception in 1971 to the mid 1990's, when every man woman and child in America wanted to own a piece of Cisco, Dell, Microsoft, Intel, JDS 3Uniphase, etc. We are sure the history books will be replete with examples of true greed and/or ignorance from the best and brightest people in America. Many of them had Ivy League educations and had studied the basic fundamentals of common stocks and what drove their returns. They threw the investment books of the past out the window and decided to come up with metrics of their own in order to justify prices that make no sense. They were taught that stock splits should mean nothing whatsoever in the valuation of a common stock, and that the only purpose of splits was to make it easier for individuals to buy 100 shares. Yet every time a company announced a split the stock would soar in price. They were taught that the P/E of the major indices range from 10 when stocks were inexpensive to 20 when there was irrational exuberance. Yet as the S&P 500 P/E rose above 20 and then 30 they actually believed that there was a "new era", or "new paradigm" and that the old fogies who thought that historical P/E ranges meant something were crazy. They started valuing companies on whether they beat the "whisper number" and how many eyeballs were logging into an Internet site. Imagine how any strategist could have been bullish as the market rose to triple and in some cases quadruple levels seen in normal times.

Even now business schools all over the country are looking back at what took place during the bubble and are more than likely knee slapping and belly laughing at how insane the environment was. They will find it very hard to believe, and in hindsight wish they were managing money since it would have been so easy to see the errors of the best and brightest. It is too bad, because they will never again see that type of mania in their life times. Also in hindsight, they could have looked back at valuation levels of individual stocks and wish they would have been around to sell or sell short ridiculously valued stocks. The most egregious examples of greed were the business-to-business Internet stocks, like I Two Technologies, Ariba, or Commerce One. These companies were in the business of facilitating business purchases through the Internet and each one sold at valuations exceeding $48 billion when there were no earnings and in some cases very little revenue. Other companies that come to mind are CMGI and Internet Capital Group, which did nothing but invest their capital in start up Internet companies that for the most part had no revenues or earnings. At one time the capitalization levels of these two companies were $125 billion. This valuation level was higher than the combined capitalization of International Paper, Alcoa, GM, Honeywell, AT&T, and Eastman Kodak. But that was when the stock of CMGI traded at 163 and Internet Capital Group traded at 212. Now CMGI trades around 85 cents and Internet Capital Group trades around 33 cents. Priceline, which did nothing except sell airline tickets over the Internet and had no planes, no pilots, no baggage handlers, or maintenance men, was worth more than the entire airline industry-by a lot!

Is it possible that the consequences of a financial mania that ludicrous can end with the mildest recession in history in 2001? Debt increases and mergers and acquisitions, whereby one overpriced company bought another overpriced company, were the typical market transactions. After selling overpriced stock to the public as IPOs, the shenanigans investment bankers used to manipulate new issues to triple and quadruple the IPO price (the same day of the offering) were amazing. They would only allocate new offerings if the client paid substantial commissions to the underwriters and then insisted that the buyers of the IPO also buy more shares wherever the stock opened after the IPO. Of course this activity only encouraged the public to chase the new offerings to an eventual horrible outcome. There were exceptions made to purchasing in the aftermarket, but you had to be a prospective client who could flip the IPO for a substantial gain at the public's expense. The investment bankers were able to convince the best minds in the country that they were getting a great deal on the initial public offerings even as all understood that many of these companies had no earnings and some had no revenues. When the mania ended the debt load remained and as the stocks crumbled individual investors were left holding the bag. Is it possible that this mania could end without the debt contracting or the individual investor disgorging themselves of the stocks and stock mutual funds they rushed in to buy at any cost? We don't think so!

History of Debt and Deflation

The U.S. has a history of major inflation followed by massive deflation for the past 200 years. These inflationary periods were accompanied by increasing debt and rising inflation while the deflationary periods were associated with decreasing debt and interest rates. In between the inflations and deflations we experienced periods of disinflation, which just happened to coincide with all the gains in the stock market over the past 100 years. The periods of inflation and/or deflation were not what you would call beneficial to the stock market. We have been experiencing disinflation for the past couple of decades (the best environment for common stocks), but we would not bet on this environment to continue and we expect to fall into a deflationary period shortly.

Inflation is an abnormal increase in the available money and credit beyond the proportion of available goods, resulting in a sharp and continuing rise in the general price level. Deflation, on the other hand, is a reduction in available money and credit that results in a decrease in the price level. In other words, deflation is the destruction or elimination of the build up in debt associated with inflation. Because of the relatively recent events of the 1970s almost everyone is familiar with what happens during periods of inflation. What occurs during deflation is less familiar since the last time it happened was during the 1930s. Precipitating the deflation of the 1930s was the inability of the banks to lend out money supplied by the Fed. While the banks had the funds to lend, qualified borrowers didn't want the money and the others were not creditworthy. This could have taken place because of job losses, business failure, or the bank not wanting to loan the money to non-credit worthy borrowers. And if you think about it, why should they? The goods they would have purchased with the money borrowed were declining in value due to excess capacity and deflationary conditions.

Concentrating on the chart attached below we will describe the flow of debt and interest rates as well as the producer price index. The first period of inflation on the chart started in 1800 and lasted until 1816 when interest rates peaked at 5.02% and debt peaked at $225 million. The deflation that followed lasted until 1845 with interest rates troughing at 2.17% and debt declining to $500,000. The next inflationary period took interest rates all the way up to 10.38% (just about double the highest rate from 1800 to 1970) in 1858, while the debt rose to$10.2 billion. This debt declined to $6.5 billion in the following deflation while interest rates declined to 3.18% in 1902. The inflation that followed took the interest rates up to 5.16% in 1921 while the debt grew to $192 billion. The next deflation brought the debt down to $168 billion and interest rates to 2.80% in 1944. From 1944 inflation grew until 1949 when it leveled off into another disinflationary period where stocks prospered until 1966. Anyone who studied financial history would have believed the debt would peak and we would enter another period of deflation. However, with the build up in liquidity that took place during the war, there remained enough liquidity to enable a continuation of borrowing and spending. So, instead of falling back into deflation, inflation accelerated from 1966 to 1981 with the PPI tripling before leveling off again. From 1981 to the present we have been experiencing a disinflationary period associated with bull markets. And we had a doosy! In fact, the debt levels continued to grow just as they did in the other disinflationary periods such as 1920 to 1929 and 1949 to 1966, two periods that also witnessed tremendous stock market returns. These disinflationary periods are circled in the Debt Cone chart, which is attached at the end of the text. You will find that these disinflationary periods alone accounted for the entire gain in the stock market averages for the 203-year period of time.



The debt grew to approximately $20 trillion relative to the GDP of $8 trillion in the first quarter of 1997 and continued to grow in the financial mania to the present level of almost $32 trillion with $10.6 trillion of GDP (GDP is essentially the revenue generated that could be used to pay down the debt). Nobody knows if this is the limit to the debt-to-GDP ratio that will lead to deflation, but the bursting of the bubble leads us to believe that we are very close. Keep in mind that the growth of debt from $20 trillion to $32 trillion over the past 6 years with the GDP growing at $2.5 trillion catapulted the debt-to-GDP ratio from 2.5-to-1 to 2.8-to-1 in six years. Is this the limit? Who knows, but if it ever ends, there couldn't be a more logical time than right now! Again, only because of the fact that the bubble in U.S. stocks has burst in a way similar to the U.S. in 1929 and Japan in 1989, we could conclude that the debt is starting a major decline.



Other important signals preceding a debt decline would be the money supply peaking and the velocity of money contracting. The charts of these two indicators of potential deflation are shown at the end of this paper.

Why Real Estate Might be the Catalyst for the Next Deflationary Period

Anytime you want to find the most vulnerable segment for an implosion of a debt bubble, just identify the main asset that the lending institutions are using as collateral in making new loans. Recent history is replete with numerous examples. The banks couldn't wait to loan money to the LDCs (lesser developed countries) in the mid 1970's because of the fact that governments could always print money if they had a problem with too much debt. Walter Wriston of Citibank was the largest proponent of the theory. They found out the hard way that this was not the panacea that most bankers thought as these countries used the printing press to substantially depreciate their currencies. Then the banks loaned money to the farm belt since it was obvious in the late 1970's that inflation would bail out any problems with farmers. This turned out to be even worse than the LDCs. The banks were loaning money to a segment of the economy that had no chance to pay down the debt. The income from the crops they were growing and selling couldn't possibly justify the cost of the real estate that was skyrocketing at the time. At the time, Merrill Lynch even tried to sell a limited partnership on farmland to its clients. We believe the plan was stopped in its tracks only by a very sharp client (Mr. Dwayne Andreas, then CEO of Archer Daniels Midland) a who warned them how dangerous it would be to do the deal with the price of farmland so high relative to the money the farmers could receive for the crops they grew. Naturally, this also blew up in the lenders' face and they had to find another segment of the economy to keep the debt bubble going. Voila, energy! The lenders saw that the OPEC agreement in the mid 1970's would be a "no-brainer", since there were many forecasts by experts that the price of oil would rise to $100 a barrel and there would be no problem getting their money back with interest. This also turned out to be a mistake since the oil price stopped rising as exploration activities soared and energy users found ways to alleviate the pain through energy-saving engines and appliances, wood stoves, sweaters, and whatever else it took to stop the rise in energy in its tracks.

This was followed by massive loans to the "rust belt" manufacturers in the mid-west, and this turned out to be a mistake also. The following area of concentration was the junk bonds and LBOs (leveraged buyouts). Mike Milken was a hero at the time and the banks concurred that they couldn't lose this time for sure. Well, we all know what happened to Mike Milken, and the banks should have learned another lesson. If the banks consistently found that the areas and segments that they lent to never seem to work out, you would think that they would learn to stop concentrating in just one area or segment. But believe it or not, they never seem to learn that the only reason the collateral behind the loans rose in value was because the money that was loaned supported the collateral. What area do you think the most money is being loaned to now? You guessed it, real estate in any form. Houses, apartments, office buildings, and raw land can't miss. Everything else seems to be wilting away, but not real estate!

Now, take a guess at what segment dominates domestic non-financial debt? What area is over 40% of total domestic non-financial debt? You guessed it---Mortgages! What area now do you think will be the catalyst for the next deflationary period? You guessed it again-Real Estate! Now maybe we are wrong on this, but we are highly confident in the final outcome even if we are early. We believe that just like the farmland that became too expensive relative to the prices received from crops, the price of real estate can't be justified by the amount of rents received. We look at this in the same way as the P/E of a common stock. If the price of the company's stock is way out of line with earnings, that stock will eventually decline. On our home page in the section titled "Comstock in the News" is an interview with Barron's that touches on the dilemma of real estate and housing. The Center of Economic Policy Research put out a paper comparing the cost of renting a home to the cost of owning a home. They looked at the situation just as we do. They concluded that the gap between the two is now about the largest ever. Comstock was written up in Barron's magazine in 1988 discussing this same theme and the gap was wide then, but it is even wider now! This gap can only be filled by rentals rising or home prices falling. With vacancies increasing in every area of real estate, we doubt that the gap will be filled by rents increasing. There is no other solution to this problem except for housing prices to fall, and that won't be a pretty picture since it seems that every homeowner in America has been borrowing money on the equity of their homes.



The Mortgage Bankers Association of America estimates that the total volume of mortgage loans in 2002 is a record $2.5 trillion. The Federal Reserve estimates that homeowners raised $130 billion last year through home equity loans and lines of credit. (Total cash-outs of all home refinancing could be as high as $250 billion.) Many of these home equity loans are used in place of credit card debt since the interest rates are much more favorable. However, while credit card lenders can only sue a borrower and request a lien on the property, the problem with home equity loans is that the bank can seize the property. This would very rarely be a problem with housing prices going up, and home prices have increased over 40% on average since 1997, with some areas like New York (especially Long Island), Phoenix, and Denver increasing much more than the average. However, there are other areas where the home prices have softened, such as the Midwest (St. Paul, and Indianapolis) and Southeast. In these areas the banks have their hands full as delinquencies and foreclosures are rampant. Just last month the U.S. hit a near record delinquency rate and a record foreclosure rate, with almost all coming from the areas of soft home prices. If home prices that have been skyrocketing start to fall we could have a snowball effect and delinquencies and foreclosures could really get out of hand.



The real estate problem we see is not confined to housing alone, as office buildings and apartments are having their own problems. Only yesterday it was reported in the Wall Street Journal that the U.S. office-vacancy rate rose to 16.2% in the first quarter. This was the ninth straight quarter of rising vacancies and declining rents. It started in the first quarter of 2001 along with the start of the recession, but just like the job market, it seems to have remained in a recession. Apartment landlords also saw vacancy rates on average in the U.S. climb to their highest level in a decade. The apartment-vacancy rate for the nation's top-50 metropolitan areas rose to 6.8% in the first quarter, from 6.3% in the fourth quarter of 2002 and 5.7% a year earlier. Effective rents fell .3% from the fourth quarter and .1% from a year earlier to $845 a month.



Right now real estate and housing are the pillars of the individual's investment portfolio, and if that cracks, it could be the catalyst that throws the U.S. into the same economic quagmire that it went through 74 years ago. When you look at the record foreclosures and near record delinquencies on mortgage debt as well as rising vacancy rates in every area of real estate you start to come to the conclusion that the banks and other lending institutions could be making the same mistake again.


http://www.comstockfunds.com/html/TheBubble.htm

Silver™

Richard Freeman = Allan Greenspan ???

Fibonacci

Has Greenspan Over-Pumped the Real Estate Bubble?
by Noel Sheppard
03 January 2005

The residential real estate market is beginning to behave in an irrational fashion that could be portending an imminent peak.



Like most people with even a passing interest in matters relating to business, I have been reading articles in financial periodicals and have heard the prognostications of many economists concerning a looming “Real Estate Bubble” for at least the past three years. Regardless of the logical and empirical approach to much of the research that has been shared on this subject, my own analysis has been quite contrary to these bearish assertions. However, some recent events have begun to weaken my resolve, and lead me to believe that the residential real estate market is indeed beginning to behave in an irrational fashion that could be portending an imminent peak.

The first cautionary signal was raised when a good friend of mine told me about what has happened to the house that he bought in Sarasota, Florida this April. As he will be retiring in two years, he purchased a lot with construction plans for a lovely model in a fine, gated golf community a bit inland from the Gulf. His base price before his personal add-ons was $399,000. They have barely broken ground to lay the foundation, and a similar floor plan in this community’s next development is now going for $699,000. That is a 75% appreciation in eight months -- an annualized increase of 112.5%. Now that’s what I call a bubble.

Granted, there may be mitigating circumstances in Florida related to the hurricanes, very strong economic growth in the region, retirement home purchases by baby boomers just like my friend, etc. However, when assets begin to appreciate at this kind of a pace -- not just the ten and twenty percent annual rates that we have been seeing in many parts of the nation including Florida for the past five years or so -- one must start paying heed.

The next shoe dropped a few days later when another friend of mine who owns a mortgage company told me about his average client the past three months or so -- mid-40’s to mid-50’s couple that is tired of their recent paltry gains in the stock market, and is, for the first time, purchasing a home or condominium as a rental/investment property. In doing so, they are not only leveraging themselves to the hilt, but also are negatively amortizing with total payments -- including taxes, insurance, homeowners’ association dues, and equity reduction -- that give them a monthly negative cash-flow of $1000 AFTER rent collection. But, they’re not concerned about this guaranteed recurring loss of capital because they believe they’ll make it all up when they sell the house for a huge profit somewhere down the road. That’s also what I would call a bubble.

To try and put this kind of speculative borrowing and investment behavior in perspective, in the stock market, this would be akin to buying on margin -- purchasing stocks with money that you had borrowed off of the value of other stocks you owned -- to such an extent that your interest costs were eating into the principle of the equities that you held. Now, to be sure, this is not an uncommon practice for investment professionals and experienced traders. However, analysts are always keeping track of the total retail margin debt that exists as a percentage of retail stock accounts to gauge speculative excesses in the market. To be sure, one of the real warning signs in the first quarter of 2000 when stocks were peaking was the level of this very debt. Now, it is quite conceivable that this same degree of speculation is emerging in the real estate market.

Finally, my other concern about this behavior is that these are first-time real estate “investors,” or what stock traders would refer to as “weak hands.” Strong hands are professionals and seasoned investors. Weak hands are neophytes who have no experience with equities that always get sucked in as buyers at or close to the peak. Certainly, this is what happened in the first quarter of 2000, when you couldn’t swing a dead cat in this country without accidentally hitting someone who had never invested in stocks in their lives, but now owned either dot-com shares, or an aggressive growth mutual fund that was largely investing in such worthless assets.

Today, the weak hands -- people who have never purchased investment property before -- are actually willing to lose money every month because they believe that real estate will keep going up. It’s dot-coms all over again, folks, but with much larger sums of money, much greater degrees of leverage, and, as a result, much more ominous portent. When people were speculating this way in the stock market five years ago, for the most part, all they lost was their savings and their retirement plans. This time, if the cards begin to implode, people could end up quite literally losing not just their investment properties, but also the homes that they live in.

What potentially is the cause of this speculative excess this time? Well, to a certain extent, the same as one of the root causes of the recent stock bubble -- overly aggressive monetary policy. If you recall, in the fourth quarter of 1999, in order to ward off the possible banking illiquidity that was feared to transpire as a result of money hoarding prior to Y2K, the Federal Reserve left interest rates unchanged at its December meeting. At the same time, they executed a variety of procedures to make sure banks were quite flush with cash just in case Y2K problems arose. Many economists after the fact believed that this “looser” than required monetary policy precipitated the upward movement in stocks at the end of the millennium.

As one can plainly see from a NASDAQ chart, this index went from roughly 2500 to 4000 during the fourth quarter of 1999 -- a 60% rise -- with some of the catalyst clearly being an overly aggressive monetary policy. Moreover, Mr. Greenspan was certainly too slow in altering said policy. For instance, at the time, there were many economists like myself who expected that once Y2K had passed without the dire consequences that had been presaged, the Fed would immediately -- meaning as soon as the first or second business day of the New Year -- raise rates. Why? Because the economy was very strong throughout 1999, and clearly warranted a tighter monetary policy than was necessary to avoid Y2K related liquidity problems. Unfortunately, by leaving rates unchanged, Mr. Greenspan encouraged the final rally in stocks that quarter that ended with the eventual financial bloodbath. By contrast, if Mr. Greenspan would have immediately raised rates early in January 2000 -- rather than waiting until February -- the final push from NASDAQ 4000 to 5000 in roughly ten weeks might not have occurred.

Subsequently, as far as real estate is concerned, Mr. Greenspan might be making the very same mistake, for without question, much of this extended real estate boom is largely interest rate driven. However, part of today’s aggressive monetary strategy is clearly also intended to deflate the value of the dollar to help our multinational companies export products and reduce American appetites for foreign goods. Unfortunately, even at the current 2.25% federal funds rate, our monetary policy is still on the easing side, given that a neutral posture would attempt to mimic the current rate of GDP growth. For example, as GDP grew by 3.7% in the third quarter, and will end up likely somewhere between 3.5% and 4% this year, with projections of roughly the same next year, a neutral policy would be a funds rate somewhere between 3.5% and 4%. Obviously, as we are nowhere near that yet, even though our economy has been expanding since the fourth quarter of 2001, our central bank for all intents and purposes still has its foot on the gas pedal with much of the fuel going right into the real estate speculation engine.

Given this, one has to wonder if Mr. Greenspan isn’t making the same mistake that he made in 1999 and 2000, when he left rates too low for too long. In fact, of Mr. Greenspan’s policy errors during his fabulous tenure, it has usually been either this kind of a situation where he doesn’t raise interest rates in a timely and aggressive enough fashion to prevent an asset-bust, or an overreaction to a financial crisis (1987 stock market crash) with excessive easing that results in a rekindling of inflation.

Irrespective of these cautionary signs, there are economic realities that exist today that are quite different than what was transpiring just before our last two real estate busts in the early 80’s and early 90’s. For instance, both of those collapses were preceded by exogenous economic events that led to huge employment dislocations in entire industries. In the 80’s, it was the implosion of the oil patch. In the 90’s, it was the fall of the defense complex as well as the savings and loan industry. By contrast, as our economy looks quite healthy at this stage compared to what was occurring during both of those periods, there is currently no apparent similar dissolution of an entire employment sector that appears to be presently looming on the horizon.

As a result, my concerns -- much as they were in January 1999 when I first started worrying about equity valuations -- might be very early. Moreover, if Dollar Diplomacy works, the population models moving forward could suggest that any correction in real estate valuations regardless of severity might just be a short-term deflating of present aberrations. However, as an exploding stock bubble was largely responsible for our last recession, and a real estate collapse acted to significantly exacerbate the previous one, this matter warrants continued scrutiny.

Noel Sheppard is a business owner, economist, and writer residing in Northern California.

http://www.intellectualconservative....ticle4061.html

Silver™

Post more articles from 2002 predicting the imminent collapse of the "housing bubble"

Fibonacci

May 23 2004
Geneva.
It seems almost surreal. Everything seems in order. Traffic flows outside my window, but this Calvanistic city is almost shut down because it is Sunday. However, the weekend of solitude has allowed me a rare time for reflection and that is good, because things become much clearer when they are not subjected to the noise of competing viewpoints. I have access to the internet and over the past few days have read many writers, including some of my favourites like Richard Russell (www.dowtheoryletters.com) and Bill Bonner, the editor of The Daily Reckoning, and of course newspapers such as The Financial Times and The Times. My mind, far from being bombarded by the amount of my reading, is clear. Perhaps I have been assisted by my presentations of The Long Wave, so far in Paris and Geneva, and almost certainly by my visit to Monsieur Jean-Antoine Cramer, a traditional Swiss banker of the old school, who was kind enough after my one-on-one presentation of The Long Wave, to invite me to his beautiful home just outside Geneva, where we continued our discussion. We were in agreement on almost all the issues, and we agreed that the fundamental reason for the impending collapse was the enormity of the debt bubble that Alan Greenspan has spread throughout the world.

So, that tranquility and order that is manifested here in Geneva and almost everywhere else in the world is about to be shattered by an explosion of the debt bubble. There is no warning before a bomb explodes. However, there is some warning before the debt bubble explodes. That warning is apparent now, and the crisis, as I see it, is imminent. The warning is rising interest rates. Rising rates place an intolerable burden on over-leveraged debtors. There are just too many of these and many will suffer the consequences of their stupidity. If rising rates place over-borrowed debtors in jeopardy, what do they do to the bankers and hedge funds that have made hay from the so-called carry trade, which is to borrow short and buy long? Their long positions are underwater, as are the US debt positions held by the great creditor nations.

It appears that the world, and in particular the US, is in the beginnings of a credit crunch. I believe there is insufficient capital to finance the enormous amount of debt, some new, and some that has to be rolled over as it expires. In my opinion, interest rates must rise under the circumstances and weaker borrowers are crowded out and must pay exorbitant rates to stay in business, which usually means that they do not. There was a credit crunch during the early stages of the last Kondratieff winter and rates rose in the face of a deepening depression forcing many high debtors into bankruptcy. While the circumstances today are similar to those of the early 1930s, they are much more acute. In the early 1930s the US was the world’s largest creditor nation and did not have to rely on the goodness of foreigners to lend her money. Nor were the debts of US corporations and individuals anything like they are today. Foreign money has poured in to finance not only US government debt but also that of many of the better-known US corporations, despite the fact that many of these companies are massively laden down with debt. As the value of the dollar falls and interest rates rise, these foreign creditors will experience losses on their US debt holdings and eventually withdraw their capital to safer havens. This negatively impacts interest rates and the ability of high debtors to service their debt obligations. The problem is compounded by a weakening economy.

The one thing missing from the so-called recovery was the creation of new jobs. That problem was apparently eradicated in March, when there were 308,000 new jobs created after a paltry increase in all the preceding months of George Bush’s presidency. How did these jobs suddenly materialize, just when they were needed? The truth is they did not. They are the results of creative Government reporting, as 95% of these jobs were part-time. New government jobs exceeded the total, meaning that private sector joblessness increased. To make matters worse, 400,000 Americans ran out of unemployment insurance. I have not seen a detailed analysis of the April figures, which were released on Friday and also exceeded the expected number, however, I am sure it’ll be more of the same; that is, misleading numbers suggesting that the jobless recovery is no longer jobless. There is some poetic justice associated with these figures, as they suggest an economic recovery in the making, which is also contributing to rising interest rates. In my opinion this will be the kiss of death to the bogus recovery.

Already, rising interest rates have dampened American enthusiasm for home re-financing. I cannot transport charts into this report, but even a relatively novice chartist is likely to be shocked by the massive tops evidenced in the charts of US homebuilders and in companies like Fannie Mae and Freddie Mac. Read Clive Maund’s excellent analysis, I think it’s on www.gold-eagle.com. These charts are indicating serious pressure for US real estate and the bursting of that enormous debt bubble would have a catastrophic effect on the US economy. The Japanese real estate bubble continued three years beyond the Japanese stock market peak. That bubble was not so much one related to homes, but rather to commercial real estate, particularly in large urban centers. The American bubble is centred on individual housing and a US real estate collapse would be devastating, not only to the US consumer, but also to all businesses associated with the industry, and in particular the mortgage lenders, such as Fannie Mae and Freddie Mac. An indication of impending collapse would be a rise in interest rates beyond the norm for these voracious borrowers.

The great American debt bubble looks ready to burst into smithereens. This would be devastating to the world’s economy and its financial system. As for the stock market, forget about it. How could stocks survive in the face of such disaster? Anyway, US stocks look ready for a new downward move. The broadening top, that is in place, and other technical evidence suggests that this move could be violent.

I am reminded very much by the recent recovery in stock prices, by its predecessor winter recovery, following the crash in 1929. At that time the Federal Reserve dropped interest rates and flooded the banking system with money, much as Alan Greenspan has done this time, although nowhere near to the levels employed by the current Chairman. People re-invested in stocks and the economy appeared to be in recovery. By April 1930, stocks had regained 50% of their losses and investors believed that they would continue on to new highs. The muted economic recovery based on the drop in interest rates and a significant injection of money into the banking system also contributed to the renewed confidence. But, it was all a false promise. The economy and the stock market had by no means corrected the excesses of the roaring 20s and, what followed from that stock market peak in April 1930 was a debilitating series of falls in stock prices to a bottom almost 90% below their peak and the destruction of the American psyche in the ensuing Great Depression.

The great autumn stock bull market of the 1920s at best attracted some 1.5 million Americans to its magnetism, whereas the autumn bull market of the 1980s and 1990s, which was almost 2˝ times bigger in terms of its price move than that of its predecessor, has attracted some 50 million Americans. It should not be difficult to imagine the utter financial ruin that be experienced by many Americans should the winter bear market follow the course of its predecessor. There is no reason to believe that it will not, as bear markets typically image the preceding bull market.



The intermediate term correction in gold may be over. This will be confirmed by a weekly closing above $379.10, which would put in place a key point reversal (a lower low price than the previous week, but a close above the previous week’s closing price). So watch Friday May 14th closing price. Technical indicators are at bottoms; sentiment is decidedly bearish, with many investors panicking out of their gold holdings. This is the stuff of bottoms. It may require some backing and filling in prices, before the next leg of the bull market really gets underway, but gold shares should start to regain their price losses of the past few months in anticipation of the next up leg. $435 acts as resistance to this new upward trend. If this price is overcome, then $500 becomes the level for the next point of resistance. Ian Gordon
May 12th, 2004



This brings me to the question of gold. Despite the shocking fall in prices not only for the metal itself, but even more frighteningly for the share prices of the junior mining stocks, the reasons for owning gold and gold shares are even more compelling and apparent today, than they were in 2000, when this 4th Kondratieff winter began with the peak in US stock prices. Allow me to review these reasons and to suggest additional reasons, which have become apparent, as this winter has unfolded.

1. The inevitable failure of paper money: It’s been tried many times before and has never succeeded, because the system provides for no discipline and allows governments to inflate the money supply to ridiculous levels. This inflation has always led to a bubble of immense proportions, which always bursts. Remember The South Sea Bubble, or the Assignant bubble, or John Law’s bubble, or more recently the 1921-1929 stock market bubble, and of course the Japanese stock market bubble, which ended in tears for the Japanese economy after its collapse in December 1989. Then of course there’s the most recent stock market bubble, which at least for the Nasdaq collapsed after its peak in 2000. I believe Alan Greenspan has engineered another bubble in a desperate bid to keep the over leveraged US economy going. When the real estate bubble collapses, as it will, (rising interest rates will do the trick), it will be a major financial disaster, since so many people have their wealth tied to the equity in their homes.

2. The failure of the US dollar as the world’s reserve currency: The process is already beginning. Reserve currency status always belongs to the world’s premier creditor nation: Britain in the 1800s and America in the 1900s.

3. The impending collapse of the world economy led by the United States into the Kondratieff winter: That process has already begun, but the pace will intensify in the face of rising interest rates. The purpose of the Kondratieff winter is to cleanse the economy of debt. The world economy, and principally that of the United States, is built on a massive bubble of debt. The purging of this debt will have a resounding impact on financial institutions, which have been the major debt providers.

4. The end of the American empire: The US has failed in Iraq. Its forces are stretched too thin. This will lead to challenges, which create geopolitical uncertainties. What currency do people turn to in times of uncertainty? It used to be the dollar, but no longer, and all other currencies are fiat too.

I believe the case for gold is stronger now than it has ever been. The recent setback provides a buying opportunity. Why is it only in investing that people want to buy high and sell low? It is because they get comfort in doing what the crowd is doing, but most of the crowd has not the slightest idea about the impending economic and financial disasters. Gold is your protection in these very difficult times.

Investment in well-managed junior gold mining shares is recommended, because these companies are growing their gold resources, whereas the producers are depleting theirs.

http://www.howestreet.com/story.php?ArticleId=424

Fibonacci

The housing bubble doesn't add up
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Lots of people have been saying it over the past few years, but, just like stock prices, real estate prices will not go up forever. We can’t all live in million-dollar houses.

By Bill Fleckenstein

It might be hard for folks to step back and see a speculative housing environment for what it is -- especially when the frenzy has furnished a lifestyle beyond their means. But we all can't live forever in dream homes financed by dangerous debt levels. The "math" suggests that this tenuous fantasy ultimately will fail.

Last week, I had a chance to read "The Asset Economy," the most recent article by Morgan Stanley’s Stephen Roach. He is probably the lone economist working on Wall Street who understands what has been going on during Greenspan's tenure. Kudos to him for standing up tall and telling it like it is amidst the ocean of dead fish surrounding him.

His latest article really put the current speculative environment into perspective. Oftentimes, it's just that, perspective, which is needed. I urge everyone to read the article and think about its ramifications.

Insanity reigns in real estate
Roach’s main point is this: Beginning with the big equity bubble, folks started using their assets to live beyond their means. First, it was stock-option wampum and other gains that resulted from the insanity. Now folks use their houses as ATMs. Then, he adds:
Stepping back from the data flow, it is important to appreciate the consequences of the asset economy. A more chilling picture emerges. Courtesy of the Great Bubble of the late 1990s, the American consumer discovered the sheer ecstasy of converting asset holdings into spending power. Households learned to spend beyond their means -- as those means are defined by growth in disposable personal income. Yet when the equity bubble popped, the consumer never skipped a beat. There was a seamless transition to another asset class -- property. And the joys of asset-driven consumption continued unabated.Start investing with $100.
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Income-based consumption had, in effect, become passé, and American households went on an unprecedented debt binge. No one seemed to care that the personal saving rate had fallen from 5.7% in the pre-bubble days of early 1995 to 1.0% in late 2001 (and now stands at just 2.3%). In the asset economy, who needs to save out of his or her paychecks? Who needs to worry about debt? Asset markets, goes the argument, had emerged as a new and presumably permanent source of saving for the American consumer. . . .

I must confess to being just as suspicious of this new paradigm as I was of another such scheme back in the late 1990s. As the bursting of the equity bubble should forever remind us, there is no guarantee of permanence to asset values and the wealth effects they spawn.

We can’t all live in $1-million houses
One point Steve Roach doesn't make is that the math for housing simply doesn't work. Not everybody in this country can live in a $1 million house or some higher-priced mansion. The income necessary to support the debt service just isn't there.

Housing got a boost in the stock mania because people rolled their gains into real estate. That was on shaky ground, as we dealt with the aftermath of the stock bubble. But then we got on "firmer" ground in the last 15 months or so, via all the government stimulus and low interest rates that sparked a speculative frenzy in housing, which continues to this day.

Money coming into the hot housing market is pushing up prices. This not only allows people to live beyond their means but also creates the capital gains to advance to the next bigger house -- or multiple houses. Of course, the total collapse in lending standards has abetted this process, since folks can take out 100% loans (or more, in some cases). It's as though every lender feels that every borrower is a triple-A credit and can't possibly borrow too much.


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When the math does not work
We have seen drunken lending orgies in the past, and they always end in disaster. Just as the math hasn't worked for everyone to live in a super-expensive house, no matter their income, the math doesn't work in lending, either. That's two pieces of the housing market where the math just does not work.

In the short run, saying that the math doesn't work doesn't matter. But in the long run, the math does matter. Let me give you an example: Back in 1980, when gold was $600 an ounce and interest rates were 12%, I remember thinking, how could anyone buy gold at that price instead of a Treasury bond? The math made no sense. In fact, for gold to keep up with the compound rate of return available from a Treasury (assuming the reinvestment rate was also 12%), the price of gold from 1980 to 2010 would have had to rise to almost $18,000 an ounce. That seemed impossible to me.

Often, we see situations where it's clear that things cannot conceivably work out. What I like to say is that it's completely and totally knowable that certain events are preordained. However, what's usually not knowable is the timing, which only can be ascertained as it is actually occurring. Thus, all we can do as investors is wait and see (and then pounce) if what we expect to occur actually does.

Bubblenomics: A window into 'home' economics
Also, you can be very close to the end of some phenomenon that's completely and totally knowable, and you can look completely stupid as things get even wilder. Here’s another example: In October 1999, I gave what I think is probably the best speech that I will ever make in my life, “Spinning Financial Illusions: The Story of Bubblenomics.” (If you believe that the housing bubble will never end, I encourage you to read the speech and think about what it was like at that time -- when it seemed the stock mania would never end.)

My observations in 1999 about what was happening and what would ultimately happen were fairly accurate. That said, the Nasdaq ($COMPX) doubled in the five months after my speech, making me look like a complete and total idiot, when, in fact, I was essentially dead right. This happens all the time. Markets tend to make you look the silliest just before they're about to change.

My point in bringing this up is to lend some perspective to the lunacy in housing and the continued denial/semi-lunacy we see in equities. The Fed and the government have attempted to bail out the aftermath of our giant stock bubble with a leveraged real-estate bubble. This will end in disaster, guaranteed -- no ifs, ands, or buts about it -- though, to repeat, what we cannot know is the timing.

Paying the piper for Fed 'prosperity'
Meanwhile, the longer the insanity persists, the greater the frustration on the part of people who've acted prudently and tried to prepare themselves. I suspect that's what makes them angry or causes some folks just to whine. But that’s the nature of markets. It's not easy to get rich or even make money in the markets, and folks shouldn't expect it to be easy. After all, if it were, everyone would be rich, which is another mathematical absurdity.

Back during the stock mania, I received a legitimate complaint from one sane fellow: The problem with being a "level head" (his description of folks who didn't believe in the mania), as opposed to being a "bubble head", is that when the aftermath of the stock mania played out, even level heads would have to suffer.

That was true then, and it will be true prospectively. It's one of my complaints about the irresponsible actions of the Fed. Everybody will be made to suffer, thanks to the incompetence and sheer arrogance of the Fed. That is one of the reasons why I have such contempt for Greenspan and the rest of the central planners at the Fed.


http://moneycentral.msn.com/content/P85418.asp

Fibonacci

Don't forget, Alan Greenspan made his famous "Irrational Exuberance" statment in December of 1996 and the Stock Market continued to run for another 4 1/2 years before it started correcting.

This Real Estate Bubble could continue to run for a while as long as long term interest rates stay low - 10 year treasuries dipped below 4% today.

The propensity of consumers to add debt to their balance sheets never ceases to amaze me....

Zapata

waiting for the prices to dip to get a house. these prices are not right.

BigPimp

This is why I called this the 'middle' of the end.


Late comers conservatives are getting into this now trying to cash in. The end will not be obvious. Just one day, investors start listing their 'empty' rental properties all at the same time, thus supply increases, driving down prices.

Silver™

Bubble? Housing more affordable, study says.

Low interest rates and rising incomes have made houses more affordable than they were 10 years ago, suggesting that talk of a national real estate bubble may be exaggerated, a report by the Federal Reserve Bank of Chicago said.

But the study's contention that home prices will fall if mortgage rates rise to 6.5 percent drew skepticism from economists at mortgage financier Fannie Mae and major housing and mortgage trade groups.

The study by senior economist Richard Rosen found that it took 15.8 percent of the median household's income to cover the monthly mortgage payment on a home with the median sale price last year.

Rosen created a "mortgage servicing index" that pegs the ratio of a mortgage payment for an existing single-family home at the national median price to median household income. In his index, consumers paid 20 percent of household income in the mid-1980s and 18 percent in the early 1990s.

"The increase in housing has come at the same time as mortgage rates have declined and incomes have increased," Rosen wrote in the Chicago Fed Letter published Tuesday. "These two factors have kept housing affordability for the United States as a whole roughly constant as housing prices have increased."

The study echoes comments by other Fed officials, including Chairman Alan Greenspan, that while some markets appear overheated, it is unlikely there is a national housing bubble that will burst, sending real estate values plummeting .

However, Rosen's study does spin some scenarios of house prices falling, a situation that other housing economists say has never happened on a nationwide basis. For example, Rosen's study suggests that if mortgage rates rose to 6.5 percent from last year's average 5.8 percent, and people continued to spend only 15.8 percent of their income on monthly payments, housing prices would likely fall by 6.5 percent.

The study suggested that if rates went to 7.5 percent and consumer housing expenditures remained the same, housing prices would drop by 15.5 percent.

Rosen said in an interview that his report probably should have emphasized that such price declines could happen over an extended period, rather than as an immediate reaction to interest rate increases.

Doug Duncan, chief economist of the Mortgage Bankers Association, a Washington trade group, said that when interest rates shot up in the 1980s, many home sellers reacted by simply taking their homes off the market while they waited for the market to improve, thus reducing the supply. "When the rates rose, prices didn't fall. The number of units sold fell. Prices actually went up," he said.

Two other economists, who said they had not read Rosen's report, said the prospect of nationwide home sale prices dropping in reaction to interest rate increases was highly unlikely.

"[Those price declines] just intuitively don't make sense," said David Lereah, chief economist of the National Association of Realtors in Washington. "We had mortgage rates go from 6 to 8 percent between 1998 and 2000, and we still got record sales."

"A 6.5 percent price decline would be substantial and unusual," said David Berson, chief economist for Fannie Mae. "Five years ago rates climbed to almost 8.75 percent, and home prices didn't decline at all."

Berson also said it's more likely that households spend upwards of 20 percent of their incomes on housing. Lereah's research presumes 18 percent.

The Chicago Fed study, which did not account for condominiums or new construction homes, said housing affordability in some real estate markets, including Boston, New York and San Francisco, is far lower than the national median. According to Rosen's index, the median household in San Francisco spent about 45 percent of its income on housing in 2004.

Some economists say the increases in housing prices are a sign that the Fed needs to keep boosting interest rates.

"It will be difficult to persuade the [Federal Open Market Committee] that the funds rate is anywhere near a `neutral' level when a mortgage financing boom is contributing to double-digit gains in home price inflation," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, N.J.

Rosen said his study does not factor in the influence of speculators on the market; it also assumes that homeowners make 20 percent down payments and that they borrow using a traditional 30-year mortgage.

A recent study by the Realtors suggests investors and second-home buyers may make up 23 percent of the sales market.

Owners using adjustable-rate mortgages or interest-only loans "may feel the pressure to sell more than those with more traditional mortgages," Rosen wrote.

Combined sales of new and existing homes, townhouses and condominiums set records in each of the last four years, aided by low mortgage rates.

The median price of a previously owned home in March rose 11 percent from a year earlier, the biggest year gain since December 1980, according to the Realtors group.

Sales of new and previously owned homes are expected to total 7.87 million this year, trailing only last year's record, the group predicts.

http://www.chicagotribune.com/busine...i-business-hed