bob shiftright

Robert J. Shiller (Yale Economics prof, "Irrational Exuberance" author) was predicting not a crash but an insidious leak in the bubble, nominal price decrease of 1-2% annually in a 4-5% inflation environment. (Would you notice it if your house depreciated 1-2%? I sure wouldn't notice. Or even care. But that's still maybe 50% in "real", inflation adjusted terms after 10 years.)

Slower market, builders throw in extras like "free" hardwood floors and whirlpool tubs to move inventory. So speculators, like the frog in the pot of boiling water, might not notice anything at all until it was too late to get out. Most aren't speculators. About one-in-three homeowners don't even have a mortgage, it's already paid off.

Fibonacci

So, Bunky, you thought US home equity was safe
if house prices simply don't decline?
by Bob Bronson
Bronson Capital Markets Research
June 30, 2005

Everybody knows the math of debt leverage shows that growing, even if only doing so slowly, mortgage debt in combination with several years of only modestly declining home property prices will seem to suddenly collapse highly debt-leveraged home equity.

And we fully expect growth in mortgage debt will decline from its recent 14% year-over-year, seasonally-adjusting peak rate, down to 4%, if not lower, just as it has done several times during the past 50 years after, and thus not considering what happened during, The Great Depression.

But quite counter intuitively -- at least for most homeowners, and even Wall Street bullishly-biased economists -- the chart below illustrates that home equity collapses in highly-leveraged properties even when such home prices only slow their rate of gain to just slightly less faster than the growth in the underlying mortgage debt.

It demonstrates the not-so-obvious point that the huge portion of US home equity that is highly mortgage-leveraged should be expected to virtually collapse even if there was no eventual decline in home prices.

Because mortgage debt has been growing faster than home prices, and will likely continue to do so, the 40+% of American homeowners who currently have less than 10% equity in their property, will be quite shocked as their 90+% mortgage debt leverage (loan-to-value, or LTV) causes them to become upside-down (underwater), where they, quite depressingly, owe more than their property's (re)marketable value.

It is the ever-growing mortgage debt that is the real underlying problem in the so-called "housing bubble" (the associated problem of a MCHVIE* blow-up in financial derivatives is a matter for later discussion), much more so than the unsustainable, and at least partially reversible, price escalation of the 30% or so of American homes without mortgages.

We fully expect such an unavoidable adverse impact on most US homeowner's equity will create an extremely negative wealth effect on household (consumer) spending, which will exacerbate the coming recession, especially because of the negative feedback that creates the vicious downward spiral that predictably leads to reversions to the extreme -- not just to the mean.


http://financialsense.com/editorials...005/0630c.html

Silver™

Top officials at the Federal Deposit Insurance Corp., which regulates banks, last week dismissed fears that rising home prices nationwide reflect a speculative bubble ready to burst.

Nationwide, home prices grew more than 12.5 percent in the first quarter of this year, 11 percent last year, and 8.4 percent over the last five years. The nation's hottest markets have had gains exceeding 30 percent in the last three years. Some economists say speculative investment based more on faith than on economic fundamentals is driving prices.

FDIC officials, however, frowned on that notion. The banks the FDIC regulates hold 30 percent of the credit risk on outstanding U.S. mortgages.

State profiles updated for summer appear on the FDIC Web site. Taken together, the profiles conclude that most booming U.S. housing markets are sustained by strong growth in new jobs.

"In general," said Barbara Ryan, associate director of the FDIC's research division, "that is where home prices are rising most rapidly."

For example, she said, Nevada recorded a 31.22 percent rise in home prices for the first quarter of 2005 over the same quarter in 2004. In the same period, it posted job growth of 6.7 percent, far higher than the 1.6 percent year-over-year national average.

Arizona had the seventh-fastest climb in home prices in this year's first quarter - and the second-fastest increase in jobs. Florida had the fifth-fastest climb in home prices and jobs.

In December 1996, Federal Reserve Chairman Alan Greenspan famously warned of "irrational exuberance" when describing a bubble in stock prices that collapsed in 2000. He is using softer language today regarding the housing market, describing excessive home-price jumps in some markets as "froth."

Many economists believe that "froth" is primarily in California, and statistics suggest as much. California posted the second-fastest growth in first-quarter home prices over the previous year, but ranked 26th in job growth.

Even in markets with steep price gains, busts don't always follow booms, said Richard Brown, the FDIC's chief economist.

FDIC researchers examined data from 55 metropolitan areas that saw a boom at some time between 1978 and 2004 - defining a boom as an inflation-adjusted rise in home prices by 30 percent or more over a three-year period. A bust followed the boom in only nine instances - with a bust defined as a drop in nominal prices by 15 percent or more over a five-year period.

The few busts that came after booms had significant external factors such as the mid-1980s collapse in world oil prices that rocked the Houston market, or the loss of jobs when a huge employer went out of business.

As for lending trends, FDIC officials said there were reasons for optimism and concern. On the plus side, delinquent mortgage loans made by federally insured lenders stood at just 0.75 percent.

"That is the lowest in the 22 years that these data have been put together," Brown told Knight Ridder. "Have low-interest rates in recent years had something to do with it? Absolutely, that salves a lot of wounds there, and it's not going to stay that low forever."

The trigger that could prompt change is the downside: home prices far outpacing wage gains. "Affordability is becoming a major issue," Brown said. "As affordability gets stretched, that tends to limit price increases eventually."

www.philly.com/mld/philly/business/12053877.htm

VTEC11

July 5, 2005
Hole in the Housing Bubble
By RAYMOND BONNER

SYDNEY, Australia - For several years, dinner party chatter here did not linger on favorite Australian subjects like rugby, cricket, sailing and surfing or politics. No, all the talk was of real estate: how much a house was worth, how much more this year than last, and how much more valuable it would be next year.

It was not just the rich who were getting super-rich, their multimillion-dollar homes with water views rising rapidly in value. Every homeowner was making money, at least on paper, and Australia is a country with one of the highest levels of home ownership in the world. A midlevel office worker, for example, who bought a house in a middle-class Sydney suburb for 188,000 Australian dollars in 1996 was offered 720,000 Australian dollars ($504,000) in 2003. Sound familiar? As in many regions of the United States these days, house prices here seemed to defy gravity. They just kept going up and up and up - in Sydney, by 11 percent in 1997, according to the Real Estate Institute of Australia, followed by a leap of another 21 percent the next year. After more modest increases, prices rose by 16 percent in 2002, and another 23 percent in 2003. It was similar in other major cities.

"It overshot all models, all predictions," said Rod Cornish, head of property research at Macquaire Bank.

In the last two years, though, the Australian housing boom has come to a halt, in a move that many experts see as the first signs of the end to a housing bubble, not just in Australia, but also in the United States as well as several other rich countries around the world.

It is impossible to say for sure how the situation will work out here - or in the United States, for that matter. But so far, despite predictions that housing prices in Australia would plummet by as much as 20 to 30 percent, there are no signs of a crash. Prices have leveled off noticeably or dropped slightly, at least in Sydney, Melbourne and Canberra. They continue to rise at a modest rate in Perth, Darwin and Brisbane, the major cities in resource-rich states, where the local economies are being buoyed by China's insatiable demands for raw materials.

Nationwide, for the year ending March 31, the rise in house prices was 0.4 percent, the lowest since 1996, according to the Australia Bureau of Statistics.

"It's been an orderly correction," said Mark Steglick, managing director of Gowings Properties, a Sydney property development company, who said that there had been few foreclosures or forced sales since the boom ended. "There's not blood on the streets."

Looking ahead, local housing experts expect prices to flatten out, perhaps remaining stagnant for a number of years to allow gradually rising incomes to catch up with the sharply higher level of home values.

But there are significant differences within the market that may provide some clues as to how housing booms elsewhere could run out of steam.

Prices for investor-owned apartments have fallen considerably more than for owner-occupied houses. Nationwide, prices are down about 10 percent from the peak.

The most expensive homes, particularly those along the coast, have held up better than the rest of the market. "My jaw drops at some sales," Mr. Steglick said, describing a house in Vaucluse, a posh Sydney suburb, that recently sold for $17 million Australian dollars ($12.7 million). The home does not even have direct access to the beach, though it does have spectacular views of the soaring Opera House and of the Sydney Harbor Bridge. It last sold in 2001 for 12.1 million Australian dollars.

Australia is no stranger to booms and busts in housing prices. The latest boom began in the mid-1990's, following a bust brought about by the recession of 1990, one of the worst in Australia's history, and far more severe than the downturn in the United States at the time. Unemployment soared to more than 10 percent as interest rates reached as high as 17 percent.

Those high rates knocked many potential buyers out of the market, but even more importantly they also saddled many existing homeowners with a greater debt than they had assumed when they took out their loan.

House financing here differs significantly from the United States, where the 30-year fixed rate mortgage has been the norm and most adjustable rate mortgages delay rate increases for several years and then limit them to set annual amounts. In Australia, fixed rate mortgages are very rare. The standard mortgage is a variable, with the rate rising automatically whenever the central bank raises interest rates.

So someone who borrowed at 12 percent in 1985 found that his monthly mortgage payments had gone up by nearly 50 percent five years later, when the rate was just over 17 percent.

There was "blood on the streets" then, with thousands of foreclosures and forced sales.

The market remained stagnant until around 1996 or 1997, when prices began to rise, first in Melbourne, then in Sydney.

As in the United States in the early 2000's, the primary driving force behind the housing boom in Australia was the decline in interest rates, which dropped to about 7 percent here by the end of 1997. Simultaneously, unemployment fell, continuing to shrink to as low as 5.5 percent today.

Another factor driving house prices, especially in Sydney, is the quality of life. In surveys of the most desirable cities in the world, Sydney is regularly in the top 10. Moreover, not many major cities offer such a wide variety of beachfront properties, many of them attracting wealthy people from around the world.

The increase in home values, and the expanding economy, also sent Sidney residents in search of second homes. In the late 1990's, the housing boom hit Byron Bay, which juts into the ocean, about 500 miles north of Sydney.

"It just flew in here," Barbara Sexton, a real estate agent, said about the swift rise in interest in a beach community where the rich now mingle with writers, artists, backpackers and hippies, and dolphins frolic with surfers. "I do believe this is the greatest boom we've had."

People would come to Byron Bay for two-week vacations, Ms. Sexton said, and spend the second week looking at property.

The market has now softened, but limits on development in a town where the council is dominated by Greens, who are determined not to let the area go the way of the uncontrolled Gold Coast, an hour north, are likely to keep prices from falling significantly.

A 700-square-meter piece of land on the beach recently sold for 1.8 million Australian dollars ($1.3 million), Ms. Sexton said. A modest three bedroom cottage on the water - "beach shack" in the Australian vernacular - recently sold for 4.1 million Australian dollars ($3 million), double what it sold for five years ago.

With interest rates falling and as the value of homes soared, homeowners began borrowing against their equity, whether to renovate or buy the latest flat screen television. It was a lending practice introduced here by Citigroup, and now followed by nearly every bank.

The economy has continued to expand - it is now in its 14th consecutive year of growth - and with money and confidence, people not only bought their own homes, but properties for investment as well. In this, they have been actively encouraged by Australia's tax laws.

In contrast with the United States, interest payments on an Australian home mortgage are not tax deductible. But for those who invest in property and rent it out, the payment is deductible as an expense against rental income.

If total expenses exceed income, the loss can be offset against ordinary income. In a country where the top marginal tax rate is 48.5 percent, that provides a strong incentive to search for ways to reduce taxable income.

For example, an investor who has $30,000 a year in rental income, and $40,000 in expenses, including the mortgage, can take a deduction of $10,000. But when the property is sold, the gain, quite substantial in recent years, is taxed as a capital gain at a rate of no more than 24 percent.

"The market was awash with people turning over properties," said David Edwards, owner of the LJ Hooker real estate franchise in Palm Beach, an hour north of Sydney, where the rich and super-rich have holiday homes. A house, with a view over Whale Beach, sold for $1.7 million in March 2002, Mr. Edwards said. The owner put on a coat of paint, planted a few trees, and sold it four months later for $2.1 million. Nine months later, it sold for $2.5 million.

In 2003, the governors of the Reserve Bank of Australia began trying to talk the market down, with speeches about households having too much debt and about the housing bubble.

The Reserve Bank, the equivalent of the Federal Reserve in the United States, also went to commercial banks to examine their loan portfolios, and did something called "stress testing." Assume unemployment went to X percent, or the interest rates went to Y, regulators asked, could the bank handle it?

The central bank found that banks were in pretty good shape, but the exercise made the banks more cautious about lending to property investors, said Mr. Cornish of Macquaire Bank.

In late 2004, the central bank started raising interest rates, by a quarter point in November followed by another quarter point in December. There was another quarter point increase in March.

"They hit the brakes, lightly," said Shane Oliver, head of investments strategy and chief economist at AMP Capital Investors, who estimated that the value of his house on the water in Avalon, a small suburb north of Sydney, has gone to $3 million, from $700,000 in 1995.

But no one was sure of what was coming, and the fear was that rates would continue to go up. The psychological impact was just what the central bank wanted and was needed.

The median price for a three bedroom house in Sydney has gone up only 0.2 percent so far this year. It has dropped 5.2 percent in Melbourne, according to the Real Estate Institute.

The leveling out of housing prices is beginning to have a ripple effect on the rest of the economy. "Housing equity withdrawal has now ceased," the governor of the Reserve Bank, Ian Macfarlane, said in a speech in mid-June. That has contributed to a sharp slowdown in consumer spending. Some of the major retail stores, like David Jones and Coles Myer, seem to have been offering almost perpetual sales since November.

Now the question on people's minds: is the decline over, or is the worst yet to come?

Mr. Oliver thinks Australian house prices are still at least 25 percent overvalued, as measured by their historical values, and as a ratio to wages. It now takes 500 weeks of average wages to buy the typical home in Australia, Mr. Oliver wrote recently in his newsletter, much more than the 350 weeks, on average, required in the United States.

Still, he is not predicting a crash.

"It's easier to trigger a panic in the share market than in the housing market," Mr. Oliver said. "People get attached to their homes."

While analysts express comfort with their predictions that the market will remain soft but not collapse, they are not cocky about it. A sharp increase in unemployment or interest rates could trigger an even sharper fall in real estate prices, they warn.

"We're still vulnerable to shocks," Mr. Cornish said.

http://www.nytimes.com/2005/07/05/re...05aussie.html?

Silver™

Immigrants are one of the fastest growing categories of first-time homebuyers in the United States. And many real estate analysts attribute the strong housing market nationwide, in part, to their house-hunting. The northeastern state of Massachusetts is home to about 850,000 immigrants and their numbers continue to grow as the native-born population shrinks, according to the U.S. Census. This demographic shift is already affecting local real estate.

At a spacious colonial house in Boston, realtor Chrissy On helps her Vietnamese-born clients work with the home inspector. The buyer, Huy Pham explains that he, his wife and two young children lived in one room of his brother's house for several years. "During the time I lived with him, I saved a lot of money, so that's why I have the money to put down for payment." He saved enough for a 20% down payment on this $371,000 home. Now his family and his in-laws will share the 4-bedroom house.

Mr. Pham is part of a growing state and national cadre of foreign-born first time homebuyers, who "have definitely bolstered demand for housing, both home owning and for renting," according to Rachel Drew, a researcher at the Joint Center for Housing Studies at Harvard University.

"In the last few years," she says, explaining the demographics behind the trend, "native-born populations … entering their 30's -- [which tend to be] home-buying years -- have been on the decline following the baby boom, but immigrants have really supplanted that difference and made a big difference in keeping home buying and home demand strong." Across the country, the percentage of immigrant homebuyers more than doubled from 2003 to 2004, reaching nearly 20% in some areas.

But with housing prices so high and immigrants tending to be in the lower income brackets how are they doing it? National studies show immigrants save more and shoulder larger mortgages to be able to buy a home than native-born first-time homebuyers. Boston Realtor Chrissy On says she sees this with most of her Asian clients. "One of the things about Asian Americans [is] we tend to live with family and that allows us to save a lot of money. And we also are very conservative with our money so that we can think big in the future and make a better home for ourselves."

Latino immigrants often combine more than one income to buy a multi-family home, according to East Boston realtor Luiz Gonzalez. "Their families are large and when I say large [it's] not that it's just one couple has 10 kids," he says. "I mean large in the sense that the brother has the other brother with the wife [living with him] and they have uncles, aunts and everything. Once one person buys a property, they become like partners." He says that's why the high priced housing market doesn't scare them away.

Immigrants are also educating themselves about home buying. In the Boston area, there are dozens of classes -- in languages from Cantonese to Spanish -- about navigating the process.

Foreign-born homebuyers are having such a big impact now because of the surge in immigration during the 1990s. As Rachel Drew of Harvard's Housing Center explains, these newcomers have been in the country long enough to learn English, understand mortgage options, save money and be a part of a community, all of which makes them ready to buy. "Our research has shown that at the median, on average, immigrants will buy a home after being the country about 10 or 11 years," she says. "So the immigrants that arrived in the early and mid-90s are the ones who are really impacting housing markets and are home buying today."

And banks are becoming a lot savvier about catering to immigrant loan applicants. Bruce Ocko, a Senior Vice President of Citizens Bank, says it was an easy marketing decision. "We realize that immigrants have accounted for such a huge growth in the labor market here, particularly in Massachusetts, that it is a segment that we do need to go after." He says helping immigrants with home loans requires flexibility. Because it can be difficult for immigrants to provide evidence of a good credit history, his bank will consider other signs of financial responsibility, like whether they pay their bills on time. Some banks allow immigrants to make a large down payment in cash, without accounting for where the money came from.

Banks are tapping into just the tip of the demand iceberg, according to Realtor Luiz Gonzalez. "As long as there's the right information out there for them, they'll still buy," he says. "It's not going to stop. According to statistics nationwide, only 17% of the Latin community has bought [a house], so that means it's huge."

And as long as there are potential buyers, banks and realtors will continue to look for ways to get them into their first house.

http://www.voanews.com/english/Ameri...7-06-voa16.cfm

Fibonacci

The worry is not for first time buyers of homes in non-speculative areas of the US or for existing homeowners who have built up cushions of equity. The worry is for the macro impact on US GDP and how it will effect all of us, fiscally prudent and otherwise...


HOUSING FUTURES, TECH PAST

Much as home builders and mortgage associations and national realtors and REIT managers would like to deny, strong parallels exist between the housing bubble and the tech stock bubble in 1999. We all know how the Nasdaq stock index faltered badly, gave up the ghost, and experienced a dizzying bust heard around the world. Over the course of the last year, in my head several item factors have been logged to put a face on that parallel. With only a little extra effort, the laundry list of similarities has grown to the cited symphony of musical notes ringing in near perfect harmony. Why should they not ring in harmony? Major bubbles have nearly identical characteristics, feeding mechanisms, and public psychology. Before describing the residential housing futures contract, subsidized and actively encouraged, let’s examine some past tech stock bubble parallels to the modern day housing bubble.



PARALLELS OF HOUSING TO 1999 TECH STOCKS

A summary perusal can make a powerful case of parallel. On a valuation basis, tech stocks had extraordinarily high price earnings ratios in 1999 and early 2000. Housing has a valuation of the nation’s entire property at least 5% above the rent (plus homeowner imputed rent) last seen at peak in 1988. Stocks enjoyed rosy brokerage firm opinions before their bubble burst, with certain vested interest to the broker that earns fees. Housing has lax appraisal standards, pressure to meet a given appraised value, and departure of many respected professionals who refuse to yield. Stocks benefited from liberal margin requirements, set a record of $21.4B in Nasdaq margin debt in May 2000 (eclipsed by $23.7B in February 2005), which gave a giant assist to stock share demand. Housing has been powered by liberal rates below 6.0% on a 30-year mortgage. As you have seen in many similar advertisements, bad credit is not an issue !!!



Little discussed is the need for an acceleration (not just continuation) in mortgage funds in order to maintain a constant stable housing price structure. A bubble has, by nature, a voracious appetite. The federally sponsored mortgage pool growth in 2002 was $328.1 billion. In 2003 the federal mortgage lending growth was $330.9 billion. In 2004 against a background of Fanny Mae accounting fraud, executive option tampering, and extensive scrutiny, mortgage fund growth petered off to $53.5 billion. Absurd pro-forma accounting enabled tech stocks to count all good numbers and push aside many bad numbers, to produce exaggerated earnings reports each quarter. They maximized profits for investors to see, but mimimize profits for the IRS to see. Mortgage applications are a feeding frenzy partly because income verification is almost a collusion between applicant and the mortgage underwriter, who merely sells that contract to Freddie Mac or his bloated wife Fanny Mae. High analyst earnings estimates for tech stocks were the norm, just like property faults are easily overlooked in a hot housing market.

Kickbacks are more and more reported for brokers from companies issuing stock, as favors were granted. Unfortunately, the norm has become the hand-off of cash at closing to the mortgage applicant, for the purpose of supplementing the down payment under the guise of identified inspection fixes. Sometimes, a tech firm would have an aging product line, or simply be involved in a hot niche, the result of which was to lift the share price. Even houses with problems, like decaying exterior, or partially completed roofs, or outdated kitchens & bathrooms, or stinky carpets, sell well in a hot market. Nasty surprises in the form of hidden costs from legal fees, patent settlements, R&D costs, were easily hurdled in a rising tech stock bull market. Housing easily sidesteps balance sheet obstacles by citing inflated rent income, lowballing utility costs, and more.

Excessive debt-asset ratios for high-flying tech stocks was never a problem, perceived easily to be overcome by gigantic new revenues from the next whizbang technology and attendant devices. Tiny down payments for home mortgages have become the norm, with 12% of new mortgages now logging in at zero percent down payment, after clever methods are used to finance the down payment itself (such as second mortgages at the get-go). Private mortgage insurance is often averted through clever finance terms. The newest rage, interest only loans, has removed the concept of principal repayment altogether, and adding to the risk of negative home equity status. By means of executive options and secondary stock issuance, tech companies diluted their base of outstanding shares, often in abusive fashion. New home construction adds briskly to supply in an obvious bubble in the housing market, even as justification abounds for shortage of available lots and land. Not without their gears & levers, tech firms were able to direct stock buyback programs in order to lift their share values in a misappropriation of corporate funds. Certainly, motive of enriching executive stock options helped the buyback process along. Home owners abuse debt and assist their homestead enhancement by means of room additions, bathroom additions, or back decks & patios, which lifts the property value but adds to debt.

An investor deluge occurred throughout the 1990 decade via the retail movement in mutual funds, as well as the individual pension participation in 401k and IRA accounts, which surely loved tech stocks. Liquidity in mortgage finance for the last decade or more has been powered by Fanny Mae and Freddie Mac, a veritable centrifuge in recycled mortgage money. Banks and agencies originated the mortgages, as federal associated (Govt Sponsored Enterprises) recyclers returned the same money for the next mortgage to be approved. By 1999 the last tech stock buyers were little retail investors, investment clubs, cocky little snot-nosed kids, and unprepared daytraders. The housing movement has lately resorted to paid television advertisements appealing to minorities and others who might not otherwise have been able to enjoy the benefits of home ownership. It is clear to some that the last buyers of housing are being actively recruited. Tech firms engaged in a final climax of mergers & acquisitions late in the 1990 decade. In my view, the Time Warner buyout of America Online and the Uniphase (fiber optics) buyout of JDS Fitel can be identified as leveraged overpaid acquisitions at the top. Countless others occurred. In the housing world, property owners can overdo home extensions, or over-extend with purchases of second homes, or excessively draw on cashout extractions, only to leave themselves vulnerable. The exposed fraud was magnificent in Wall Street in recent years. Cases against Enron, WorldCom, Adelphia, Global Crossing, Tyco, Imclone, and Computer Associates were given the greatest focus of attention. Let’s not overlook Microsoft and their regular ongoing practice of anti-trust violations (see Netscape, Sun Micro, Real Networks), whose frequent high profile fines tally as mere cost of doing business. The FBI reports the incidence of mortgage fraud tripled from 2003 to 2004, in cases such as collusion among buyer, mortgage broker, and appraiser. Fraud has increased tremendously in the housing market, with little publicity over subterranean activity.

Early in the 1990 decade, the Japanese bust resulted in approximately $700 billion to flee from their deflationary wreckage as both stocks and housing declined in Japan despite falling interest rates. The climax in foreign involvement led Daimler Benz to overpay and acquire Chrysler, which today is highly resented by old school Europeans. Correspondingly, the entire housing phenomenon is powered by Asian funding indirectly. The Yen Carry Trade by Asian hedge funds exploits a 3.0% differential between US and Japanese long-term interest rates. The yawning US trade gap translates into a gargantuan trade surplus which Asians recycle into US Treasury Bonds. Direct Asian central bank intervention, often overnight under the cloak of darkness, offers regular USDollar support by means of USTBonds. Asian bond support is absolutely critical to the housing movement.

No tech stock frenzy would have been so robust without a cheerleader, an ideologue, a priest, a wizard, an alchemist, a true Pied Piper. Federal Reserve Chairman Greenspan argued quite incorrectly that high productivity enabled high stock values late in the 1990 decade. He argued that fast speed of information flow enabled high stock valuations. Then tech stocks fell 50% to 90%. He fails to comprehend productivity at all. The productivity was shared across industries, which resulted in higher fixed costs for companies, even as they had to suffer lower profit margins. The shared technology was deployed by all competitors. The internet exposed price differentials, thereby leveling the playing field. Consumers were the primary beneficiaries. More efficient supply chain networks did lower some costs, but added to disruption risk in tighter Just-In-Time inventory management. Corporate profits went into decline. Greenspan continues to harp on the wrong tune, like a fool who cannot comprehend borrowed toys in a romper room.

In the housing world, the pervasive housing bubble served multiple purposes. It masked the horrible after effects of the stock busted bubble. It provided a quick and easy savings account to raid for consumer spending. It enabled household credit card debts to be consolidated, even for a renewal of new revolving credit extension. In short, the new housing bubble prevented (or delayed) the economic recession so dreaded. Greenspan back in 2001 almost singlehandedly jawboned the long-dated bonds to lower yields, with statements that he wished for mortgage rates to go down. This past autumn and winter he offered more incorrect justification, if not heretical rationalization. He claimed first that household balance sheets had been repaired and were in excellent shape, the best in years. He also claimed that housing inflation was indeed blessed as legitimate “wealth generation,” utter heresy for any central banker. There exists no precedent of a bubble avoiding its dissipation phase, where values decline. The trigger could be sheer gravity, and the absence of the accelerated credit (air) supply needed in growing quantities. No shortage of hot air from Greenspan though. He now inconsistently criticizes Fanny Mae for its inadequate capital base, sprawling hedge book, and hedge practices. Yet, slow to realize, Fanny Mae is a monster built in his own back yard.

This should not be confusing, even to the novice observer. For tech stocks, the bubble force was uncontrolled debt. In the housing market, the bubble force is uncontrolled debt. This should not be confusing, even to the novice observer. For tech stocks, investment was all the rage as psychology took over. In the housing market, ownership and speculation are all the rage as psychological factors continue to drive the movement.

THE NEXT LEG

The credit supply machinery is in the repair shop. Both Fanny Mae and Freddie Mac occupy the twin-bay repair shop. The economy has been put at risk. Its critically important giant centrifuge is not operating at even half speed. Many are the financial umbilical cords stretched from homes to car loans, student loans, second homes, boats, vacations, medical payments, education plans, home extensions, home entertainment systems, home adornments, basic consumer spending, and much more. The dependence by the US Economy upon the housing sector is incredibly great, and very under-stated. So far, higher energy costs, higher borrowing costs, more heavy handed credit card practices, have all contributed to a shock wave within financial markets exactly during the income tax week of April 15th.

Next on the road to housing distress is what can be called “property tax tyranny.” Local cities, towns, and municipalities recognize the deep well of available new taxes, against a backdrop of their own severe fiscal distress. Most areas have undergone increases to property tax levies. Since wages are struggling, as property values rise, on a relative basis household income has fallen even as taxes have risen. In this sense, the housing bubble has brought us a horrendous regressive tax in rising property taxes.

Suburban commuters are vulnerable. At the same time of the housing bubble, energy costs have risen. Commuters must shell out a disproportionate amount of money toward fuel costs which the urban dweller keeps low and the bus/train/trolley rider avoids. For this reason, my personal expectation is for housing prices to falter in suburbia first, while at the same time urban properties will enjoy a thrust of the housing bubble blowoff top. As Sport Utility Vehicle sales plummet, so might suburban properties dependent upon commuter schedules on outlying roadways.

THE RESIDENTIAL HOUSING FUTURES CONTRACT

The USGovt actively encourages home ownership. The tax structure permits home mortgage interest to be tax deductible, thereby inducing renters to save toward their starter house. In time, home owners trade up to larger houses as families grow, needs grow, or businesses grow. A home mortgage contract requires an investor to post a margin cash position called a down payment which can be 20% or more for conservative owners. However, in recent years, the norm is to minimize the down payment (margin posted) to 10%. With the aid of second mortgages and “under the table” kickbacks from the seller, down payments are reduced in the cash amount. Leverage is enormous. To aid the movement, the Federal Reserve, with its incredibly lax monetary policy and encouraged monetary inflation, has offered a stiff favorable tailwind for housing investors (or speculators). A vast derivative pyramid has been constructed to support the mortgage and bond industry. You can be guaranteed that 99% of homeowners have no knowledge of this system littered with mortgage backed securities, strips & floaters, as well as REMIC conduits.

Owning a house nowadays has become an adventure into the highly leveraged and risky futures trading pits. Homeowners unwittingly have morphed into bond speculators under contract occupation. Delivery is not taken; instead the home is occupied !!!

Requirements to open a futures contract trading account are far more stringent than for a stock account. A degree of sophistication is required. Risks are great, leverage is great, gains & losses can be great. No such demand and qualification is required to open up a homeownership futures contract, known as a mortgage. In fact, the USGovt via its GSE agencies has actively enabled widespread participation, even encouraged the lower income groups to buy here. Instead of regulation and tightness at the top, we have laxity and more liberal abuse. New homeowners seem unaware of the risk of complete and total loss of their investment, the down payment, if they have one at all. Negative equity is a very real potential in coming years.

The unmistakable trend has been gradual rise in home values over the decades. That does not stop nasty down drafts from occurring, like what happened in 1973 to 1975, from 1980 to 1983, and from 1988 to 1994. In the high stakes game of futures contracts, if the underlying contract declines in value, the investor is required to post additional margin against the position, or else liquidate for a heavy loss, sometimes at a total loss of the account. Not so with housing mortgages, where no margin maintenance is enforced, NONE. In my past, a friend had bought in 1987 a modest condominium in Salem, Massachusetts. At one point, she was underwater by $50 thousand on her $120k property, holding a $100k mortgage. The bank did not call in the loan, thankfully for her. A housing decline this time around might see millions of mortgage holders deeply underwater. One must wonder if banks will call in the mortgages and force sale at a loss, a feature written in the contract fine print. If Fanny Mae and Freddie Mac proceed through bankruptcy, will the next Resolution Trust Corporation force liquidations, salvage agency equity, and heap hardship upon the unsuspecting housing futures investors?

Rather, look for distress to occur slowly, despite Herculean efforts by the USGovt to prevent the inevitable damage. Why? Because the entire system called for the housing bubble to side step the stock bubble bust, the entire system requires a housing bubble to enable consumer spending, and now the entire system desperately needs the continuation of the housing bull market to avoid a crippling series of events. Recession and stagflation are a real possibility upcoming.

Instead of the Herby Homeowner having to deal with “marked to market” value and status of the residential futures contract, quite the opposite effect enables rampant consumer spending. Home equity loan credit lines are marked to market, with offered loans for the spendthrift occupants and owners. If property value rises, more spending power. If property value drops, no margin call on the mortgage, but also likely curbed home equity credit. The public has abused the privilege given them. They have turned their homes into an investment bank, an ATM machine dispensing cash, a sanitization fund to cleanse over-extended credit card accounts, a virtual sugardaddy to fund extravagance. Soon, the tide turns back.

THE BIG BATH

This link came to my attention, a rather expansive (somewhat overwhelming) weblog of articles on the housing bubble. Special thanks to my buddy Hiro F for sharing it with me. It is well worth a perusal if you need some sway to conclude not just a bubble, but a wicked big bubble this way lies in housing, ready to give off massive vented gas and render damage downwind much like the volcano at Mt Saint Helens. Or will it become the biggest bath American homeowners will ever experience? They might emerge clean, too bad it might be cleaned out of a major portion of their life savings. The website is managed by Patrick Killelea in the Bay Area of California. The following graphic was made by Rick LaForce and appears on the website listed. Many thanks to them for the tremendous treasure trove of not so trivial tracked sources. Finally, a picture is worth a thousand words. A tragedy this way comes.

http://www.financialsense.com/Market...2005/0421.html

Silver™

California's hot housing market will avoid a major drop in prices through next year as job growth in the state outstrips the national rate, according to a Union Bank of California report released on Wednesday.

Home prices in California have almost doubled since late 2001, prompting concern of a "bubble" among some analysts. They are convinced the state's housing market is overheated and its home prices are poised to plateau or slump.

But in his research report, Union Bank of California economist Keitaro Matsuda wrote that the term "bubble" is being used too frequently by some to describe the state of the U.S. housing market. He said California's market would be immune to a sharp downturn through 2006.

"California is not where the big correction is likely to occur. How do I know that? Well, all recent housing crashes happened when a large number of jobs disappeared in local markets," Matsuda said.

"The Golden State now enjoys strong job growth, stronger than the rest of the country. Jobs are being created in all regions of the state. When people are employed and their income is rising, nominal home price corrections are possible but not likely," he said.

Nonfarm payrolls in California have been growing steadily as the state has emerged from a long high-tech downturn, and the state's nonfarm payrolls will grow by 2.5 percent this year, compared with 1 percent last year, Matsuda predicted.

The improving job market has helped fuel demand for homes across California. That demand has been unrelenting in recent years, largely because home buyers have taken advantage of tumbling long-term mortgage interest rates and have snapped up adjustable-rate and interest-only mortgages.

A persistent shortage in housing and a growing population also have helped fuel California's torrid homes market.

California's median price in May for an existing single-family home of $522,590 marked an 86 percent increase from $281,330 in December 2001, and it will surge 16 percent to a new record of $523,150 this year, according to a California Association of Realtors forecast.

The group expects sales of existing detached single-family homes in California this year to rise 1.4 percent to 633,490 from last year's record of 624,740 sales.

http://today.reuters.com/business/ne...OUTLOOK-DC.XML

Fibonacci

A lesson here, from our Brittish friends...


Progress impeded: Britain's consumer-led boom looks for a new signal to proceed Bank counts the cost of a property slowdownBy Scheherazade Daneshkhu and Chris Giles
Published: July 7 2005 03:00 | Last updated: July 7 2005 03:00

Overlooked by a saturnine portrait of Montagu Norman, one of the Bank of England's formidable past governors, the nine members of the Monetary Policy Committee will today decide whether to cut interest rates for the first time in two years, a move that would signal an end to the the current interest rate cycle.


It was Lord Norman who once said: "A year that began in uncertainty is ending in perplexity." Mervyn King, the present and equally formidable governor, may not choose to echo these sentiments exactly - but the outlook for the economy has become less predictable as the year has progressed. Signs of a consumer slowdown, which emerged at the turn of the year, have become more glaring.

Higher oil prices, an export performance less buoyant than expected and a weaker housing market have all taken their toll on an economy that in recent years has been transformed from one of the most volatile to the most stable among the Group of Seven wealthy nations. Along with the US and Canada, the UK has been in the G7 fast lane for annual growth in each of the past three years.

John Llewellyn, global chief economist of Lehman Brothers, says: "A number of European leaders, most notably [French president Jacques] Chirac, believe they face a stark choice, between harsh, US-type, hire-and-fire policies and the more humane European social model. While structural policies in the UK are not perfect, labour market, social, and product market reforms over the past two decades have resulted in the UK growing briskly, and employing a greater proportion of its workforce, without concomitant inflation and without sacrificing social protection."

Gross domestic product growth last year reached a four-year high of 3.2 per cent - a pace that leaders such as Mr Chirac and German chancellor Gerhard Schröder, as they contemplate the global outlook from their vantage point this week at the G8 meeting at Gleneagles, can only envy. Eurozone growth last year was 1.8 per cent. In Frankfurt, the European Central Bank, also meeting today, is expected to keep its main rate on hold at 2 per cent but is coming under increasing pressure for a cut to stimulate growth.

Britain may not for much longer be able to look down on the eurozone's economic performance, however. Official revisions to UK data last week showed that the economy had slowed more sharply than previously thought.

Last month, two MPC members voted to cut the main rate from 4.75 per cent, where it has stood since last August. Most economists expect the first reduction to come next month if not today. Market sentiment has shifted from March, when rates were still expected to rise this year. Could the slowdown signal an end to what Gordon Brown, the chancellor. described that month in his Budget as "the longest period of sustained economic growth since records began in the year 1701"?

Mr Brown has stuck to his belief that the economy will grow by 3-3.5 per cent to match last year's cracking pace. But last week, private sector economists tore up their forecasts after data revisions showed that - though the economy grew more rapidly than previously thought in 2002, 2003 and the early part of 2004 - the slowdown since last autumn had been sharper than the old figures implied.

The Office for National Statistics revised down annualised growth for the first quarter from a healthy 2.7 per cent to a below-trend 2.1 per cent. Consumer spending accounted for a bigger share of growth last year than previously thought and investment a smaller share. For the first three months of this year, the rise in consumer spending - one of the Bank's main concerns - was restated as 0.1 per cent instead of 0.3 per cent .

Most analysts now expect sub-trend GDP growth of 2 per cent this year, instead of the previous consensus of around 2.5 per cent. After what has emerged as nine months of below-trend growth, the question now is, how bad is this slowdown likely to get?

There are broadly three views on the outcome. The most optimistic is that the downhill slide is to be expected and welcomed after a period of above average growth and that the country's economy will climb back to trend or thereabouts next year. The second view is that the sharper than expected slowdown in consumer spending will prolong the slide but not push it into free fall; the economy's inherent soundness will drive GDP growth back up. The most pessimistic view is that the economy is not inherently sound; a housing boom and robust consumer spending have left an overhang of debt that threatens to provoke a more severe and prolonged downturn in growth.

To know what might go wrong, it helps to examine why the economy had until late last year performed so well. The structural improvements enumerated by Lehman's Mr Llewellyn contributed to unemployment falling to a 30-year low. Britain also enjoyed favourable terms of trade, with the price of exports rising relative to imports. Falling import prices, mainly due to the emergence of low-cost producers such as China, helped boost real disposable incomes and consumer spending.

Mr Brown sharply increased spending, mainly on health and education, which has helped support the economy. Monetary and fiscal policy have both been stimulative in response to the global slowdown after the technology bubble burst in 2000. Interest rates, which the Bank began cutting in February of that year, were brought to a 48-year low of 3.5 per cent in 2003, with the intention of encouraging household borrowing and spending in the face of weak business demand.

The Bank's policy proved successful to the extent that - unlike the US, the eurozone and Japan - the UK escaped recession. The question now is whether the policy led to an unsustainably high rate of consumer borrowing and spending that will eventually have to be paid for in higher taxes, lower consumer spending and lower growth.

Clearly, the official actions have had a downside. The rise in household borrowing - driven mainly by the porperty market - has pushed household debt as a proportion of post-tax income to a record. The Bank last week pointed to a rapid increase in unsecured borrowing. Martin Weale, director of the National Institute of Economic and Social Research, says: "In 2003, interest rates were cut too much because of a couple of gloomy quarters and, to some extent, we are now paying the price of the house price boom. So the Bank probably wants to be cautious. I don't expect a need for sharp cuts now - only gradual reductions."

The Treasury, the Bank and many other reputable economic forecasters, particularly those relying on large econometric models, tend to be sanguine. Their views fall into the first, most optimistic, camp.

This school of thought holds that the slowdown in household consumption is welcome and necessary; it has been caused by a drop in real disposable income due to higher interest rates. The housing market is unlikely to crash because the usual triggers of high unemployment, high inflation and rising interest rates are absent. Housing values will stagnate, or "stabilise" in the Bank's lexicon. There may be small price falls but these will not have a big impact on consumption.

Continued productivity growth will drive the economy forward, under this view. The big disappointment has been in investment and net exports, which have not been strong enough to offset the slowing consumption.

Following the ONS data revisions, Michael Saunders of Citigroup cut his growth forecast for this year from 2.8 per cent to 2.1 per cent but expects a return to an above-trend 2.8 per cent next year. "The economy needs the support of cheap money to achieve trend-like growth. With 4 per cent base rates, we expect housing, consumer spending and the economy as a whole to pick up again," he says.

The second camp is populated by economists who also believe there is nothing fundamentally wrong with the economy but think the slowdown in the housing market, and a renewed willingness to save, might have a larger effect on consumption. There will be little to compensate this because investment and exports have underperformed expectations and a fiscal stimulus is not possible because of constraints on government borrowing.

"This is a cooling-off story, not a crash," says Peter Spencer, professor of economics at York University. "The big problem is that investment and net exports are failing to take the slack in the economy." He believes household incomes will come under further pressure, because Mr Brown will have to put up taxes to fill a shortfall caused by tax revenues being inadequate to fund the government's spending plans.

"The real problems will come next year when there will be a hit to real disposable incomes and a likely rise in unemployment. As the shocks come along, we'll ride them but not as well as this year. So 2006 is the trough and 2004 was the peak. But the bottom line is that interest rates can be cut because inflation is under control," he says.

The most pessimistic camp believes the risks to the economy have been understated. Proponents put far more weight on the increase in household and government debt, part of a picture whereby the fortunate circumstances of the past eight years turn into a much less benign position.

The props of fiscal loosening and a housing boom will soon disappear or lose their strength, the theory runs. The best that can happen in these circumstances is a mild slowdown mitigated by very low interest rates but a recession could arrive if people react to poorer circumstances and pension worries by building savings.

Some argue interest rates might have to fall very far indeed. Danny Gabay, director of Fathom Consulting and a former Bank of England economist, says: "House prices and debt have reached unsustainable levels. In order to prevent the total debt burden facing UK households from rising to similarly ruinous levels as those reached in 1990, interest rates may need to fall to as low as 2 per cent."

Wynne Godley, of the Judge Institute for Management Studies in Cambridge, believes house prices do not even need to fall for problems to develop; a cooling housing market is sufficent to set off an economic slowdown. He says the growth of debt has complemented disposable income and, as it slows, it will hit personal spending. Rate cuts will prove ineffective. "I don't agree with the Bank that unbalanced growth is better than no growth - you store up a problem for the future. This is a bubble. Every time people say it's different but it never is."

His argument is based on the observation that growth in household borrowing as a share of income has risen every quarter, from 3.9 per cent in the second quarter of 1993 to 15.8 per cent in 2004. It slowed to 12.5 per cent in the second quarter of this year, which explains the slowdown in spending.

While Prof Godley does not expect an outright recession, he does think growth could slow to 1.5-2 per cent for as long as it takes for the credit boom to exhaust itself - maybe five years.

The core difference of opinion among the three camps is based on two linked questions. How sustainable is the current position? If it is unsustainable, how will the economy adjust to lower than expected consumption? The argument pits the resilience of British consumers against growing evidence that they have become stretched.

"It is unlikely that growth will be as smooth in the future as it was over the past decade," Mr King safely predicted recently, in a comment worthy of Lord Norman's "perplexity" pronouncement of more than 70 years ago.

Lord George, the first Bank of England governor to be given independence over interest rate decisions, once quipped that house prices did not keep him awake at night. But for policymakers in other countries with hot property markets, including the US, Australia and the Netherlands, the way the house price boom unwinds in the UK is a matter of more than passing interest.

Last November, the Bank predicted for the first time that house prices would fall "modestly". But, controversially, it said the effect on the economy was likely to be limited because the link between house prices and consumer spending had weakened. This was based on the observation that growth in consumer spending had remained constant over the previous five years whereas house prices had surged. Last week's official data revisions will make it harder for the Bank to maintain the same line.

"It's fair to say, especially in the light of the revisions, that the housing market has been very important in driving consumption and that there is a clearer link between the housing market and consumption," says David Turner, head of the UK desk at the Paris-

based Organisation for Economic Co-Operation and Development. "The weaker economic growth is much more related to the flattening of house prices last year than was previously thought."

Mervyn King, Bank governor, has argued that the seeming correlation between consumption and house prices in the past could be misleading. Consumers' optimism about their financial future would lead to both higher spending and increased demand for housing.

Others dispute this. Danny Gabay of Fathom Consulting says: "The weakness of the correlation over the past few years could easily be explained by the weakness of other determinants of consumption, namely real disposable income and financial wealth, for example, stocks." He believes that unless the equity market or real disposable income take off, weaker house prices are likely to translate into weaker consumer spending.

The Bank has already started to row back on this. In a study last month, it argued that there was a close link between house prices and certain types of consumer spending, notably spending on household durables. People moving home were two or three times more likely to buy items such as washing machines and freezers, according to the study.

Kate Barker, a member of the Bank's Monetary Policy Committee, pointed out this year that house prices could have more impact on consumer spending when they are falling than when they are rising. For example, banks and building societies could tighten their lending criteria if they were concerned about a fall in house prices.


http://news.ft.com/cms/s/1d91934c-ee...cl=,s01=2.html

scl23

I think we all agree, things aren't looking bad per se, BUT if things did go wrong, say WW3 or collapse of American auto makers, or interest rates going up 3 points and ppl declaring bankruptcies, THEN we are set up for a fall.

Fibonacci

GOODBYE MIDDLE CLASS; HELLO HOUSE POOR
by Richard Benson
Benson's Economic & Market Trends
July 7, 2005

There’s no question that home building, home sales with large capital gains, and record mortgage financing drives the economy, creating millions of jobs and generating billions of dollars in wages and tax revenues each year. Nothing plays a more crucial role in providing individual financial security for millions of Americans than homeownership. Obviously, the drivers of homeownership are a good steady income and cheap and readily available mortgage credit. Indeed, looking at housing prices rocketing up, our government tells us we have never had it better!

For many households, however, who have not stepped onto the first rung of the housing ladder, affordability conditions have deteriorated, especially among lower income households. The homeowner rate is less than 50 percent for households in the lowest income bracket, while it surpasses 90 percent for those in the top income bracket. Higher income clearly widens the choice of available homes for purchase and increases the likelihood that a household will qualify for a mortgage. Around 1980, when asked what level of personal income would qualify as middle-class, George H.W. Bush replied: $50,000. Only 5 percent of the U.S. population made that amount of money at that time. With inflation, that’s over $100,000 today.

While the United States has traditional values of hard work, entrepreneurship, and individualism, we have a large and growing number of people in our country who live hand to mouth and paycheck to paycheck. Since factories are no longer built in our country and the cost of living is increasing at an astounding pace, it’s likely that the lower-middle class will struggle to own a home for generations to come. The working poor are dreaming about white picket fences and becoming middle-middle, while the middle-middle aspire to become upper-middle and beyond so they can afford to build one of those Mc-Mansions we’ve all seen that absolutely dwarfs the older, split-level homes the baby boomers grew up in.

There are five separate social classes in American society. They are the Upper, Professional Upper-Middle, Middle-Middle, Lower-Middle or “working poor,” and the Lower. America used to be a land with a few upper class, some lower middle class and the rest were somewhere in the professional upper-middle and middle-middle category. Factory workers were middle-middle. Now when a worker loses their job at the factory and takes a job at Wal-Mart for one-third of his previous wage, are they still in the middle?

A new class seems to be developing. I call it the “House Poor.” In this over-heated real estate market where homes are selling above list prices and speculative buyers are quickly flipping properties at a record pace, the House Poor are keeping up with the rising cost of living by paying the bills through home equity extraction, home-equity loans and cash-out refinancing. While many homeowners believe they can live like the upper class and appear to be wealthy, they’ll be the first to end up in the poor house. Those easy money real estate speculators who purchased several investor properties are now beginning to see that renters are more difficult to find these days but the bills to maintain their properties keep coming in.

Indeed, homes have a tendency to actually make you poor because they need to be finished and furnished; older homes become deep money pits; roofs need replacing; drains clog; termites gnaw at foundations while squirrels and mice move in; pipes break; furnaces fail, and, in the south, mold and mildew can’t even be insured; walls need paint; bricks cry out for tuck-pointing and yards need constant care. Worse yet, when it comes to the state and local government, they are always looking for someone to tax. As soon as you buy a house, you have just raised your hand and announced “please tax me”! While some localities offer tax breaks to primary residents, second home and investor property owners get hit full bore on tax increases!

(Historical trends indicate less than half of Americans owned their homes at the beginning of the 20th century. Homeownership remained fairly stable until the onset of the Great Depression during which many homeowners lost their homes. In the subsequent two decades, the homeownership rate rose dramatically with the rate easily topping 60 percent by 1960. Modest gains were made during the 1960s and 1970s, but during the 1980s the rate leveled off. Homeownership once again trended upwards during the 1990s as mortgage rates steadily declined and the economy expanded at rates not experienced in many years. (Statistics today indicate about 69 percent of Americans own their homes – a record high. However, the statistics count people who have purchased a home as owners yet many homebuyers today will never really own!).

A growing number of homeowners are realizing they can no longer afford to live in their home even though they’re “mortgage free”! The conservative sane homeowner who purchased a home over five years ago and refinanced a 30-year mortgage – without taking money out - is now stuck paying higher inflated taxes. Indeed, the home’s value hasn’t really gone up because the price and the cost of everything associated with maintaining it is spiraling out of control. In a very real sense, as the house price rises, the value is forced down because it becomes so much more expensive to pay for the darn thing!

In paying so much for real estate today, it’s virtually certain the middle class homebuyer will never really own the home outright. With a mere 5 percent or no money down, today’s buyer rarely uses his own money to buy. Besides, the mortgage is so big, they would have to win the lottery to pay it off. Moreover, who in their right mind would grossly overpay for an investment property?

Nationwide, 23 percent of homes purchased are investment properties, with some localized markets well over 50 percent. Today, about 15 percent of homes purchased are bought by sub-prime borrowers, and a majority of those need to use an ARM mortgage to qualify. Mortgage payments, as a percent of income, are steadily rising and approximately 10 percent of Americans spend more than 50 percent of their monthly income on the mortgage payment. While the statistics say 69 percent of people own their homes, at least a full 10 percent have no stake in the property and with the slightest disruption in income, will give the house back to the bank. For the investment property market, I really wonder how many people will stick around to pay the insurance, property taxes and mortgage when the price is going down. Calling them homeowners is a joke. If you really own something it means it is paid for and it can’t be taken away!

Only the upper class can really afford what was once a middle class house unless, of course, you are willing to “take cash out of your house” just to pay for living in it. When housing prices cool down but the cost of living keeps going up, the “phony equity” in the house will quickly vanish. When that occurs, today’s buyers will be literally eaten alive by housing costs. So, when it comes to class, the Middle will lose it and truly become the House Poor

http://financialsense.com/editorials...2005/0707.html

Fibonacci

U.S. Two-Year Notes May Decline Amid Housing `Froth' (Update3)
2005-07-11 06:27 (New York)

By John Dooley
July 11 (Bloomberg) -- U.S. two-year Treasuries may extend a
year of losses as the Federal Reserve raises interest rates to
fight what Chairman Alan Greenspan called ``froth'' in the
housing market.
Greenspan dedicated half the 14 paragraphs of his testimony
to Congress last month to housing, saying ``signs of froth'' and
``speculation'' in some areas neared ``unsustainable'' levels.
The Fed on June 30 reiterated a plan to raise rates at a
``measured'' pace after increasing the federal funds target a
ninth time by a quarter percentage point, to 3.25 percent.
Two-year Treasuries will decline as policy makers lift rates
until housing slows, said investors such as Michael Cheah of AIG
SunAmerica Asset Management. Prices on two-year notes, more
sensitive to changes in monetary policy than longer-maturity
debt, are down 1.3 percent since the Fed started raising rates a
year ago. Ten-year notes are up 5 percent.
``The Fed is trying to slow the housing bubble and there's a
good chance that they'll overshoot'' by boosting rates too much,
said Cheah, who manages $2 billion in bonds for AIG SunAmerica in
Jersey City, New Jersey.
The yield on the benchmark two-year note is 3.77 percent, up
from 3.07 percent at the start of the year and 2.82 percent in
June 2004. Yields move inversely to bond prices. As the note's
price fell, interest payments allowed an investor who bought $10
million of the securities on June 30, 2004, to earn $206,652,
according to Bloomberg calculations.
The current two-year note, a 3 5/8 percent security maturing
in June 2007, was little changed today at 99 23/32 as of 11:25
a.m. in London, according to bond broker Cantor Fitzgerald LP.

Surging Prices

The median price of a home topped $200,000 for the first
time in April, and is up 8.4 percent this year through May,
compared with a gain of 9.1 percent for all of 2004 and 8 percent
the year before. The figures are according to the National
Association of Realtors, a Washington-based trade group.
By comparison, consumer prices rose at a 3.7 percent annual
rate this year through May, compared with a 5 percent increase at
the same time last year, according to the Commerce Department.
``It's gotten to the point where there's no paradigm to
explain why a house costs what it does,'' said John Cerra, lead
manager on a team that oversees $10.5 billion of fixed-income
investments at TIAA-CREF Investment Management LLC in New York.
The Fed's ``view is that they have to do something about it'' by
continuing to raise short-term rates, he said.

Fed `Bubbles'

Fed policy makers have more than tripled the target fed
funds rate from 1 percent. A survey of the 22 primary dealers of
U.S. government securities by Bloomberg in late June showed half
expect the rate to reach 4 percent this year. The two-year note
yields 52 basis points more then the fed funds target. The
average the past 10 years is 40 basis points.
``The two-year note is tied directly to the fed funds
rate,'' said Gary Pollack, head of fixed-income trading at
Deutsche Bank AG's investment-management unit in New York, which
has about $12 billion in assets.
Fed policy makers probably learned from their experience of
the stock market bubble in the late 1990s, when they were slow to
raise borrowing costs, said TIAA-CREF's Cerra.
From April 1997 through June 1999, the Fed cut rates three
times as the Nasdaq Composite Index more than doubled. The index
then fell more than 50 percent from the peak in March 2000 over
the next 12 months after the Fed began to raise rates -- almost
three years following Greenspan's warning of ``irrational
exuberance'' in the equity markets.
``The history of this Fed has been asset bubbles,'' Cerra
said. ``They're going to try to manage the housing bubble more
delicately than they did the stock market bubble.''

`Uncomfortable' Fed

Housing accounted for about one in every four of the 146,000
jobs created in June, according to a July 8 government report.
Housing contributed 0.64 percentage point to the economy's first
quarter growth rate of 3.8 percent.
Central bankers including Fed Governor Donald Kohn have said
the same low rates that helped create economic growth also
contributed to risks such as home-price bubbles that higher rates
may correct. Atlanta Fed President Jack Guynn said May 25 he was
``uncomfortable'' with residential speculation in some markets.
The Fed's rate increases haven't slowed housing because of a
drop in yields on long-maturity debt such as 10-year notes, which
help determine terms on many fixed-rate mortgages.
Ten-year Treasury yields trade at 4.09 percent, down from
about 4.70 percent when the Fed started lifting rates. The rate
on an average 30-year fixed mortgage was 5.62 percent in the
latest week, down from 6.32 percent in June 2004.
Fed policy makers probably believe that continuing to push
rates higher and talking about the ``froth'' in housing is the
only way to cool the real estate market, said James Pagano, a
debt investor at Merrill Lynch & Co.' asset management arm.

U.K. Australia Experience

``The actual raising of rates is the only tactic left at
their disposal for pushing up long-term rates,'' said Pagano,
part of a team that oversees $5.7 billion from Plainsboro, New
Jersey.
Fed policy may end up backfiring by restraining the economy
enough to keep inflation in check, said investors such as Pagano
and AIG's Cheah. Tame inflation, which erodes the purchasing
power of fixed-income payments, favors longer-maturity debt and
may help to keep mortgage rates from rising too much.
Using the housing markets in Australia and U.K. as a guide
shows that the Fed may not be quick to cut rates even if the
economy shows signs of slowing, according to William Dudley,
chief U.S. economist at Goldman Sachs Group Inc. in New York. The
firm is one of the primary dealers.
``U.S. short-term rates are likely to stay high, for longer
than expected,'' Dudley wrote in a July 6 report to clients.
``This should push up bond yields. If Australia and the U.K. have
not yet cut short-term rates more than a year after (their)
housing market peak, this suggests that a cut in U.S. short-term
rates could be 18 months or more in the future.''

Silver™

Housing bulls say home prices are soaring not because of a speculative bubble, but for a simple economic reason: Supply has not kept up with demand.

On top of organic demand for homes due to population growth, immigration and divorce, many people now see housing as a better and more enjoyable investment than stocks, which you can't live in or can't trust, and bonds, which are yielding next to nothing.

Low interest rates and more liberal lending standards have allowed more people to buy homes, helping to raise the U.S. homeownership rate to 69 percent from 64 percent over the past decade.

Also fueling demand is the 1997 tax law that lets married couples sell a primary residence and pay no tax on up to $500,000 in profits as often as every two years. (The limit for singles is $250,000.)

Meanwhile, the supply of new homes has not kept up with demand because there is less vacant land within reasonable commute distance of job centers, and that's because governments and environmental groups have made it harder to build and developers have not overbuilt like they have in past booms.

Housing bulls expect these trends to continue, unless there is a recession or sharp increase in interest rates, which they don't anticipate. Although many expect the rate of home price appreciation to moderate, and possibly fall in some overheated markets, they don't see home prices nationwide declining and certainly not by 15 or 20 percent -- a drop that would qualify as a bubble bursting.

"I'm hard pressed to see why housing, barring some major international event, is going to decline in the foreseeable future," says Bob Curran, who rates homebuilder debt for Fitch Ratings.

Supply and demand

One way to look at supply and demand is to look at the number of homes sold (which represents demand) and the number of homes for sale (which represents supply).

In 1990, there were 2.9 million existing homes sold. In May, homes were selling at a rate of 6.21 million per year. That's an increase of 114 percent, says Samuel Lieber, manager of the Alpine U.S. Real Estate Equity Fund.

In May 1990, there were 2.32 million existing homes for sale. Today, there are only 2.22 million for sale, 4 percent fewer than 15 years ago.

Lieber says demand for existing homes has grown by 114 percent and supply has fallen by 4 percent.

For new homes over that period, demand has grown by 143 percent and supply has grown by 23 percent.

Another supply/demand indicator is the unsold inventory index, or the number of months it would take at the current rate of sales to sell all homes on the market.

Since 1970, this index has ranged from 3.5 months to 11.5 months, says Lieber.

An index of 5.5 to 6 months means supply and demand are in rough equilibrium.

In May, the index for existing homes nationwide was 4.3 months, which means demand moderately outpaced supply. It was 3.8 months in May 2004.

Since 1997, this index has hovered between 4 and 5, which suggests "the builders are trying not to build a lot of speculative inventory. They are trying to build more to order," Lieber says.

In California, the index for existing homes was 2.8 months in May, compared with 1.6 months in May 2004.

Price history

Housing bulls point out that home prices are "sticky" on the downside. If prices decline, owners simply pull their homes off the market. Unlike stocks, they can't be sold with a phone call, and transaction costs are very high.

"Since they started keeping track in the early 1950s, there has never been a nationwide decline" in home prices, says David Berson, Fannie Mae's chief economist,

Since 1976, there have been nine years -- in the early 1980s and early 1990s -- when home prices did not keep up with inflation, according to Fitch Ratings.

There have been regional busts, usually brought on by economic jolts like falling oil prices, which hurt Texas in the late 1980s and early 1990s, and defense cutbacks, which hurt Southern California in the mid-1990s.

When that happens, people might move from California to Arizona, but they tend not to leave the United States, which is one reason prices nationwide don't decline, says Berson.

Booms and busts

Even regional booms usually are not followed by busts, according to a recent report from the Federal Deposit Insurance Corp.

It defined a boom as a 30 percent or greater increase in inflation- adjusted (or real) home prices during any three-year period. It defined a bust as an average decline in nominal (not inflation-adjusted) home prices of at least 15 percent over five years.

Between 1978 and 1998, it found 54 instances of housing price booms and only 21 instances of home price busts.

That means only 17 percent of booms ended in busts. Most booms, it says, were followed by periods of price stagnation.

However, the paper goes on to say that "history might be an imperfect guide to the present situation." It said changes in credit markets are pushing homeowners -- and housing markets -- "into uncharted territory."

It cited a nearly tenfold increase in subprime mortgage loan originations between 1993 and 2004. "While the growth in subprime lending has made home ownership an option for millions of households ... it has also been associated with higher levels of delinquency and foreclosure," the FDIC said.

It warns that in 2003, loans exceeding 80 percent of the home purchase price accounted for 30 percent of all purchase mortgages nationwide and that more borrowers are taking on piggyback loans, which usually combine a first mortgage for 80 percent of the home's value with a second mortgage for most of the rest.

"The effect of this structure is to raise the total loan amount to a level very near the value of the home, which may make borrowers more likely to default in the event of a housing market downturn," it says.

Foreclosure activity

Despite the big increase in riskier loans, mortgage delinquencies and foreclosures are low.

At the end of the first quarter, only 4.31 percent of home mortgages nationwide were delinquent and 1.08 percent were in the foreclosure process, according to the Mortgage Bankers Association. Those numbers were down slightly from the previous quarter and the same quarter last year.

In the second quarter of 2002, 4.77 percent of homeowners were delinquent in their mortgage payments and 1.23 percent were in foreclosure.

Foreclosure activity in California is below the national average.

This is heartening, but not surprising. As long as housing prices are going up, people who get into financial trouble can usually sell their homes at a profit.

Housing bears are also concerned that so many homeowners -- roughly one third -- are choosing adjustable-rate mortgages at a time when fixed-rate mortgages are so cheap.

If people are taking out ARMs to buy a house they couldn't afford with fixed-rate mortgages, that's risky. But Curran thinks many people are simply making a wise financial decision by choosing hybrid ARMs. These loans have a rate that is fixed for three to 10 years, then becomes adjustable. As many as 70 percent of ARMs are hybrids, he says.

Because most people stay in their home less than 10 years, a hybrid gives the advantages of a fixed rate, at a lower cost, Curran says.

Homeowners with traditional ARMs, which are tied to short-term rates, could be in for a surprise the next time their payments adjust because short- term rates have risen substantially since June 2004, when the Fed started raising the federal funds rate.

"That could certainly help deflate the bubble," says Brad Sorensen, an analyst with Schwab Center for Investment Research. "But a 5 percent retrenchment or a flat market would not be a bubble bursting."

Affordability issues

Despite the run-up in housing prices, affordability nationwide remains good, thanks mostly to falling interest rates.

The National Association of Realtors' affordability index was 122.8 in May, down from 132.6 the previous May but far from its all-time low of 63.9 in September 1981. An index of 100 means a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home, assuming a 20 percent down payment.

Affordability in California is much worse. In May, only 16 percent of households could afford a median-price home, according to the California Association of Realtors. That's down from 17 percent in April and 19 percent in May 2004.

The all-time low was 14 percent in May through June 1989. (The association started tracking the index in 1988.) Housing prices, however, continued rising for more than a year.

Last year, the share of homes purchased in California by first-time buyers hit 26 percent, a record low. The average is 40 percent and, in 1995, first-timers made up half the market.

"We have to be concerned that affordability is approaching an all-time low," says Robert Kleinhenz, deputy chief economist with the California Association of Realtors. But he points out that "usually price continues to rise beyond the trough in affordability."

Falling affordability "has to slow the pace of price appreciation, unless you get people immigrating from other parts of the country or abroad," says Lieber, whose fund has a large stake in home-building stocks.

"I think we have a market that is going to flatten out," he says.

Lieber says the fundamental reason that housing "is not in a bubble in most markets is that homeownership is still a more attractive option than renting for those who can afford it. People want a piece of America they can call their own."

Does Lieber think California is a bubble? "No. It's expensive, but it has been for three decades. San Francisco could be a bubble, but people thought it was two years ago and prices still went up."

http://www.sfgate.com/cgi-bin/articl...UG8JDLA661.DTL

scottiew

:whocares: I love my house Beats the shit out of renting an apartment.

fdl

Hear that? Sounds like a real estate bubble bursting


By ERIC REGULY



http://www.theglobeandmail.com/servl...0050709/RREGUL Y09/TPBusiness/?query=house+bubble


As far as trailer park homes go, this little number's not bad. The place has an attached car park, a small patio, marble floors and a pantry. There are two bedrooms and two bathrooms. The outside isn't much to look at, with its bland, chocolate-brown siding, yellow trim and flimsy porch. But it's a trailer, so drop your standards a bit, okay?

And what a bargain at $1.4-million (U.S.)! A nearby trailer sold for $1.8-million. Another's on the market for $2.7-million. Oh, forgot to tell you the price doesn't include the land. The trailer park owner gets $2,700 a month for that. But this is Malibu and you've got an ocean view on one side and mountains on the other. You want a proper home? Try $4-million in this town, son, and that's for a starter.

The numbers are real. The trailer sits in Point Dume Club, a gated and guarded Malibu community. The owner, a realtor, is 29; maybe someone should tell him he could live mortgage-free in Vancouver's best neighbourhood if he sells. Take away the palms and Point Dume could be any cheek-by-jowl trailer park on the planet. Welcome to housing insanity, California style.

Signs of a housing bubble are everywhere. Of course, bubbles aren't technically bubbles until they burst. No bursting sounds have been heard, but with trailer homes going for the price of second-hand business jets, you've got to assume the cacophony is not far off.

That's partly because mortgage lenders are making it easy for people who can't afford homes to buy homes, with the predictable inflationary effect. With the flimsiest of credit checks, you can get a zero-down or an interest-only mortgage. The latter make up about 20 per cent of all new mortgages in the United States, up from 5 per cent only a couple of years ago. Another type of mortgage allows you to defer monthly payments twice a year.

The real beaut is the negative amortization mortgage, a product pitched to those who can't afford all of the monthly interest payments. The unpaid amount is bolted onto the principal, meaning your debt is higher at the end of the term than at the start. The tightrope act works if you keep your job and your marriage, housing prices keep rising and you develop a penchant for porridge.

So far, Americans have been lucky. Yesterday, the U.S. Labour Department reported a June unemployment rate of 5 per cent, a four-year low. House values are smoking hot in some parts of the country, notably California, New England, the District of Columbia area, Florida and parts of the Southwest.

The Office of Federal Housing Enterprise Oversight says house prices more than doubled in Washington, D.C., and in California in the past five years. In the past year, Nevada prices went up 31 per cent; California's 25 per cent. Even last year's slowest market, Texas, managed a better-than-inflation gain of 4 per cent. Fitch Ratings says the median house price rose 7.7 per cent in 2004. Adjusted for inflation, that's the biggest rise since the mid-1970s.

The Canadian market is hot too, but not at the boiling point of the U.S. market. Mortgage lenders are more conservative in Canada. Interest-only mortgages are available, but only for wealthy clients who plunk 35 per cent down on an investment property (Royal Bank of Canada says such mortgages are exceedingly slow sellers).

Mortgage interest is not tax deductible in Canada, as it is in the United States, which encourages house owners to take on less debt. Housing supply and demand seem to have found a happy equilibrium. The speculative condo building of the late 1980s, for instance, is extinct. Most of the condos in a building have to be sold before a bank will finance construction. Mortgages come at rock-bottom prices, thanks to the recent fall in long bond yields. Haggle with your banker and you can bag a five-year mortgage at 4.25 per cent, well below the official "posted" rate and equal to the prime rate.

But still, you've got to worry. While the market seems somewhat more sane in Canada, the share of "investor-held" condos, a polite term for the speculators who don't live in the places they buy, is creeping up. In Toronto, according to the Greater Toronto Home Builders Association, it bottomed out below 20 per cent in 2003 and has climbed into the low 20s since then. The inventory of completed but unoccupied condos is rising too, though it's still well less than half the level of the early 1990s glut era.

The main worry simply is that prices have climbed too fast for too long in both countries. Real estate executives say the market tends to go in seven-year cycles. If so, we're three years overdue for a correction. All real estate pros will deny the market is overheated -- there's never a bad time to buy. Privately, though, some admit they would rent rather than buy if they were first-time buyers.

Silver™

If you are from somewhere like Toronto or Detroit and have never been to Malibu it may sound crazy. But Malibu is one of the most desirable places to live and a house in a similar location in Malibu would cost at least 4x as much. Living on the Beach in Malibu is comparable to living in Beverly Hills or Manhattan. They are not making any more land in Malibu and are in fact making it more difficult to develop any remaining land due to environmental regulations.

http://www.banderasnews.com/0506/re-...llarmobile.htm

Silver™

Boston, Los Angeles and San Francisco are the riskiest housing markets in the country, with high probabilities of declines in housing prices over the next two years, according to a list based on the PMI Risk Index.

The list considered job growth, population, median income and affordability in identifying the 13 riskiest real estate markets. It was published in the August Kiplinger's Personal Finance Magazine and was based on the PMI Risk Index.

Soaring prices and a new generation of inexperienced real estate investors were cited by Kiplinger's as reasons for concerns about a possible bursting of the real estate bubble. The growing number of houses bought as investments, nearly one-fourth of purchases over the past year, was also cited.

Boston was deemed the riskiest housing market in the country. It is at risk because the area has lost 200,000 jobs since 2000 and housing prices remain high, according to the Risk Index. PMI assigned a 53 percent probability that Boston housing prices will decline over the next two years.

Speculation and explosive price increases, plus the possibility of loosened restrictions leading to a substantial amount of new supply, netted Los Angeles an estimated 40 percent risk of a property slump.

The median home price in San Francisco is the highest in the nation, beating even New York, and PMI predicted a 40 percent chance of falling property values there over the next two years.

Sacramento, Calif., was pegged with a 40 percent possibility of a price decline, with Providence, R.I., netting an estimated a 39 percent possibility. Detroit, with flat job growth, had an estimated 38 percent possible price downturn.

New York, Miami, Minneapolis-St. Paul, Ft. Lauderdale, Fla., Denver, Washington, D.C. and Tampa-St. Petersburg, Fla., were also named as among the 13 cities most at risk for price downturns.

http://www.inman.com/inmannews.aspx?ID=47041

zamo

http://www.sun-sentinel.com/business...business-front

Fibonacci

How to Detect a Bubble? Try the Original-Use Test: Chet Currier
2005-07-12 00:09 (New York)


(Commentary. Chet Currier is a Bloomberg News columnist. The
opinions expressed are his own.)

By Chet Currier
July 12 (Bloomberg) -- In 17th century Europe, some people
hocked everything, including their houses, to invest in tulip
bulbs.
In the early 21st century, some people around the world are
hocking everything to invest in houses. Same story, different
details?
That question has become the subject of a long and windy
debate. To complicate the discussion, the world has recently gone
through a boom-bust in technology stocks from the late 1990s to
2002 that has been widely compared in the annals of financial
``bubbles'' to the tulipmania of almost 400 years ago.
Captivating as it may be, the theoretical argument over what
constitutes a bubble doesn't help ordinary investors much. No
matter how many I-told-you-so stories we hear now, a clear
consensus identifying the recent tech-stock experience as a bubble
didn't emerge until after its collapse -- satisfying a famous rule
of thumb that bubbles are known only by their bursting.
In the making of investment decisions such as whether to buy a
house in Malibu or a technology mutual fund, after-the-fact
information comes too late. That's a problem, because nobody who
makes those decisions can afford to ignore the issue.
So what to do? In the absence of better answers, investors can
at least imprint on their minds the idea that bubbles represent a
separation of the market price from the basic purpose of the asset
in question.

Disconnected

As one authoritative writer on the subject, the late economist
Charles Kindleberger, described them, participants in a bubble are
``generally speculators interested in profits from trading in the
asset rather than its use of earning capacity.''
When something comes to be viewed as a ``trading tulip''
rather than a flower bulb, we understand that the asset's price has
probably broken loose from its moorings.
That is not to say the asset's fundamental value is always
simple to determine. Nobody can define for certain the upper limit
on the real value of a commodity that enables its owner to grow
beautiful flowers, perhaps in ever-increasing quantities.
Likewise, nobody can say for sure how much future earning
power the stock of an Internet company such as merchandiser
Amazon.com Inc. may represent. What can be taken as fact, however,
is that stocks are never just blips on a computer screen -- they
are always part ownerships in an enterprise that give their holders
a claim on the enterprise's earning power.

Motivation

So investors can begin an informal test for bubble conditions
by examining their own motives for buying a stock. If we are
working from some reasoned appraisal of what the company might earn
in five or 10 years, based on a study of its business model, we can
hope we are on solid ground. If it's because ``they're talking
about a price target of $500,'' probably not.
So too with houses, which in their essence are places for
people to live in, not price-appreciation vehicles. It's a
reasonable certainty that people will always need a roof over their
heads; price appreciation is a wish, not a need.
There was a time, just a couple of generations ago, when the
standard advice given to new homeowners was to depreciate one's
investment by, oh, 3 percent or 5 percent a year in doing one's
family accounts. Like cars and many other consumer durable goods,
houses lost value as they aged. My grandfather passed along that
advice to me in 1974 as we sat on the back porch of a small place
my wife and I had just bought.
How quaint, I thought even then. Time had already given the
younger generation a different set of expectations about the
economics of houses.

Sound Basis

Then again, we also say ``how quaint'' today when looking back
on assertions, widely advanced less than a decade ago, that stocks
in the New Economy were going to behave differently from the way
they did in the Old.
Hits on a Web site, it turned out, weren't such a solid basis
for projecting a company's prospective earnings five or 10 years
hence. You wanted something closer to the reality of how much a
company could reasonably expect to increase its earning power.
For all its wide usage, the label ``bubble'' carries limited
information. The Internet stock bubble, as it turned out, wasn't
the empty phenomenon that the bubble metaphor suggests. At its
center was important progress in technology and productivity.
Still, the prices it put on numerous stocks couldn't be
sustained. Between them and the value inherent in their original
purpose, there was too much empty space.

Silver™

With the cost of a new house seeming to defy gravity, many would-be home buyers suffering from sticker shock are baffled by the relentless run-up in prices. The explanation may, however, be simple — houses have gotten bigger.

Twenty-five years ago, the average price of a new home in the U.S. was $76,400, according to the National Association of Home Builders. By last year, the price had shot up to $274,500.

But in 1980, the average home was 1,740 square feet, had three bedrooms or less, and two bathrooms or less, according to U.S. Census figures. About a quarter of the new houses you looked at in 1980 would have had no garage; a third would lack air conditioning.

Last year, the average new home buyer bought 2,349 square feet of living space, with at least three bedrooms and two-and-a-half bathrooms, with a garage that held at least two cars. Some 90 percent included air conditioning.

Not only are today’s new houses packing more square footage, they have more volume -- nine-foot ceilings are becoming the norm. Today’s homebuyers are demanding separate rooms for media centers and home offices, spacious walk-in closets, and kitchens you’d expect to find in a restaurant. New houses today are built with higher-quality materials, from better finish and trim to granite countertops in the kitchen and bathroom. Buyers are demanding -- and getting -- central air, state-of-the-art security systems and broadband wiring for the Information Age. All of which is helping to push home prices higher.

There’s another major force driving up home prices: Rising wages and increased buying power continue to push prices higher, according to David Berson, economist at Fannie Mae.

“Home prices over the long run tend to grow — not at the rate of inflation — but instead at the rate of income growth,” he said. "Which, over time, is above the rate of inflation by usually about 1.5 to 2 percentage points."

And, even as wages have rising, falling mortgage rates have allowed home prices to go up even faster than income growth, said Berson. Compared to the average 1980-vintage mortgage —at 15 percent interest — the cost of buying a home is less than half what it was 25 years ago.

To be sure, there are still plenty of would-be homeowners who feel priced out of the housing market. But based on overall buying power and affordability, housing in the United States is as cheap as it's been in 25 years.

Take an average couple who have saved a year’s earnings to put down on their new average home. Last year, that down payment would have left them saddled with a $247,044 mortgage. But 25 years ago, a down payment of a year’s salary would be left the buyer of an average home with a mortgage of just $63,920.

Ah, the good old days. But take a closer look. Last year’s average home buyer financed their purchase with a 5.5 percent, 30-year fixed mortgage, leaving them with monthly payments of $1,403 — or about 2.7 paychecks of $528, the average weekly wage in 2004. But for our 1980 homebuyers, the $808 monthly payment on the average 30-year fixed mortgage — of 15 percent — would have burned through 3.4 paychecks, when weekly wages averaged $240.

In other words, after buying their house in 1980, Mr. and Mrs. Average Homebuyer were left with $54 a week (or about $123 in 2004 dollars) to pay for taxes, food, clothing, car payments — the works. By 2004, the family budget had $204 a week to spend after making the monthly mortgage payment.

Doing more at home
Conspicuous consumption is only part of the reason for the expansion of American homes. Though demographers have been predicting for years the trend toward smaller American families would eventually bring about smaller average house sizes, the average home buyer has found ways to use more space, not less, according to Dan Levitan, a Florida-based consultant to home builders and developers.

“We look to a house to do more things that we did in the past,” he said. "We work in the house, we recreate in the house, we spend time on the Internet and our kids play Game Boys instead of joining Little League. So to that extent we need more house because we do more things in the house.”

To be sure, it’s not clear how much of all this bulking up is a function of need — or want. The Baby Boom (a.k.a. the Me Generation) is famous for its penchant for immediate gratification. Now, with a massive shift in inherited wealth from the previous generation, Boomers can afford ever bigger residences. But demand for bigger homes is just as strong from younger buyers, according to Gopal Ahluwalia, an economist with the National Association of Home Builders

“We thought Generation Y was going to get by on less,” he said. “But they’re going the other way around.”

Housing analysts say that although they see no signs of a slowing in this trend toward bigger and bigger homes, at some point it will level off. But there are no signs of that happening yet, said Levitan.

“I don’t think were going to end up with the average person in the country living in a 20,000-square-foot house,” he said. “But we still have along way to go to get anywhere near the maximum.”

One force that could slow the swelling of American homes is the rising cost of energy. In the late 1970s, a prolonged rise in energy prices took a toll on expansive, poorly insulated homes —often dubbed “white elephants” by owners who were sometimes forced to sell at below-market prices. Higher energy costs then sparked a major drive to improve energy efficiency through improvements in design, materials and building standards — along with more efficient appliances and heating and air conditioning systems.

But with houses getting bigger and home electronics consuming more and more power, today's new homes are once again using more and more energy. That creates a new opportunity for home buyers and builders to find even more ways to conserve, according to Brian Castelli, executive vice president of the Alliance to Save Energy.

“I think people are going to be pushed to do more as houses are getting bigger and ceilings are getting taller,” he said. “They’re going to see bigger bills unless they start to design those homes to be much more energy efficient and use more energy efficient appliances … for the fifth TV or the third computer.”

But while the size of the average American household continues to shrink, homes are still getting bigger and better appointed. Industry analysts say the reason is simple -- new home buyers are demanding more space and better amenities than they were a generation ago.

“If someone is there to buy it, builders will always be there to answer the call," said Levitan.

http://www.msnbc.msn.com/id/8544466/

VTEC11

Global house prices

Still want to buy?
Mar 3rd 2005
From The Economist print edition


According to our latest house-price indicators, it is now much cheaper to rent than to buy a house in many countries


WHEN The Economist launched its global house-price indicators in 2002, residential-property markets were merely warming up. Today they are red hot in many of the 20 countries we cover: in half of them, prices have risen by around 10% or more in the past year (see table). But for the first time since we started to track them, housing markets in several countries have slowed sharply.

The most dramatic slowdown has been in Australia where, according to official figures, the 12-month rate of increase in house prices fell to only 2.7% in the fourth quarter of last year, down from nearly 19% at the end of 2003. Another index, calculated by the Commonwealth Bank of Australia, which is based on prices when contracts are signed rather than at settlement, shows that average house prices fell by 7% in the year to December; prices in Sydney plunged by 16%. The Reserve Bank of Australia's quarter-point increase in interest rates this week is likely to give prices another downward nudge.

Britain's housing market has also cooled since last summer. The Nationwide index, which we use, was still up by 10% in the year to February, down from 20% growth in July. Other anecdotal evidence suggests that prices have fallen since last summer in many parts of the country.

In contrast, America's housing bubble continues to inflate. Although the rate of increase slowed in the fourth quarter, prices were still up by 11.2% over the year. In California and Washington, DC, housing prices rose by more than 20%. Alan Greenspan, the Fed's chairman, recently admitted in congressional testimony that there may be property bubbles in “certain areas” and a risk that prices could decline. There is certainly evidence that prices are being driven by speculative demand: a new study by the National Association of Realtors shows that one-quarter of all houses bought in 2004 were for investment, not owner-occupation.

House prices are still rising rapidly in continental Europe. French house-price inflation has accelerated to 16%, its fastest on record in real terms and only a whisker behind Spain's 17%. Prices in Italy, Sweden and Belgium are also rising at close to 10%. Excluding Germany, where prices fell again in 2004, average home prices in the euro area have risen by 12.5% over the past year, causing some concern at the European Central Bank.

Punishing prices, puny yields

The main reason why housing markets have cooled in Australia and Britain is that first-time buyers have been priced out and demand from buy-to-let investors has slumped. While house prices have soared, rents have risen modestly or even fallen in some cities. In America, Britain, Spain New Zealand and Australia, average net rental yields (allowing for management fees, maintenance and empty periods) have fallen to 3.5% or less, well below mortgage rates. Shane Oliver, the chief economist at AMP Capital Investors, estimates that net rental yields on houses in Sydney are only 1%. Landlords are nowhere near covering their true costs, but many still hope to make their profit from capital gains. That sounds ominously similar to the days of the dotcom bubble, when it was argued that the link between share prices and profits no longer mattered.

According to calculations by The Economist (with the help of Julian Callow of Barclays Capital), house prices are at record levels in relation to rents (ie, yields are at record lows) in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. America's ratio of prices to rents is 32% above its average level during 1975-2000. By the same gauge, property is “overvalued” by 60% or more in Britain, Australia and Spain, and by 46% in France (see chart).


The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier. To bring the ratio of prices to rents back to equilibrium, either rents must rise sharply or prices must fall. Yet central banks cannot allow rents to surge as this would feed into inflation. Rents directly or indirectly account for 29% of America's consumer-price index, so rising inflation would force the Fed to raise interest rates more swiftly, which could trigger a fall in house prices. Alternatively, if rents continue to rise at their current annual pace of 2.5%, house prices would need to remain flat for over ten years to bring America's ratio of house prices to rents back to its long-term norm. There is a clear risk prices might fall.

Lower real interest rates might justify a higher p/e ratio. For example, real interest rates in Ireland and Spain were reduced significantly when these countries joined Europe's single currency—though not by enough to explain the whole rise in house prices. In Britain, where tax relief on interest payments has been scrapped, real after-tax rates are close to their average over the past 30 years, and so do not justify a higher price/rent ratio. In America, too, real post-tax interest rates are not historically low, in part because mortgage-interest tax relief is worth less at lower rates of inflation. For instance, if interest rates are 10%, tax relief is 30% and inflation is 7%, the real after-tax interest rate is 0%. If interest rates are 6% and inflation is 3% (ie, the same gap as before), and tax rates stays the same, the real interest rate is 1.2%.

The unusual divergence between house prices and rents does not just affect investors; it also undermines the conventional wisdom that it is always better to buy a house, because “rent is money down the drain”. Today in many countries it is much cheaper to rent than to buy.

Rent asunder

Take a two-bedroom flat in London, which you could buy for £450,000 ($865,000). To rent the same flat would currently cost £1,700 a month. In addition to a 6% mortgage rate, a buyer would face annual maintenance and insurance costs of, say, 1.25%. In the first year, the rent of £20,400 compares with total mortgage interest and maintenance payments of £33,000, a saving of £12,600. Interest payments would be less if a large deposit were paid, but in that case the income lost from not investing that money elsewhere has to be taken into account.

Assume that rents rise by 3% a year, in line with wages, while house prices from now on rise in line with inflation of 2%. At the end of seven years (the average time before the typical homeowner moves), you would be almost £35,000 better off renting, taking account of the capital appreciation and buying and selling costs. In other words, even without a fall in real house prices—which many believe to be likely—buying a house in Britain today seems a poor investment.

The figures look even more striking in the San Francisco Bay Area, where it is possible to rent an $800,000 house for $2,000 a month. Making the same assumptions about rents and house prices, but also deducting tax relief on a fixed-rate mortgage and adding property taxes, a buyer would pay $120,000 more over seven years than if he had rented. House prices in San Francisco would need to rise by at least 4% a year (2% in real terms) for it to prove cheaper to buy a house. Since 1950 American house prices in real terms have risen by an annual average of just over 1%. To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.

http://www.economist.com/finance/dis...ory_id=3722894

doopstr

A good read... links to msnbc Homeowners place faith in 'exotic' mortgages

zamo

Very interesting read doopstr. And the worst thing, most people are now choosing the exotic loans to get bigger loans. Risky Risky, welcome foreclosures.

BigPimp

Good Article

http://biz.yahoo.com/special/re05_article1.html

JPL530i

the article scares me. just picked up a place outside of boston.

SDCGTSX

Although this thread has started in 4/05, the official official thread was perhaps started in 2002 by The Economist when they started with the San Francisco market in particular and California in general as being in a housing bubble. Of course, the market has gone up significantly since then. And of course if you are a bull or a bear, eventually you will be right. So I don't think it's that important as to WHEN the bubble burst will happen, because if by BUBBLE you mean that housing values won't go up double digits forever, you are right. But HOW and by HOW MUCH? If the market goes sideways for a while, I think we all would be pretty happy, even those who bought at the top of the market. That is my hope and one that I think has a very good chance of happening.

The Fed and the world economists honestly have no clue as to what will happen. If they did, believe me, they'd be billionaires by now. What they do know is that as long as the economy, and by economy I mean jobs, are steadily growing, the housing market will be stable.

So for each of us who holds some expensive piece of property with a variable, interest only loan, the thing to think about is 1) is it time to switch to a fixed rate loan? 2) do I have enough savings to handle a sudden rise in interest rates? 3) is my job really secure? 4) what will I do if the market were to suddenly drop 20%?

As long as answers to 1-3 are yes, then the answer to 4 should be to just hold on. If you sold it at a time when prices are falling, you are just shooting yourself in the foot. The only really serious question to consider is whether you should switch your current variable interest only loan with 3-5 year fixed rate into a longer term fixed rate loan (whether interest only or amortized). If the prices were to go down, you will most likely NOT be selling your property after 3-5 years, and instead will be FORCED to hold on to it for a longer term or sell it at a loss. Given the transaction cost of up to 6-7% of the price of your home, (3-6% to sell, 1-2% to buy) you'll take a HUGE HIT if you sold at the bottom. Cont'd

SDCGTSX

So here's my situation and my expectation. I bought a 3 bed / 2 bath condo in July '04, in downtown San Diego for $704,000 with a loan of $658,000. The first loan is a 30 year, interest only loan of 4.9% fixed rate for 3 years. The 2nd loan is a floating prime + 1.5 which is at 8.5% now with the damn prime climbing quarter % each frigging month.

My upstairs neighbors bought his penthouse unit for speculation for $800,000 and is now trying to sell it for between $900,000-975,000. I think he'll end up selling it for around $925,000. If this goes down, I think I can get my unit reappraised for around $875,000 and refinance it with just one loan at below 80% LTV which will eliminate my 2nd loan. I should be able to get my first loan at a 10 year fixed rate ARM at 5.9%.

At this point, I'm thinking I can go a few different directions.

1) Pay down my 2nd loan at the higher rate and hold on to my first loan for the remaining 2 years left on the fixed term and refinance at the end of it.

2) If I think rates are gonna to up a lot in 2 years, then I can just refinance now but the rates will be slightly higher than my current loan. But I can lock in a fixed rate loan for 10 years.

3) Sell it now.

4) Sell it after July 06 so I can take advantage of up to $250,000 appreciation tax free

I'm leaning towards option 1, where I pay off the $103,000 2nd loan, hold on to the first. That's because I think the market will hold for 2 more years, but should I expect the worst and just refinance and lock in a 10 year rate now?

zamo

You never know what is gonna happen. At least 2 things are true; conventional loan rates wont go up drastically and you have up to 3 years of cushion before your interest-only rate bumps up.

I am more conservative. If I were you, I will try to refinance with a 30 year fixed APR loan which wont that big of a hit, plus you will be paying at least a portion of principal each month.

A better solution might be selling and moving to a cheaper market. 700+ k mortgage, sounds pretty high to me.

fdl

^^^

$650,000 loan is nuts

Silver™

I find this funny.

www.housing-bubble.com was started in 2002 and they guy gave up updating it two years ago when the market continued to show strength.

Silver™

Close your eyes.
ADVERTISEMENT

Picture the Dream Economy.

In this economy, everyone is able to borrow money. I'm not talking about a little bit of money.

You can borrow lots of it. Better still, you can borrow it for long periods. And, if you play your cards right, you only have to pay interest on the amount borrowed. You wouldn't have to deal with those pesky principal payments.

Hiring workers in the Dream Economy is a snap. And it doesn't cost much because so many workers are available. There are no payroll taxes, no benefits and no messy paperwork. There is no worker's compensation to pay. Finally, you just hire people as you need them.

Many are hired for no more than a day. It's as easy as driving to a few well-known spots. You pick workers as you need them.

Better still, the workers will eagerly bargain with you about wages.

Finally, there are no taxes to pay when you sell your product. We're not talking about low taxes.

We're talking about no taxes. Not a dime. You keep every penny of the money you make in your business.

My guess is that just about everyone would like to work and live in the Dream Economy.

So, how do you find the Dream Economy?

The Dream Economy is part of America. It's in your backyard, literally. Your admission is easy. Own a house, something most people want to do anyway.

While the word "bubble" is inseparable from discussions of real estate, most observers have ignored a simple fact.

Congress created the Dream Economy in 1997 when it liberalized the rules for capital gains in homeownership. Prior to 1997 you could defer gains only if you bought a more expensive house. After 1997, homeownership became a gigantic tax-free zone. Gains became tax-free income.

At the same time, no-tax, no-benefit labor was available on a local corner, and lenders were creating ever-more-attractive loan packages. Together, the three elements created the Dream Economy.

What does all this mean?

Some of what we're seeing in residential real estate isn't a bubble at all.

It's what economists call "tax capitalization" at work. Investors pay more for a dollar of tax-free municipal bond yield than they pay for a dollar of taxable bond yield because they don't have to pay taxes on the income from tax-free bonds.

If we have a bubble in home prices, part of is simple tax capitalization.

So where's the danger?

Inevitably, some will overvalue the prospect of tax-free income.

http://www.chron.com/cs/CDA/ssistory...siness/3271409

RaptorCLS

I'm in such confusion at the moment.

I orginally thought that I would take come equity out of my current home (Stockton, CA) and purchase a 1000-1300sq ft loft in Emeryville, CA. I would then rent out my Stockton home. The move is ideal cause I want to be closer to work, family, and friends in San Jose.

Looking at it now, I'm not too sure. The loan on my house now is about $170K. I actually got a steal cause I bought it from my parents for way below market value. I've been in the house longer than 2 years and will not pay any capital gains. The current market value is $400K.

Thinking of the upkeep and things I would have to fix or whatever to the house to be put up for rent, I dont know if I want to mess with it now. I do still want to get into the real estate investments (buying..then renting) so the I'm not too concerned with the bubble (since renting). I figure I could start off fresh by purchasing a new place and work from there.

If I did have $230K cash..I could put about $25K down on the new place, $25K to pay off everything I have in debt, and put some in investments and savings.

But, with the bubble thing going on, and I THINK that the area is close to its peak on prices, perhaps it would be best to sell, for that reason.

What is everyone elses take on this? Should I just go ahead and sell or rent?

doopstr

How much could you rent out your current place for? If you do, make sure you are financially prepared for trouble. Ie. what do you do if the renters decide they aren't paying this months rent? If you have multiple units, that can help take care of itself. But with only one you better have some cash in the bank.

What I would suggest is that you do a refi on the current property to get just enough cash to pay off your debt, make a deposit on the new house, and still have enough cash to pay 3-6 months of mortgage payments in case you have a tenant issue. In the meantime you can put that cash in some fund somewhere and make interest on it.

Fibonacci

U.S. Treasuries Drop on Speculation China Will Cut Purchases
2005-07-21 17:06 (New York)


(For more on China's currency change, see {TOP CHINA <GO>})

By Michael McDonald and Al Yoon
July 21 (Bloomberg) -- Treasuries dropped after China let
its currency strengthen, boosting speculation the country will
reduce purchases of U.S. government debt. The yield on the
benchmark 10-year note reached the highest since May.
China was the second-biggest holder of Treasuries with more
than $243 billion at the end of May, up from $165 billion a year
earlier, according to the U.S. Treasury Department. Japan was
the largest with $686 billion. China has been buying Treasuries
to prevent its currency from appreciating above a fixed rate
against the dollar.
``This does mean a shift away from investing in U.S.
assets, and yields will move higher,'' said Peter Hooper, chief
U.S. economist at Deutsche Bank AG in New York, on a conference
call. The firm is one of the 22 primary dealers of U.S.
government securities that trade with the central bank's New
York branch.
The yield on the 10-year note rose 12 basis points, or 0.12
percentage point, to 4.28 percent at 5:01 p.m. in New York, the
highest since May 10. The price of the 4 1/8 percent note due in
May 2015 fell almost 15/16, or $9.38 per $1,000 face amount, to
98 25/32, according to Cantor Fitzgerald LP.
``The timing was more of a surprise,'' said David Ader,
head of U.S. government debt strategy at RBS Greenwich Capital
Inc. in Greenwich, Connecticut. ``It's a headline event.'' The
volume of trading today in the Treasury market was the most
since June 3, he said. RBS is also a primary dealer.

Basket of Currencies

The new rate strengthens the yuan by 2.1 percent to 8.11
per U.S. dollar immediately, the People's Bank of China said on
its Web site. The central bank said it will allow the yuan to
fluctuate versus an unspecified basket of currencies, which will
permit it to rise or fall as the dollar gains or drops against
other currencies.
``Adjusting the yuan exchange rate will enhance the
independence and efficiency of monetary policy and help bring
imports and exports into balance,'' the central bank said in a
statement in Chinese on its Web site.
The yuan had been pegged at about 8.3 per dollar, prompting
criticism from U.S., German and Japanese government officials
that an undervalued yuan gave China an unfair trade advantage.
The revaluation permits China to begin diversifying its
foreign-exchange reserves out of dollar-denominated assets and
may serve as a ``signal for other Asian central banks'' to
follow suit, hurting Treasuries, wrote Stephen Roach, chief
global economist in New York at Morgan Stanley, in a report.
Malaysia immediately scrapped its currency's seven-year peg
to the dollar and said it would adopt a managed float. Hong Kong
kept its own peg.
U.S. Treasury Secretary John Snow said in an interview he
isn't concerned that China will reduce its demand for U.S.
government debt.

`Flat-Footed'

News of the revaluation reached traders at about 7 a.m. New
York time as many were just settling in.
``It caught the market flat-footed,'' said Gregg Cohen, a
government bond trader in New York at Cantor Fitzgerald LP. ``I
was drinking my coffee, looked up and the market was falling out
of bed.''
The drop in Treasuries prices were limited earlier after
reports of an attempted bombing in London, two weeks after the
worst attack on the capital since World War II. Treasury losses
may also be curbed by speculation the revaluation will do little
to curb China's economic growth.

`Major Producer'

``China is still a major producer, they are still going to
sell a lot of goods, take in a lot of dollars and buy
Treasuries,'' said Scott Gewirtz, head of Treasury note and bond
trading in New York at Lehman Brothers Holdings Inc., which is
also a primary dealer.
China may also end up buying more U.S. dollars as it
attempts to control increasing speculation that the yuan will be
revalued again, which would help Treasuries, wrote Larry Cantor,
global head of market strategy at Barclays Capital Inc. in a
report to clients.
``I'm buying Treasuries,'' said Michael Cheah, who manages
$2 billion in bonds for AIG SunAmerica in Jersey City, New
Jersey. China's revaluation will help the Treasury market as it
buys more government debt to support ``the upper end'' of the
new yuan band, he said.

'Firm Footing'

Federal Reserve Chairman Alan Greenspan said yesterday that
that the economy is ``on a firm footing'' while inflation is
tame, causing Treasuries to rally for a second day. Inflation
erodes the value of a bond's fixed payments.
Greenspan gave his semi-annual testimony on the economy to
the House Financial Services Committee. He testified today to
the Senate Banking Committee.
The Conference Board said its index of leading U.S.
economic indicators gained 0.9 percent last month, from a 0.5
percent decline in May. The Conference Board recalibrated its
index to reduce false warnings about economic slowdowns.
The Philadelphia Fed reported today that its regional
factory index rose to 9.6 in July from minus 2.2 last month.
Manufacturing growth in the region contracted in June for the
first time in two years as energy costs rose. Readings greater
than zero signal growth.
The Treasury Department said it will auction $6 billion in
19-year and six month inflation indexed notes, or TIPS, on July
26.
The Fed also today released the minutes from its June 29-30
meeting, indicating that policy makers are reluctant to use
monetary policy to directly deflate what some economists say is
a ``bubble' in the U.S. housing market.
``The Fed's objective is to take the froth out of the
property market and they believe higher long-term interest rates
are necessary to do that,'' said Paul McCulley, a managing
director at Pacific Investment Management Co. The Newport Beach,
California-based firm manages the world's largest bond fund.


Cliff's Notes: What does China's baby step in removing a currency peg have anything to do with the housing bubble? Simple, as one of the largest buyers of treasuries, China has been a huge factor in keeping YOUR mortgage rates lower than would normally occur. 10 yr treasuries have the most direct influence on mortage rates and today they got smacked...as long term rates normalize, housing appreciation will slow.

fdl

Some news for the canucks ....

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

Experts stick pin in housing bubble fear

Home owners across Canada may fret that a bubble is developing in housing in their area, but for the most part they would be wrong, according to a study done by Carl Gomez, economist with Toronto-Dominion Bank. The only spots in Canada where house prices may be growing much faster than conditions seem to warrant are Vancouver and Victoria. Toronto and Calgary don't qualify.

Mr. Gomez shot down concerns that a speculative bubble akin to the late 1980s or the "frothy" conditions south of the border may be brewing. Vancouver and Victoria may be the exceptions -- Vancouver possibly because of supply constraints and the upcoming Olympics and Victoria because of its attraction as a resort destination.

Applying indicators better known in the stock market than the housing market, Mr. Gomez examined the situation in regional markets across the country. For example, he came up with a housing price/earnings multiple, which measures the price of a benchmark property relative to its future imputed rent. And borrowing a term made popular by U.S. Federal Reserve Board chairman Alan Greenspan in describing the stock market in 1999, Mr. Gomez calculated an irrational exuberance indicator.

In this housing boom, prices adjusted for inflation have risen much slower than the late 1980s, Mr. Gomez said in his report yesterday. In the 1980s, inflation-adjusted housing prices jumped about 70 per cent trough to peak and that occurred in just over 16 quarters. The current cycle is already in its 27th quarter and the trough-to-peak rise has only been 34 per cent. "Moreover, the annual rate of home price appreciation has already begun to moderately cool from the double-digit pace registered last year, thanks to an increase in housing supply," he said.

The TD economist also said "the economic backdrop in which the current price gains are occurring are fundamentally more supportive to the housing market than they were in the late 1980s," he said. Employment levels are high and interest rates are significantly lower than they were in the earlier period.

"Since the most basic definition of a housing bubble is that prices are being bid up beyond what their underlying fundamentals would justify, then most regional markets in Canada would not qualify for 'bubble' status," Mr. Gomez concluded. However, he believes Vancouver and Victoria risk a bubble.

Despite its "red-hot real estate market," Toronto is not at risk of a bubble, Mr. Gomez said. Nor is Calgary, where inflation-adjusted house prices in the second quarter were up 9.8 per cent from a year earlier, he said. Toronto's P/E is not far off what it was in 1995, before the latest housing boom, and remains well below the level seen in 1989. "Furthermore, there are few signs of irrational exuberance in Toronto's housing market," he said. In Calgary, the economy is strong and affordability has actually improved.

The same is not true for Vancouver. That city's P/E has risen much faster than any other major Canadian city over phe last few years. It also scored poorly on other indicators as well.

Mr. Gomez suggested that some of the price appreciation there might be the result of the 2010 Winter Olympics, but concluded after looking at the price growth premium that Sydney and Atlanta experienced the years those cities hosted the Olympics that "if Vancouver's home prices continued to appreciate at its current pace over the next five years, its comparable 'Olympics house price premium' would be almost double the respective gains made in those two previous host cities."

Victoria is also at risk of a housing bubble, he said. It may have something to do with reported speculative interest in Victoria as a resort destination, particularly from Americans who may be using some of the cash derived from "over-inflated home prices in some U.S. cities" to finance property in Victoria, he suggested.

The Canadian situation contrasts with that in the United States.

Even the Fed chairman has waded into the debate over U.S. housing prices. Last week Mr. Greenspan suggested some regional housing markets in the United States might be undergoing a "speculative fervour." He warned that the low interest rates that have helped spawn that boom are coming to an end. And he cautioned that "households may have trouble meeting monthly payments as interest rates rise."

Statistics released yesterday by the U.S. National Association of Realtors underscore just how heady the U.S. market is, thanks not only to low interest rates, but also speculation and the availability of unusual financing devices such as interest-only mortgages. Existing houses sold in June at the fastest monthly clip ever and the median price set a record.

fdl

Home prices increasing on Toronto's periphery

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

Re/Max Ontario-Atlantic Canada Inc. reported yesterday a double-digit price appreciation for detached homes on Toronto's periphery this year, fuelled by buyers fleeing the city's rising housing values. As the average price in the central core increased 12 per cent, hovering at about $775,000, home buyers have flocked to the north, west and east of the city and the fringes of the Greater Toronto Area. The average price of detached homes north of the GTA has climbed 22 per cent during the past six months, up to $254,577 from $208,906. Meanwhile, in some neighbourhoods in northwest Toronto, where condominiums can still be purchased for under $200,000, average property prices have inched up 4 per cent this year, to $253,801 from $243,948. Although affordability is the main driving force behind this increase in sales, buyers are also attracted by community and lifestyle, a Re/Max spokesman said.

SDCGTSX

Stop freaking out people. House prices go up when price of money (interest rates) are down. Now that they are rising, people will just have to get used to the idea of home prices going down or at least not going up in the future. Also when the home prices don't go up for 2-6 months, that'll clear out the speculative buyers which will deflate demand a bit and it'll push a load of supply on to the market from the speculators.

This is sort of already happening in downtown San Diego. Now that people think that prices have peaked, people are listing their properties to sell in droves. That has just stablilized prices here. The demand is still pretty good but overwhelmed by the supply. I think this is a healthy thing and a good thing for SD housing market. It'll give it a bit more standing power for the future. I just hope SD job market holds up.

fdl

A small dip/correction in house prices would probably be healthy for the market.

03typeS6spd

i think leveling would help more even it if should correct itself, a dip and there would be insanity in the reverse direction

fdl

maybe, maybe not.

matelot

What we REALLY need is a big-ass WAR !!! to bring things back to normal from all these frenzy insanity !