Silver™

Federal Reserve Chairman Alan Greenspan left little doubt Thursday that the central bank intends to continue pushing short-term rates higher. One major reason could be that Greenspan wants to do everything within his power to remove what he calls “froth” from some of the nation’s booming housing markets.

In testimony before a joint House-Senate committee Thursday, Greenspan reiterated that he is puzzled by the decline in long-term interest rates, which has seen rates for traditional 30-year mortgages slide to their lowest levels in more than a year. Such low mortgage rates are buoying the housing market, sending home prices surging at a 12 percent annual rate, according to one recent government report.

Greenspan and the Fed have little control over these fixed mortgage rates, which are pegged to movements in the massive global bond market. But the Fed does have a powerful influence over one important segment of mortgage rates through its control of short-term bank lending rates.

“The only part of the mortgage market that the fed has control over is adjustables,” said Vince Boberski, senior economist at RBC Dain Rauscher.

Adjustable-rate mortgages, including what Greenspan called “relatively exotic” financial instruments such as interest-only and no-money-down loans, have been one of the major factors in sustaining high home prices in California and other coastal markets.

By continuing to raise short-term rates, the Fed can reduce the differential between such relatively risky loans and higher-quality, fixed-rate mortgages, Boberski said.

“It’s a way for them to let some air out of the housing market,” Boberski said.

In his opening statement to the panel, Greenspan did suggest that the Fed is concerned about home price inflation, citing the “dramatic” increase in the use of risky mortgages.

“To be sure, these financing vehicles have their appropriate uses,” he said. “But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.”

He added, however, that any bubble-bursting likely would have only local impact and would not harm the national economy.

The Fed has other reasons for wanting to raise rates besides cooling the housing market. With the economy on “relatively firm footing,” as Greenspan put it, the Fed can continue to remove the stimulus of low short-term interest rates.

In response to a question in the congressional hearing, Greenspan indicated the Fed is still not close to its desired “neutral” level of rates, which would neither restrain growth nor contribute to higher inflation.

“It’s very difficult to know where that so-called neutral rate is, but we will probably know it when we are there, because we will observe a certain degree of balance which we have not perceived before,” Greenspan said.

The Fed is seen as certain to raise short-term rates a quarter-percentage point at its next policy-meeting, which concludes June 30. That would bring the overnight lending rate to 3.25 percent, compared with 1 percent when the Fed began hiking rates a year ago.

Most analysts expect the Fed to hike rates at least once more and possibly three more times this year, which would bring the rate to 4 percent by the end of the year as Greenspan prepares to step down early in 2006.

That is almost exactly the current yield on the 10-year Treasury bond, which has fallen from 4.9 percent over the past year as the Fed has raised short-term rates. Such a “flat” or inverted yield curve generally suggests that bond traders expect a sharp economic slowdown or recession.

Greenspan noted that decline in long-term rates is the fastest seen in recent decades. “So something unusual is clearly at play here,” he said in response to a question.

But he said the decline did not “necessarily” signal an imminent economic slowdown as it might have in the past.

Some analysts disagree, saying the bond market is raising a red warning flag.

“Greenspan seems to have a blind spot when it comes to flattening yield curves,” said Paul Kasriel, economic research director at Northern Trust. He said the bond market sent similar signals prior to the 1990-91 and 2001 recession. Both times Greenspan ignored the warning and continued pushing short-term rates higher.

Kasriel agrees that Greenspan would not mind cooling the housing market a bit, but not at the risk of causing a recession.

“I don’t think he wants to be remembered as the guy who created the housing bubble and then burst it,” Kasriel said. “If he’s getting an indication in August that this thing is slowing down and it’s not just a temporary soft patch, I don’t think he’s going to keep raising rates just to burst the housing market.”

Kasriel predicts the June 30 rate hike will be the final one of the current rate-hike cycle, a distinctly minority view among financial market economists and traders.

http://www.msnbc.msn.com/id/8160947/

chef chris

He's killing my Home Equity line...bastard.

I did see an article today that stated 30 year mortgages were at lows not seen since 4/04 though...so it's working.

GreenMonster

[quote]any bubble-bursting likely would have only local impact and would not harm the national economy.[quote]



It's not a wide spread (national) issue, but in certian markets (like mine), It's gonna be "interesting"....

Chris, like DE, New England has an aging demographic. When the boomers start selling their houses up here to move south or downsize, it isn't going to help...

I'm really just amazed that my house is probably worth $120K more then I paid for it 4 years ago (bought it off an retiring couple who downsized).

zamo

Sure, i've seen it jumping .25 or .5 every month i receive my statement.

I am paying 3 times the minum payment; my plan is to kill it in 2 more years.

chef chris

Man, the realtors(experienced ones anyhow) in DE are really worried about this issue. When you get a large amount of retirees...you aren't going to have the same amount of turnover than in a younger demographic. They are really fighting now already as most of the home sales are new, so you have one rep selling 200 houses by themselves. Sorta leaves a bunch of working realtors in the dark.

doopstr

At the rate they are putting up "old folks towns" in Jersey, I don't think the old people are going anywhere. Our streets are going to be 200% more dangerous in 15 years with all these old farts driving around.

bob shiftright

Yup. But just one (1) house that I live in. Nothing speculative.

And I'm not shorting the NE homebuilders or Fannie Mae (yet).

Scary story here....

http://www.real-estate-online.com/ww...ges/80513.html

mt6forlife

So those people were hoping to make a quick buck and it went against them? Ouch. I'm 100% financed but its my residence so even if the value went down, I'd just ride it out. Real estate always come back eventually. Their payment sounds really high for $445k too especially since I doubt they took out a 30 year fixed given that its not their residence.

zamo

http://physicsweb.org/articles/news/9/6/4/1

chef chris

Wow...

NSXNEXT

iTrader: (2)

You guys are missing a VERY VERY BIG POINT.

So say I'm in Jersey and the housing bubble bursts.
Ok, so I go to sell my house to move into a bigger one in relatively the same geographic area.
Current house loses 15% as a result of the bubble.
What the hell do you think happens to the house I'm going to buy? Um yeah, it drops 15% as well, which is probably better for me since it will probably be a more expensive house.

Unless you are moving from an area that had a bubble to one that didn't, why all the drama?

chef chris

No we're not, let's put this a different way.

Leverage, plain & simple. People are OVER-leveraging their property because:
1. The low rates of the past few years
2. The artificial 'market' appreciation(supply/demand), not 'real' appreciation.

So, a house is appraised at $200K. Homeowner has taken out 90% of the value in mortgages(or 100% which is extremely common, but let's say $180K). Now, since the value was pumped up anywhere from 10>30% or more due to market bubbles...18 months later, the home can only sell for $195K(reasonable scenario).

Now, try to pay a realtor(6%), transfer tax(1.5% in DE, more elsewhere), and payoff all your mortgages/penalties/fees. You'll be in negative-equity land for sure.

This isn't even taking into consideration the WORST case scenario...if the market really goes berzerk(which it will in SOME areas) and the homeowner loses 20% of the value, has a 100% leverage, has an interest-only loan(very common) and an interest-only HELOC(very common)...he's in deep shit. So, basically, some markets will have the homeowners glued to the home because there is no 'room' to get out. People lose jobs and can't move without going Bankrupt, now you have a larger problem, banks take loses...then they have to cut back, etc. It's a nasty, nasty cycle.

scl23

The homeowners will do fine as long as they can support the increased mortgage payments if they are on a floating rate and can ride through it. The prices going up or down won't matter that much. Those that are speculators and buying houses and needing to pay for the mortgage and needing someone to buy it so he can keep going will be hurt. If the speculators get hit with a declining price and rising interest rates, they will either have to declare bankruptcy or sell at a reduced price to cut their losses. This will have a domino effect in bringing down prices in an area.

The true WORST case is described above when rising interest rates and decling values are worsened by declining economy with job losses. Then you have the whole thing topple over. I guess the naysayers are predicting it because right now the interest rates are at historic lows so it only has room to move up. Values have gone up so much and so fast that it will HAVE to eventually flatten out for a period of time or even dip down. What is the only area of positive news is that the economy is doing pretty good. Inflation isn't rampant, and job markets are ok w/ 5.1% unemployment, which is close to what most economists think the natural unemployment rate should be in a healthy U.S. economy. As long as the rates inch up slowly to be a smooth brake to the rising housing values, and the values flatten out, it'll be ok. The flattening values will kick the speculators out of the market which will really cool the housing market to only real buyers and sellers who really plan on living there and who really need to move. That should cool the market considerably and make all this bubble popping talk go away. Just my :twocent:

Silver™

New Yorkers are in a state of high anxiety — about their real estate.

Blame it on Fed guru Alan Greenspan, whose warnings about housing bubbles have put them on edge. And the May 23 cover of New York magazine, which inflamed their fears with the headline "Worrying About a Real-Estate Crash."

For the one-third of the city's 8.1 million residents who own their homes, there's a lot to lose if the bottom falls out of the real estate market. A crash would wipe out gains in wealth for long-time owners whose apartments and houses have appreciated in value — and make fools of buyers who've recently paid big money to put a roof over their heads.

But it is premature to declare defeat on the real estate front, experts like Joseph Carson believe.

"They're getting the cart before the horse — predicting a bust before the conditions that would cause one occur," said Carson, who's the chief economist at Alliance Capital Management.

Housing prices have experienced an awesome run-up. Citywide, the median price of a single-family home has more than doubled in the past six years to $399,450, according to the city Office of Management and Budget.

But downturns don't happen just because prices get high.

"History tells us the fundamentals have to change before a bust occurs," Carson said. "And the fundamentals of housing are very good."

Employment trends in the city are positive, he said. And mortgage rates — which have played a key role in fueling the boom — are expected to remain low.

David Berson, the chief economist at mortgage lender Fannie Mae, told the Daily News he expects the 30-year fixed mortgage rate to rise modestly to around 6% by year's end — and keep edging up after that to between 6.1% and 6.2% by the end of 2006.

As for small supply and big demand — the classic equation that supports high prices — the city housing market has both, in ways that are different from the rest of the country.

During the past year, median home-sale prices rose more than 15% both nationwide and in Manhattan. But the inventory of homes available for sale increased 5% nationwide — while it fell 15.3% in Manhattan, said Jonathan Miller, chief exec of appraisal firm Miller Samuel. And over the past two years, Manhattan's available inventory fell by 29.1%.

Also, the city has an unusually diverse set of homebuyers to fuel demand. It's got first-home buyers, second-home buyers and growing families who are trading up. Immigrants are also an important buyer population, he said.

These assurances don't mean much to New Yorkers who fear home values could plummet as fast as tech stocks did just five years ago.

But stocks and real estate don't work the same way, said Pamela Liebman, chief exec of residential brokerage Corcoran.

"In real estate, there is no such thing as overnight panic selling," she said.

The housing market takes time to go bad. The last time it happened here, the stock market had crashed in 1987. Housing prices flattened over the next two years, but didn't start to fall until mid-1989. The worst drop wasn't until 1990 and 1991, when economic recession set in.

Kim Littlefield, a broker at residential firm Prudential Douglas Elliman, and several other brokers, developers and appraisers said they expect city housing prices to level off later this year. From December to March, the average Manhattan apartment price shot up 23% to a record $1.2 million, according to Miller Samuel.

None expected home prices to drop this year — unless economic and financial conditions take an unexpected turn for the worse.

So New Yorkers who see their homes as a source of funds for the future can sit tight for now, said Corcoran CEO Liebman.

"If you're an insecure person and you want to cash out, that's fine — but be sure you have a place to live," she said.

Buyers bite, even in Red Hook

Even if the housing bubble bursts, don't expect anything like the slump that hit New York in the early '90s. Experts predict a drop in housing prices would fail to rock the city in the same way.

The real estate crash that devastated prices between 1989 and 1995 was caused by economic factors that just aren't present now, said Lehman Brothers economist Ethan Harris.

"It's very hard to disentangle the housing downturn and the broader downturn in the economy back then," he said. "There were problems in the banking system, the economy was getting worse and housing was getting worse. They all reinforced each other."

Those factors just aren't prevalent now.

"I don't see that vulnerability in banking or the economy right now," he added. "Overall, the economy is doing well, and I don't see that it is primed for a shock."

Harris added that if housing prices in New York took a hypothetical 15% dive, the economy would get a modest shock — on the order of about 2 percentage points.

"If housing prices drop, the economy will take a hit. I would expect it to stabilize very quickly this time," he said.

In a housing downturn, construction and retail would likely take the first hits.

Construction would drop "maybe 20% or so, and employment would shrink," Harris said.

As the average household sees a decrease in wealth, retail would take a hit, as would the city budget.

Still, economic conditions today are far better able to withstand drops in home prices.

"I wouldn't expect anything like we saw in the early '90s," Harris said.

"If the economy's already vulnerable, then it can start to weaken quickly. At the moment, I don't see that."

http://www.nydailynews.com/business/...p-270388c.html

doopstr

The only problem I see is lets say you buy a $400k house with a $350k mortgage. If all a sudden your house is now worth $300k and you want to sell your house you will need to come up with $50k for closing or hope you can roll that 50k into your next mortgage.

A bubble burst won't hurt me much. When I bought my current house, houses were in the toilet. My house is worth about 180k more than what I paid for it. I think about $100k of that is "bubble money". If I use this "bubble money" to purchase my next house and the bubble bursts I won't feel the hurt as much because the money I lost was really just monopoly money anyway.

fdl

It still doesnt change the fact that you overpaid for the first house; its money out of your pocket. Not only did you over pay, but you are now over mortgaged and will need to pay off the original mortgage for years to come. I dont know about you, but paying $100K more than I need to would be a big deal to me.

Fibonacci

Has Greenspan Changed Views on Bubble Management? Caroline Baum
2005-06-09 00:07 (New York)


(Commentary. Caroline Baum is a columnist for Bloomberg News.
The opinions expressed are her own.)

By Caroline Baum
June 9 (Bloomberg) -- Back in the go-go years of the late
1990s, when everyone with a crazy idea and dot-com domain name
became a rock star, some economists encouraged the Federal Reserve
to utilize one of its little-used tools to rein in the bubble in
technology and Internet stocks.
The initial margin requirement, which is set by the Fed as
mandated in the Securities Exchange Act of 1934, is the minimum
amount of money an investor is required to deposit in his
brokerage account to buy securities. The firm lends him the rest.
In public, Fed chief Alan Greenspan dismissed the idea of
raising margin requirements, which have been at 50 percent since
1974, to reduce speculation. He steadfastly maintained, even after
the bubble burst, that identifying a bubble was possible only
after the fact.
As reluctant as the Fed was in 1999 to use non-traditional
policy instruments, six years later, with cumulating signs of a
bubble in the housing market, the Fed is dipping into its tool
chest for some moral suasion.
When used in this context, moral suasion refers to a tactic
used by the Fed to pressure banks into adhering to a particular
policy.
That's exactly what the Fed and other bank regulators,
including the Office of the Controller of the Currency and Federal
Deposit Insurance Corp., resorted to on May 16 when they issued
guidance to financial institutions ``for sound risk management
practices for home equity lines of credit and loans.''

Red-Hot Market

The regulators identified certain ``risk factors,'' including
interest-only loans and loans made with limited or no
documentation of a borrower's assets and income, and encouraged
banks to tighten their risk-management systems.
Regulators are hoping that a gentle tap on the shoulder to
lenders and bank examiners will do what falling long-term interest
rates have failed to do: cool the red-hot housing market.
Sales of new and existing homes set an annual record in each
of the last four years. If the first part of 2005 is any guide,
sales are on track to top 2004's 7.98 million this year.
Home prices rose 12.5 percent in the first quarter from a
year earlier, according to an index of repeat sales compiled by
the Office of Federal Housing Enterprise Oversight, the regulator
for Fannie Mae and Freddie Mac. Prices have increased in excess of
10 percent for the past four quarters, the largest consecutive
gains since the late 1970s, when inflation was running at double-
digit rates.

Acceptance

Greenspan has gone from a bubble denier to a froth conceder.
Other Fed officials now routinely mention the real estate market
in their public appearances. So has Greenspan changed his view
that bubble management is strictly an ex-post job for a central
banker?
Even housing analysts who argued against the idea of a
housing bubble now concede there's reason for concern.
``There are indications that people are borrowing all they
can borrow, and lenders are allowing them to borrow more than they
should,'' says Michael Carliner, an economist at the National
Association of Home Builders in Washington.
While the real estate market doesn't crash on its own, the
risky quality of the loans and the inflated price of the
underlying asset ``create a greater vulnerability if shocks come
along,'' Carliner says.
To the extent that more and more homes are being bought as an
investment -- as a second home, as a rental property or to flip
for a profit -- the housing market becomes less stable.

Conditionality

Carliner says some builders are putting conditions on sales
of new homes to discourage speculative purchases. (They don't want
to compete with a slew of sellers when their homes under
construction in the same area are ready for sale.) For example,
they may insert a clause stipulating that the buyer can't sell the
home in less than a year or can't sell it to someone with the same
last name.
``That's pushing some of the speculators into the existing
home market,'' he says.
The May 16 guidance notice from the Fed and other regulators
to lenders seems like an effort to avoid the fallout from another
burst bubble. In uncharacteristic fashion, Greenspan, whose easy-
money policy is surely one cause of the housing bubble, is
acknowledging the effect and using alternate means (moral suasion)
to try and limit the potential damage.

Evolution

Just think how different his approach was to raising margin
requirements in the late 1990s. In a footnote to his opening
address at the Kansas City Fed's annual Jackson Hole Symposium in
August 2002, Greenspan talked about bubbles, relegating a
discussion of margin requirements as treatment to a long footnote
in his text.
On the issue of whether the Fed could deflate a stock market
bubble by raising margin requirements, Greenspan said ``the
preponderance of research suggests that changes in margins are not
an effective tool for reducing stock market volatility.''
Privately, the storyline was different. The verbatim
transcripts from the Sept. 24, 1996, meeting, released with a
five-year lag, find the Fed chief acknowledging ``there is a stock
market bubble problem at this point'' and offering up some
remedies.
``We do have the possibility of raising major concerns by
increasing margin requirements,'' Greenspan said. ``I guarantee
that if you want to get rid of the bubble, whatever it is, that
will do it. My concern is that I'm not sure what else it will
do.''
A little moral suasion isn't about to get rid of the housing
bubble. Then again, it's not liable to do much damage either.

03typeS6spd

i'll take it either way, let it burst and crush people and the ones who know what they are doing will make even more...

let it keep riding and the risk-takers will clean up... along with anyone who owns their own place

but i will play it either way.... i feel fairly confident in the dc area of above average job security (govt/consultant to govt) and having avoided any BRAC mess there is nothing but rising prices around here, and we are way behind ny/cali in terms of prices...

i would venture to say slightly undervalued still on the va side of the river, i am paying double what my rent was but still less than 30% of my household income (me and the gf) which i think is pretty comfortable for owning your own place

at least in this area there is plenty of room to still grow before it is truly unaffordable imo...

i love it!

zamo

http://www.indystar.com/apps/pbcs.dl...506140354/1002

fdl

It's hard to believe that there are morons who actually believe this.

chef chris

Think about how many things we value on hype alone...stock market, gas prices, housing...I wish I was a politician

Silver™

It's clear by now that real estate is the investment of choice for most American families. But what's unclear is how much longer this real estate boom will last. By historic standards, the duration of the current housing market expansion is unprecedented. According to a report released this week by Harvard University's Joint Center for Housing Studies, the current housing boom has lasted 13 years. Let's put that in perspective: Since 1970, the next-longest streak of uninterrupted growth in the housing market was only five years.

Does this mean the housing bubble is about to pop? Not necessarily. In fact, while there are a number of reasons to worry that homes are becoming as frothy as Internet stocks were in the late 1990s, there are an equal number of reasons–outlined in the Harvard report–to think the real estate market isn't ready to collapse just yet. Among them:

* Typically, bubbles burst when markets overexpand. Yet despite the recent building boom, "the inventory of new homes for sale relative to the pace of home sales is near its lowest level ever," the Harvard report concluded.

* While it's true that real estate speculation is on the rise, serial flipping (buying a home with the intent of selling in less than a year) is actually very rare, just as day trading was in the late 1990s. The proportion of homes flipped only rose from 5 percent to 6 percent between 1998 and 2003.

* Despite rising short-term interest rates, mortgage delinquency rates remain low by historic standards. Moreover, the report indicated that the share of sub-prime mortgages categorized as "troubled" fell from 4.7 percent of the market at the end of 2003 to 3.8 percent last year.

* While adjustable-rate mortgages, or ARMs, are growing in popularity, so too is the length of the fixed-rate portion of those ARMs. In recent years, one-year ARMs (mortgages where the first year's interest rate is fixed but the rate floats in subsequent years) have fallen in popularity. Meanwhile, five-year ARMs (where the first five years are fixed) are being used more. This means households may not be in as much immediate trouble as some fear should interest rates rise further.

The Harvard report concluded that demographic trends should prop up housing demand in the coming years. In addition to the rising number of recent immigrants who are joining the ranks of homeowners, baby boomers are expected to "keep housing demand going stronger," the report argues.

http://www.usnews.com/usnews/biztech.../16finance.htm

chef chris

I'm assuming these figures are based on natiowide averages. While it is good news overall, thre are still markets where it's going to be tough(like the one I live in).

Silver™

I know in LA, where some of the largest gains have occurred, home inventory is 1/3 (13,000 vs 4,000) of what it was at the beginning of the "boom".

chef chris

That's definitely a sellers market...

Those numbers are similar to the numbers here in DE, but the figures are for new homes. They couldn't put them up fast enough 2 years ago...now, it's starting to cool down.

Silver™

Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Fla., to bring down the consumer, the rest of the economy and the entire stock market.

None of this has happened. The Federal Reserve has effectively mopped up excess cash and calmed inflation expectations. That's why bond rates are hovering around 4 percent, with most mortgage rates about a point higher.

Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven't done their homework. If they had put a little elbow grease into their analyses, they would have learned that new-housing starts for private homes and apartments haven't changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau.

It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years.

Upward price momentum has kicked into higher gear in recent years for two important reasons. First, housing is highly tax-advantaged. The 1997 tax-cut bill -- proposed by a Republican Congress and signed into law by a Democrat president, Bill Clinton -- permitted the first $500,000 of profits from the sale of a home to be tax-free. This came on top of existing law that permits mortgage expenses to be tax deductible depending on one's income bracket.

Since 1997, home prices have been increasing at a 6.5 percent pace on a yearly basis, with a 12 percent gain over the past year. In contrast, stock prices have gained only 3 percent yearly during the same period. Simply, real estate has had the tax advantage over stocks as an investment vehicle. There is no $500,000 per family tax-free capital gain for shares, nor are the borrowing costs for the purchase of stocks tax-deductible.

It appears that the housing lobby in Washington has been more powerful than the securities industry lobby, as the results clearly show.

Homebuilding also faces another obstacle with the effects of price-hiking. Local zoning and environmental regulations have restricted the availability of land on which new residential units can be built. So while housing demands are white hot, the green lobby has cooled down new supplies.

None of this is to argue that low mortgage rates haven't been a plus in the housing picture. Of course they have. But the imbalance between excess demand over limited supply, resulting from tax factors and land-use restrictions, has made home buying even more profitable in recent years than has been the case in the past.

http://www.townhall.com/columnists/l...20050618.shtml

chef chris

Good article Silver. But, I remain a bubblehead. If I move to a nicer area, maybe I'll reconsider...

M TYPE X

No housing bubble around here.

Silver™

Federal Reserve Governor Mark Olson on Tuesday said the U.S. central bank was concerned about unsustainable housing price increases in some markets, but that it still did not see a nationwide housing bubble.

"Clearly there are some markets where the increase in value is unsustainable. That's clear," Olson told reporters following a Senate Banking Committee hearing.

"So it's an issue that we're watching very closely," he said. "There clearly is some froth in some markets but we still don't see a nationwide housing bubble."

Olson's comments come as other Federal Reserve officials and U.S. banking regulators raise concerns about what Fed Chairman Alan Greenspan has called "froth" in some housing markets where low mortgage rates have driven home prices up by double-digit percentages.

http://www.reuters.com/financeNewsAr...toryID=8852490

Silver™

The popular press is full of speculation that the United States, as well as other countries, is in a “housing bubble” that is about to burst. Barron’s, Money magazine, and The Economist have all run recent feature stories about the irrational run-up in home prices and the potential for a crash. The Economist has published a series of articles with titles like “Castles in Hot Air,’ “House of Cards, “Bubble Trouble”, and “Betting the House.” These accounts have necessarily raised concerns among the general public…..”

Sound familiar? It should. It was written about the coming housing crash. When? September of 2003, about two years ago.

Marc Faber, the well known Zurich based money manager, and frequent contributor to Barron’s, suggested that a 10% to 20% drop in housing is in the offing. That was in the January 2003 Barron’s Market Roundtable, 30 months ago. Or in terms of price appreciation about 25 percent ago.

Jonathan Laing of Barron’s staff wrote a piece about bubbles and financial manias. He frets about the US housing bubble that, he says, “could explode.” That was January 18, 2003.

It is all déjà vu. It also just keeps recurring.

The financial press (not just Barron’s) seems to be perennially bearish on housing and therefore perennially wrong. Just look at what most of them were writing at the time of the last great buying opportunity, back in 1989 to 1991.

In May/June 1989 Money printed an article titled “It’s time to rethink your biggest investment.”

Aren’t you glad you didn’t? 1989 was a great time to buy.

Jonathan Laing of Barron’s wrote a piece in December of 1989 about “Crumbling Castles” and unbelievably how “demographics” would worsen a collapse of home prices.

Demographics? The demographics of housing were just changing positively for the next 30 years as the Baby Boomers were heading into peak earnings. Barron’s in that year also ran a front page article quoting a study that predicted housing prices could fall as much as 3% a year during the 1990’s.

In February of 1990 Forbes ran an article called “Home, no-so-sweet home” followed by Fortune in July of that year who ran an article titledincredibly, “Does it still pay to own a house?” Uhh, yeah.

In October of 1990 Newsweek ran a cover story about the housing bust, complete with “special section” titled “The Big Bust.” Aren’t you glad you didn’t keep that “special section?”

The negativity continued, all the way into 1992. Business Week published another head turner when it titled an article in April 1992: “Those huge hikes in home values are built on quicksand.”

That was 13 years ago and at least 100% ago in terms of price appreciation.

The ultimate article, however, was the cover story with picture that Barron’s ran in its August 22, 1988 issue called “The Coming Collapse of Home Prices” featuring a house poised on a cliff ready to fall off. It featured an interview with Comstock Partners’, Stan Salvigsen and Michael Aronstein, two of the hottest gurus on the Street back then. Aronstein’s prediction was for a decline of 50% in housing values. Salvigsen’s advice in 1988? “Sell and rent.” To make you feel better he told Barron’s readers in the interview that “I rent in Manhattan and so does Mike.” Now don’t you feel good that you didn’t buy then?

Why does the financial press think they know anything about housing?

The question has dogged me for 20 years. I don’t understand why they think they do. At your peril you will look to and listen to what Barron’s and the rest of the financial press prints about housing or buying a home.

What is it about housing and real estate that the financial press just doesn’t get?

Maybe it is that Wall Street is just too analytical and rational in its thinking. Wall Street is about being unemotional and looking objectively and analytically at everything. It is about doing your research. The guys on the street think they can figure it all out if they just do their “homework.”

Most consumers, especially first time buyers, however, approach real estate differently. They just want a home. They want a place to live. They do crazy things like empty their savings accounts, scrape together every last nickel and hit up all their relatives for a down payment, all primarily because they are motivated by the desire for home ownership. The first time homebuyer wants his own place. It is, after all, quintessentially human to love one’s own. Loving one’s own and therefore wanting to own it may not be the most rational of choices and may not be quantifiable by analysts, but it is the drive behind most home ownership.

Housing is thus one of the most personal and emotional decisions consumers ever make. Further, it is full of taste and subjectivity, adding to the emotionality. It is the opposite of Wall Street thinking. Might it not stand to reason that Wall Street’s quantitative models just may not be able to understand what drives housing? Adding to the emotionality, housing is a status symbol, both for the first time buyer and for the wealthy buyer. For the wealthy it is perhaps the biggest status symbol of all. Bigger than the car. Bigger than the club. Bigger than the jewelry and the kids’ schools. People buy and sell houses to demonstrate where they are on life’s pecking order. People want us to know what town they live in, how big their house is, or how prestigious their building is. Housing is a measure of how far you have come in the world. It is a way for people to put a sign out that says “I made it. Come see.” That does not exactly lend itself to Wall Street “quant” analysis.

Perhaps it is this emotional and status aspect to housing that is at the heart of why the crash that Wall Street keeps predicting is so unlikely. And there are other reasons why Armageddon may be put off, for a few generations.

There is the investment issue. The Wall Street lens through which it wants always to look at everything is whether it is a good investment. My observation is that most people’s stock portfolios do not fare as well as their housing “investment.” It is usually that home, which someone bought fearing it was the top of the market, fearing the next crash, fearing the leverage, and for which they emptied their bank accounts and aggravated their “liquidity ratios”, it is that house that pays for the kids’ college, the daughter’s wedding, that serves as the retirement nest egg for its occupants, not their IRA account.

Most people know this. Common man knowledge asserts at parties and on street corners that “my house was the best investment I ever made.” And common man knowledge has its roots in fact. Because the fact is that since the end of World War II when the National Association of Realtors started keeping records, the average price of a US home has never gone down. Not in the recession of 1974, not during the high interest rates of 1980, not after the stock market crash of 1987. No, not ever. Yes, pockets of overbuilding and thus oversupply have led to declines locally. For instance, the overbuilding of the 1980’s in Manhattan led to the downturn of 1990-1992. The aftermath of the oil boom led to housing price declines in Texas and Denver. But the national average price of homes has never declined. Can anyone on Wall Street say that about their investment portfolios?

The very nice lady in the periodicals department of the library who helped me research this article asked what it was about? I told her it was about the folly of the financial press in always predicting a crash in the housing market. “I wish it would crash,” she said. “Then maybe I could buy a home. It certainly would do better than my 401K.”

Could it this competition for funds that makes Wall Streeters always so bearish on housing? Wall Street makes its money by attracting your money. Your 401K, your IRA. Surely our friends on the Street prefer that your money not go out of their hands into something called real estate. Of course that does not shade people’s judgment on Wall Street, right?

Aronstein and Salvigsen, in that famous 1988 Barron’s article with the house falling off the cliff, were both renting. Is it possible that someone predicting a 50% decline in housing was secretly hoping to “buy on the dip”? Of course not because as we all know so well there are no conflicts of interest on Wall Street, right?

I just read that someone called Michael Swanson has written a tome called ‘Housing Market to Crash.’ It is a “full report on the coming wipe out…..” It emanates from a website called www.wallstreetwindow.com. I wonder if he rents, too.

Déjà vu.

www.kayelewis.com/inthenews17.html

Fibonacci

This `Time' May Not Be Bearish Sign for Housing: Caroline Baum
2005-06-17 00:01 (New York)


(Commentary. Caroline Baum is a columnist for Bloomberg News.
The opinions expressed are her own.)

By Caroline Baum
June 17 (Bloomberg) -- When Amazon.com CEO Jeff Bezos landed
on the cover of Time magazine in December 1999, it was both kudo
and curse.
A kudo in that one of the founding fathers of the Internet
revolution was being recognized as Time's person of the year. And a
curse because by the time a financial phenomenon hits the cover of
a general-interest news weekly, it's all over but the shouting.
Amazon's share price peaked on Dec. 9, 1999, at $113 (adjusted
for stock splits), right around the time Bezos's perky countenance
was smiling at us from his Time cover perch. The stock price headed
south, never looking back until it hit a low of $5.51 on Oct. 1,
2001. Today the stock trades at $35.58.
So what are we to make of Time's cover last week, ``Home $weet
Home,'' amid a global housing boom?
Not a day goes by without a front-page story on the housing
boom. Central bankers around the world are concerned about the
potential fallout from a bubble that could burst. The Bank of
England and Reserve Bank of Australia regularly referenced the
property market during their campaign to raise short-term rates.
Even Federal Reserve Chairman Alan Greenspan has acknowledged a
touch of ``froth'' in various regional housing markets in the U.S.
The median price of an existing home rose 15 percent in the
year ended April, the biggest increase in 25 years, according to
the National Association of Realtors. An index of repeat sales
compiled by the Office of Federal Housing Enterprise Oversight
shows home prices up 12.5 percent in the first quarter from a year
earlier.

Indicator Defined

The last time Ofheo's home price index posted double-digit
gains for four quarters running was the late 1970s, when inflation
was soaring along with housing prices.
With the media coverage as hot as house-price appreciation,
could Time's cover be the ultimate sign that the housing boom is
peaking?
For an assessment, I turned to the creator of the magazine
cover indicator, Paul McCrae Montgomery, president of Montgomery
Capital Management in Newport News, Virginia. Montgomery studied
magazine covers going back to the 1920s and found that by the time
an investment idea makes the cover of a general-interest weekly,
``it has probably attained maximum saturation.''
Based on the indicator's 80 percent or better accuracy rate
over eight decades, an investor would be well-advised to fade any
such magazine cover, which may mean buying or selling, depending on
the existing trend.

Housing Is Different

For example, in the last several months, various magazine
covers have advertised the demise of the U.S. dollar. Clearly the
dollar ignored the adverse publicity, rallying since March.
As far as the implication of Time's June 13 property market
cover, which was on newsstands last week, Montgomery cautions
against concluding that home prices have peaked.
``The housing market is nothing like the capital and commodity
markets,'' he says.
While there is evidence of increased speculation in real
estate, with people buying second homes to vacation in, rent or
flip, housing has some intrinsic properties that differentiate it
from the stock, bond, currency and commodity markets, for which the
magazine cover indicator is better suited.
A home buyer incurs significant transaction costs. He has to
put up with regulatory red tape.
What's more, the primary purpose of housing is to put a roof
over a family's head.

Housing Stocks

While Time's housing cover may not be a contrary indicator for
home prices, ``it may bode ill for housing stocks and, by
extension, REITs,'' or real estate investment trusts, both of which
have been in extended bull markets.
The Standard & Poor's Homebuilding Index is up 27 percent year-
to-date compared with a 0.1 percent decline in the S&P 500. Over
the past year, the increases are 71 percent and 6.8 percent,
respectively.
While real estate stocks and the underlying property market
move in tandem over the long run, stocks rise and fall ``well in
advance of real estate activity itself,'' Montgomery says. Those
stocks are ripe ``for a midcourse correction,'' which may seem
counterintuitive. Long-term mortgage rates remain at rock-bottom
levels, and home sales are on track for a fifth consecutive record
year.

Calling the Bottom

Newsweek magazine provided a nice coda to the late 1980s/early
1990s collapse in the real estate market with an October 1990
cover, ``The Real Estate Bust,'' Montgomery says. The cover turned
out to be a harbinger of a bull market in housing stocks, which
rose 68 percent in 1991, not in home prices, which barely eked out
a gain (and fell in inflation-adjusted terms).
There are a couple of other reasons to think that Time's
``Home $weet Home'' cover isn't a sign that housing has peaked.
For starters, talk of a housing bubble suggests an awareness
or fear about housing prices. As Jim Bianco, president of Bianco
Research in Chicago, likes to remind his clients in his daily news
clips, bubbles don't burst when everyone is talking about a bubble.
They burst when everyone touts the reasons ``this time is
different'' and denies that asset prices have lost touch with the
underlying fundamentals.
Another reason to question whether a top is at hand is that
Wall Street hasn't jumped on the bandwagon. ``So far the activity
has been limited and professional,'' Montgomery says. ``Before this
bull market is over, Wall Street will try to exploit it
significantly more than it has done so far.''
Given the regulatory constraints imposed on investment banks
following the bursting of the bubble in Internet and technology
stocks, when folks were shocked to learn that research was geared
toward sales, real estate analysts may not be quite so effusive in
their endorsements of the property market.
If Montgomery is right, you won't need to read the research.
Just follow the money. When the deal-making reaches a critical
mass, and the individual investor wants in, that will tell you when
the long bull market in housing is at an end.

scottiew

Here in Houston I think there will be an apartment glut. There are so many apartments yet so many houses being built. I think the apartments are feeling it.

haiduc

I don't see the market going anywhere, at least for a while.

Banks are making houses very cheap to buy. When faced with something like a 5/1 ARM or a 7/1 ARM that offers the same house for cheaper versus the 30 year fixed conventional mortgage, people will buy.

There are a many other programs that can get you into the house you want for the money you can afford.

People buy the more expensive houses now, because they have many options, and because they can afford them.

Unless buying the dream home, somehow drops out of the American dream, I don't see the housing market depreciating.

Silver™

Average national home prices haven't dropped since the Great Depression. But with the recent frenzy in the real estate market, investors are wondering whether the market can keep up this pace. Residential property investors have seen bubbles rise and pop on local geographic levels in past years, but the debate continues over whether a nationwide bubble has materialized.

A countrywide meltdown in housing prices could have a profound affect on the economy, as more Americans invested in real estate than in stock. According to the Federal Reserve, homes' appraised value made up 145% of nominal gross domestic product in March, while stocks and mutual funds were worth 82% of GDP.

The bubble question isn't an easy one, even for economists. BusinessWeek Online's June Kim spoke with several economists for their thoughts on whether a housing bubble exists. The following are edited excerpts of their comments:

Frank Nothaft, chief economist, Freddie Mac:

I don't foresee any national decline in home price values. Freddie Mac's analysis of single-family houses over the last half century hasn't shown a single year when the national average housing price has gone down. The last consistent drop was during the Great Depression, when the unemployment rate got up to 25%, or five times the level we're at now.

Housing is local, local, local by nature, and it's the local economy driving valuation of a home. The large markets people think about -- New York, Boston, San Francisco, Los Angeles, and Washington D.C. -- where we've seen double-digit home-value gains in the last three or four years, are driven by economic growth and rising family income, coupled with a 40-year low in mortgage rates.

I would worry about local markets that have weak economies, where the unemployment rate has gone up over the last couple years, or where we have begun to see a bit more of a speculative fervor (by that I mean: A lot of investor vs. owner-occupant purchases).

WHO'S BUYING? An owner occupant lives in a home an average of 14 years. The average stock owner owns a share of stock for three months. You'll see much more volatility with common stock prices than in home prices.

Investor activity remains a small percentage of home purchases, representing at most 15% of purchases nationwide, vs. 85% of homes purchased by owner occupants.

If you see that investors are accounting for a third or a half of purchases in a local community, then I would be more concerned about speculative fervor. And I would expect stagnation in home-value trends in markets where unemployment is higher than 7%.

Dean Baker, economist and co-director of the Center for Economic & Policy Research:

We've never seen this sort of run-up in home prices in U.S. history. In the past, home prices have always moved pretty much at the same rate with inflation's overall rate. But in the last seven years, they've outpaced the rate of inflation by 60 percentage points. This kind of run-up becomes unsustainable (see BW Online, 6/22/05, "Builders Keep the Home Runs Coming").

Right now, the market is caught up in the psychology of a bubble. You see the fastest increases just before the collapse. If you look at the past, the Nasdaq crossed 4,000 around the new year in 2000, and then two months later, it had already crossed 5,000. Suddenly in mid-March, the Nasdaq plunged 15%, and it was downhill from there.

I don't think the housing market will follow exactly the same pattern, but in the case of the Nasdaq bubble, in February of 2000, people were having this same conversation, but were more focused on the fact that prices were rising more rapidly than ever.

HOUSING'S HUGE IMPACT. [Fed Chairman] Alan Greenspan recognized the stock bubble and was concerned about it, but he decided the best thing to do was not to attack the bubble, simply to let itself work it out and deal with the consequences. Given he had that attitude about stocks, I would assume he has the same attitude about housing.

Of course, houses don't risk dropping to zero value like the nonsense companies in the stock market did. But on the other hand, their value also has a lot of volatility.

A lot of economists, including Greenspan, say homes aren't like stocks and their prices aren't volatile. But what's odd is that ordinarily economists say the exact opposite. The housing market is thin, meaning that the number of potential buyers is relatively small compared to the number of potential sellers. A thin market usually means it's more volatile because fluctuations could be even bigger. While there's a current buying euphoria in the housing market, if a lot of people really take a beating, they may develop a phobia about becoming homeowners.

A decline in housing prices would have a very serious effect on the economy. Housing has been supporting the economy ever since the recession. Roughly 5% of the GDP is associated with homebuilding and construction. On top of that, we've had this huge consumption boom based on people taking out second mortgages and refinancing their homes spurring on the economy.

My estimates of bubble wealth -- the rate of growth of house prices exceeding the rate of growth of inflation -- come to around $5 trillion. Roughly 4% to 6% of that is $200 billion to $300 billion a year in housing-bubble-driven consumption. That's a lot to replace.

James F. Smith, chief economist at the Society of Industrial & Office Realtors:

There's no national bubble. You have to have a huge deflationary scenario to make a national bubble make any sense. The Fed isn't going to lose control of the money supply and take us back into a very significant deflation and cause a collapse in housing prices.

There are several reasons why a national housing bubble is relatively silly. According to census data, current home-ownership rates are at 69.3% of all households, a record. If you look at home ownership by age group, the highest rate -- above 83% -- are among owners aged 70 to 74. Only marginally below that is owners aged 65 to 69.

Nobody seems to look at how home ownership rises with age. The older we get, the higher the probability that we're going to own a house. If you look at the baby boomer generation, you get a picture of increasing demand that won't end for another 40 years.

DEMAND ON THE MARCH. Second, home-ownership rates are extremely high for white Americans, pretty high for Asian-Americans, have just gotten over 50% for African-Americans, and are slightly lower for Hispanics. But we have lots of programs to help minorities improve home ownership, so they're all increasing.

Thirdly, if you look at immigrant households with the same family size and income levels as households in which the parents were born in the U.S., immigrants buy houses 15 years later than natives. About one-seventh of the population is foreign-born, and [that group] has been growing rapidly the last 20 years. That gives you another 15 years of increased demand.

On top of that, mortgage rates are pretty darn low. The only way rates are going to rise is if inflation rises and the fear of inflation drives the 10-year Treasury up to 7% or 8%. Mortgages would go back to 9% or 10%, temporarily killing the housing market, but only temporarily.

It doesn't mean there aren't a few local bubbles in areas like Washington D.C., Los Angeles, suburban Boston, or suburban New York. But we've had many of those in the last 20 years or so. Texas collapsed in 1986, Southern California collapsed in 1989, and Massachusetts and Connecticut collapsed in 1991.

Mike Englund, chief economist at Action Economics, global bond and currency consulting firm:

It's not clear that the recent price gains in the housing market are a bubble. It's bubble behavior. There are many assets whose prices move quickly, but that doesn't mean it's a bubble.

In a global context, the rise in U.S. housing prices doesn't really stand out. The global economy, led by the U.S. and China, has posted a stellar growth rate. Last year was possibly the fastest pace of growth in post-World-War-II years. And much of the new economy features a synergistic global trade pattern between the U.S. and other countries. New York, Los Angeles, and San Francisco benefit from a new axis of global investors, and home prices there are being driven higher in the context of huge wealth and economic gains.

We're unlikely to see a price correction this year, since we're already well into the second-quarter period, a high-volume period for housing, and there's a clear price movement upward. It isn't until first or second quarter of next year that we're likely to see any correction.

With the Fed adding a quarter point [rate hike] per meeting, interest rates will trend from current low levels to average historic low levels next year. The question of whether that will pop the housing market is unclear. High-price housing markets may see a decline, but we seldom see price declines at the national level.

http://www.businessweek.com/bwdaily/...9404_db008.htm

Silver™

Sales of new homes in May climbed to the second highest level in history, but the median sales price fell sharply, the government reported Friday.

The Commerce Department said that sales of new single-family homes rose by 2.1 percent last month to a seasonally adjusted annual rate of 1.3 million homes. But the median sales price dropped 6.5 percent to a median $217,000, the point at which half the homes sold for more and half for less.

The housing market has been red-hot this year with demand being driven by mortgage rates that have hovered near historic lows. However, the surge in demand has raised concerns that a speculative fever is creating a housing bubble similar to the stock market bubble that burst in early 2000.

The strong new home sales followed a report Thursday that sales of previously owned homes totaled 7.13 million units at an annual rate in May, a slight decline from the record April pace, but still the second fastest sales rate on record for existing homes. The median sales price of existing homes continued rising in April to hit a record of $207,000.

The increase in sales of new homes was led by a 22.9 percent jump in sales in the Midwest, which rose to an annual rate of 268,000 units. Sales were also up in the West, rising by 1.7 percent to an annual rate of 361,000 units. However, sales fell by a sharp 24.5 percent in the Northeast to an annual rate of 74,000 units. Sales were also down in the South by 0.8 percent, to an annual rate of 595,000 units.

In other economic news Friday, the Commerce Department said orders to U.S. factories for big-ticket manufactured goods shot up at the fastest pace in 14 months in May, reflecting a huge jump in demand for commercial aircraft.

Orders for durable goods rose by 5.5 percent last month to total $210.7 billion. The gain far exceeded the 1.9 percent increase that economists had been expecting, but the strength was concentrated in demand for commercial aircraft, where orders more than doubled from their April level.

Excluding the volatile transportation sector, new orders for durable goods fell by 0.2 percent last month, marking the third decline in the past four months for orders outside of transportation.

The 2.1 percent increase in sales of new homes in May was much better than the 0.3 percent increase that analysts had been forecasting. However, April sales were revised significantly lower to show a decline of 0.1 percent rather than an original estimate of a 0.2 percent increase.

The sales pace of 1.3 million units was surpassed only by a 1.31 million unit sales pace hit last October.

The 6.5 percent drop in the median sales price for a new home marked the second decrease in the past four months. New home prices hit an all-time high of $237,000 in February.

The reports this week on new and existing home sales come at a time when analysts are worried that the housing market in some parts of the country is being driven by speculative fever.

Federal Reserve Chairman Alan Greenspan has talked of “froth” in local markets that have seen sizable run-ups in prices over the past year. He has also expressed concerns that home buyers are using types of mortgages that let them purchase more expensive homes with less of a downpayment, leaving them vulnerable if prices do fall sharply.

In the orders report, demand for non-defense capital goods excluding aircraft fell by 2.3 percent in May, the biggest drop since last October. This category is closely watched for signs it can give of business plans to invest in new equipment to expand and modernize.

Economists have grown worried about whether manufacturing, the hardest hit sector in the 2001 recession, could be showing signs of faltering again as businesses grow more cautious in the face of a renewed surge in oil prices.

http://www.msnbc.msn.com/id/8344723/

fdl

GreenMonster

Just a slight readjustment of the market... There's nothing to worry about...

zamo

Shortage of inventory in south FL is driving purchasers to beg.

Here the link

http://www.sun-sentinel.com/news/loc...home-headlines

Fibonacci

Housing may sting more than dot.com bust

Study: 15 states, representing 35% of the economy, are vulnerable to a housing correction.
July 1, 2005: 6:04 PM EDT



WASHINGTON (Reuters) - Whether it's a national bubble or just pockets of regional froth, an end to surge in home prices could inflict economic harm that would make the 2000 tech bust look tame in comparison.

Even if the market cools in only those parts of the country that Federal Reserve Chairman Alan Greenspan describes as "frothy," the U.S. has a serious problem.

If prices were merely to level off, it could subdue the property-linked activity that has stimulated spending and job growth -- crucial supports for the U.S. economy.

Based on benchmarks from a recent International Monetary Fund study comparing the stock and housing market bubbles, there are about 15 states that are vulnerable to a housing market correction. These represent about 35 percent of gross domestic product, the broadest measure of the nation's economy.

"A significant correction in consumption spending in these states is bound to have significant effects on national growth," said Thomas Helbling, an economist at the IMF in Washington.

Merrill Lynch estimates the impact on growth could be as much as one percentage point of gross domestic product.

Add the knock-on effects to the rest of the economy to any initial spending hit and the situation looks worse.

The IMF study found that while stock market collapses are more frequent, housing busts do a lot more damage.

"The output loss associated with the typical housing price bust (about 8 percent of GDP) was twice as large as that associated with a typical equity price bust," the study said.

Fed hot rhetoric
The Federal Reserve understands these risks, which is why its top officials have talked of revamping lending guidelines to reduce speculation.

"They are certainly well aware of the fact that what is going on in the housing market could predispose toward problems down the road. And to the extent that they could avoid it, without upsetting the economy currently, they would certainly like to do that," said former Fed Governor Lyle Gramley.

The situation calls for more gradual interest-rate rises, since stopping now would only further fuel the housing boom, he said.

When it raised rates Thursday for the ninth straight time in a year, the Fed, the nation's central bank, gave no indication it was prepared to stop in the near future.

A look at the U.S. economy's reliance on the housing sector in recent years is helpful in gauging the impact of a serious market upset.

American households have enjoyed a $4 trillion rise in wealth, thanks to a 40 percent gain in house prices since early 2001, according to Merrill Lynch.

Assuming they spend 6 cents of every extra dollar, this adds up to $50 billion in additional spending each year, contributing about half a percentage point to annual GDP since 2000.

"If home prices just level off, this could slice a full percentage point from GDP growth in 2006," Merrill said.

Not everyone agrees with the worst-case scenarios.

Jonas Fisher, a senior economist and housing expert at the Chicago Fed, said the assumption that spending was being driven by consumer expectations of home price gains might be flawed.

"Instead, consumers think in terms of long-term trends, and will view much of the price appreciation as temporary or unsustainable," he said.

New jobs
Still, the numbers show housing has had an important impact on both investment and jobs.

Construction-related spending has exerted a powerful force in the economy. A big reason behind the upward revision in first-quarter growth announced on Wednesday, to 3.8 percent, was the 11.5 percent jump in annualized housing investment.

Paul Ashworth, North American economist for Capital Economics, says 933,000 of the jobs created in the current U.S. economic upswing owe their existence in one way or another to real estate.

"A full 37.8 percent of all new jobs created have come in construction, real estate, architecture, building supply, home furnishing retailers and building services, even though those sectors only account for 11.6 percent of total nonfarm payrolls," he said.

All this could suffer if housing growth petered out.

"You would get fewer houses being built, fewer real estate agents running around, fewer construction workers ... You don't have to be concerned that house prices fall to worry about the effect on the wider economy," said Ashworth.

One of the reasons housing is so hot is the low level of U.S. borrowing costs, which have stayed attractive despite a year of increases in short-term rates by the Fed. Many mortgages are priced off the 10-year U.S. Treasury, whose yield is lower now than it was a year ago when the Fed started raising short-term rates.

The drop in long-term bond yields has been called a "conundrum" by Fed Chairman Greenspan. And if long-term rates reversed and started to climb, the hit the housing market would take raises the risks for the broader economy.

"If other factors come into play that change the current yield curve structure, then the housing conditions add another dimension to the risk outlook," said the IMF's Helbling.


http://money.cnn.com/2005/07/01/real...ex.htm?cnn=yes

Silver™

The Joint Center for Housing Studies of Harvard University has released its yearly State of the Nation's Housing report for 2004. The Joint Center is collaboration between the Harvard School of Design and the Kennedy School of Government and, supported by the Ford Foundation, The Mortgage Bankers Association, Fannie Mae Foundation, and a dozen other groups with in an interest in housing, is one of the nation's leading centers for research on housing.

The study notes that the current housing boom, in spite of occasional fits and starts, has lasted for 13 consecutive years, the longest expansion since 1970. This boom continued through the recession of the early 1990's, becoming the first time since World War II that the housing sector did not actually lead the nation into recession.

Repeating what we have heard over and over, in 17 locations nominal home prices surged by 20 to 30 percent in 2004, on top of 9 to 18 percent increases the previous year. Another 57 metropolitan areas saw increases of 20 t 20 percent.

The number of metropolitan areas where the average home costs more than four times the average income has more than tripled from 10 to 33 in the past five years and this ratio is now at a 25 year high in more than half of the metropolitan areas in the study and these metro areas, largely in Southern California, New York City and Southern Florida are home to about one quarter of the nation's households.

Outside of these 33 areas, however, real estate prices are more in line with household incomes. Of 110 areas evaluated 77 have price-to-income ratios of less than 1:4 and, coupled with continued low interest rates, housing is still relatively affordable in those areas.

Still, the housing boom was broad-based with existing home sales up in every state but three (Michigan, Montana, and Utah).

As home prices have increased there has been a ripple effect on current homeowners. As tax assessments rise and insurers raise their estimates on replacement costs, property taxes and premiums go up with particular impact on those on fixed incomes.

However, much of the report provides reassurance on several fronts for those who fear a pop of the much-reported "housing bubble."

* Although housing starts and manufactured home installations have averaged more than 1.9 million units each of the last five years, the new construction appears to be roughly in line with demand. The Joint Center cites as evidence the small inventory of homes relative to house sales, near its lowest level ever. The report speculates that, given the small backlog, new homes sales would have to drop by more than one-third and stay there for over a year to flip the current seller's market over into one favoring buyers.

* Continued high immigration rates will contribute to continued household growth in the next decade and if the children of those immigrants, who now account for 21 percent of children between the ages of 1 and 10 and 15 percent of those between 11 and 20, follow in the historic footsteps of other second generation Americans, they are likely to out-earn their parents and become a great source of housing demand over the next 20 years.

* Between 1991 and 2003 minority homeownership has increased from 22 percent to 35 percent of first time home buyers and minorities are clearly making economic progress. Both white and minority households have benefited from the strong income and wealth gains of the past 15 years. This is strengthening housing demand across the board.

The report, however, did cite concerns about the share of home purchase loans made to other than owner-occupants. This figure climbed from 7 percent to 11 percent between 1998 and 2003. A large portion was vacation home purchases, but there is also a strong real estate investment component buried in this figure, indicating that speculation is beginning, once again, to creep into the picture. The report cites Freddie Mac data on loans it originated in 1998 and 2003. The share of homes "flipped" within a single year of purchase in 1998 was 5 percent and was 6 percent in 2003. The share that was sold after two years rose from 11 percent to 14 percent.

It might also be scary to know that condominium starts jumped from 71,000 in 2003 to 121,000 in 2004. The report states, however, that there is little evidence in rental data to suggest that this is investor driven; most of the growth has probably gone toward satisfying growth in owner demand.

The sudden and rapid growth in the use of interest only loans may also indicate that a number of buyers are "hitting the wall" on affordability.

In spite of the fact that rent increases in recent years have been modest, more and more low and moderate wage workers and many senior citizens can no longer afford to rent even the most modest two bedroom apartments anywhere in the country. Almost one in three households spends more than 30 percent of income on housing (the old rule of thumb was no more than 25 percent) and more than one in eight must commit 50 percent of their income to it.

Purchase and rental costs are also helping to fuel housing decentralization. The report predicted that the nation will add as many as 20 million new housing units between now and 2015 and a large majority of these will be built well outside of central business areas (CBDs) where land is cheaper and density regulations are usually much less stringent. In fact, what new rental housing that is being built near CBDs is largely high end while lower costs units are consistently disappearing from the market.

The number of the largest metropolitan areas where more than half of households live 10 miles or farther outside of the CBD has tripled from 13 in 1970 to 46 in 2000 and the number with more than a fifth of its households living 20 miles away has jumped from 17 to 44. In six metro areas more than 20 percent of households lived 30 miles from the CBD. This has contributed to longer commutes, increased pollution and stress, and has forced many households to trade lower housing costs for greatly increased transportation expenses. On the other hand, the time, costs, congestion, and hassle have begun to push people to demand newer and more affordable housing solutions in or close to the CBDs and communities, Chambers of Commerce, and employers are beginning to respond.

It is clear that the Joint Center, while not making strong policy recommendations, does feel that metropolitan areas need to reevaluate restrictions on high density construction to lessen urban sprawl and provide more affordable alternatives for households that are increasingly overwhelmed by the cost of housing.

http://www.mortgagenewsdaily.com/630...California.asp