fdl

Ya, if China nukes California it might slow down the real estate market over there.

matelot

al-Queda, China, Iran, NKorea, Russia...whatever. That "reset" button has to be pushed.
I guess that's how revolutions got started in our history - when shit just became unberable for the majority of the people.

zamo

as i told before; 60% appreciation in my neighborhood in 16 months (and those are real numbers) is just pure speculation. That Reset button will be pushed.

SDCGTSX

Why not sell now and then buy a little later?

zamo

cause i will need to buy another place to live, and with the inflated prices I am not going to take that risk. Those numbers are fake IMO. Just paper.

Silver™

In economics, bad metaphors often lead to bad policies. "Inflation is never a thermal condition described by 'overheating,' nor a budgetary consequence of 'guns and butter.' Monetary policy is never in the position of 'pushing on a string,' and government borrowing never 'primes the pump' or 'kick starts' entrepreneurial spirits. Booms need not lead to busts (Hong Kong boomed continuously from 1975 to 1997), and busts need not be preceded by booms (witness the United States in 1937). Most important, large increases in asset prices are never inexplicable 'bubbles' that collapse for no reason, or that need to be burst by a central bank assault. These crude metaphors are just journalistic tricks for concealing ignorance, but they regularly foster poisonous remedies for imagined ills."

Since 2002, when the metaphor of a "housing bubble" began to stick to reporters like Bubblicious gum on their shoes, they have continued quoting the same Chicken Littles warning about an imminent and supposedly disastrous collapse of housing prices. People who are most worried that house prices have been rising too fast appear even more worried that houses prices might stop rising.

In this journalistic rivalry to blow the bubbliest bubbles, some seized on a comment in Alan Greenspan's testimony about "potential for individual disaster" for overleveraged homebuyers. Yet the key word was not "disaster," but "individual." Greenspan said if home prices did decline in localized markets, "the macroeconomic implications need not be substantial. ... Moreover, a decline in the national housing price level would need to be substantial to trigger a significant rise in foreclosures, because the vast majority of homeowners have built up substantial equity in their homes."

Why is even the slightest rollback of asking prices on homes supposed to be such an ominous threat? The most revealing answer came from New York Times writer Anna Bernasek in "Hear a Pop? Watch Out." She began with a hypothetical wealth effect. "Economists use this rule of thumb: A $1 change in household wealth leads to a roughly 5-cent change in consumer spending. By that measure, a 10 percent decline in real estate prices would knock about half a percent off the gross domestic product."

This wealth effect results from single-entry bookkeeping -- looking only at sellers and ignoring buyers. The wealth of young couples mainly consists of their future earnings, or "human capital." High house prices reduce that wealth for first-time homebuyers by as much as they raise financial wealth for sellers.

Those trading one home for another are both buyers and sellers, so the net effect on their wealth depends on whether home prices are most inflated in the place where they are buying or selling. For those changing homes in the same area, a lower price on the house being sold would be largely offset by a lower price on the one being purchased, with little net wealth effect. If home prices softened sufficiently to make selling less attractive, then fewer people would put their homes on the market and the resulting scarcity would limit any price decline.

Bernasek went on to fret that "a fall in values ... would probably lead to tightened credit standards, less lending and higher interest rates." Yet her sources believe "the most attractive way for policy makers to cool the housing market would be to put pressure on lenders to tighten their credit standards" and for the Fed to "nudge the long end of the market toward higher rates." Their proposed solution is identical to the assumed problem.

Bernasek warned of "a new wild card for the economy. In 2004, adjustable-rate mortgages made up a third of new mortgage originations. No one knows what the effect of the widespread use of ARMs would be in a down market." But ARMs only amounted to 17 percent of outstanding mortgages in 2004, though they have often made up a third of new mortgages. ARMs made up 36 percent of new mortgages in 1995, according to the Office of Federal Housing Enterprise Oversight (OFHEO). And 1995 was in the middle of a "down market," according to an April 2003 IMF study she cites.

"Reviewing the experience in the United States and 13 other industrialized countries," she notes, "the IMF found that a real estate bust is far more dangerous to the economy than a stock market bust." But the United States never experienced a housing bust, according to the IMF, because "to qualify as a bust a housing price contraction had to exceed 14 percent."

Those "more dangerous" cases the IMF was talking about were in places like Australia 1974-78, Norway 1976-83 and Denmark 1989-93.

It is unsurprising that the IMF discovered house prices were "associated with" recessions, because recessions result in lost jobs and reduced incomes. Turning cause and effect backward, housing bust theorists suggest housing prices just spontaneously collapse for no reason and therefore cause recessions.

The IMF finds economic busts and housing busts share one common explanation. "Housing price busts were (more) associated with tighter monetary policy than equity price busts, reflecting the fact that most housing price busts occurred during either the late 1970s and early 1980s or the late 1980s, when reducing inflation was an important policy objective." That lesson is notably irrelevant to this country at this time. Aside from energy, U.S. consumer inflation was 11.1 percent in 1980 and 5.2 percent in 1990, but is only 2.2 percent today.

According to the IMF, U.S. housing suffered two mini-busts between the first quarter of 1994 and the third quarter of 1996. OFHEO indexes of house prices by state, however, show that particular decline was dominated by California. From the third quarter of 1990 to the third quarter of 1996, average prices of existing homes in California fell 13 percent. Why? The unemployment rate in California jumped from 5.1 percent in January 1990 to 6.8 percent that December, then to 8.3 percent a year later and to 9.9 percent a year after that.

California unemployment remained consistently well above the national average and did not dip below 9 percent until March 1994. This June, by contrast, California unemployment was down to 5.4 percent, and below 4 percent in San Diego, so it is not entirely surprising that long-depressed California housing prices have since rebounded by 164 percent from the IMF's 1996 trough.

If unemployment in California once again rose above 9 percent, housing prices would surely fall again, as in 1990-96. But a weak state economy rather than the resulting glut of homes for sale would then be the fundamental problem.

Those now predicting a nationwide drop in home prices that is even remotely comparable to what happened in California in the early '90s must at least explain what chain of events they imagine might make interest rates and/or unemployment soar. Otherwise, all this overinflated rhetoric is no more than a bunch of bubble babble.

http://www.townhall.com/columnists/a...20050728.shtml

Fibonacci

Greenspan Housing View Seen Hazardous by Wall Street Economists
2005-08-01 00:02 (New York)


By Andrew Ward and Alison Fitzgerald
Aug. 1 (Bloomberg) -- Federal Reserve Chairman Alan
Greenspan isn't worried about the hot U.S. housing market so he
isn't cooling it off by raising interest rates faster.
Worry, say Wall Street economists including David Rosenberg
of Merrill Lynch & Co. and Stephen Roach of Morgan Stanley.
The economists say the Fed must act, for a simple reason:
The U.S. has become so dependent on real estate and construction
to fuel growth and jobs that an eventual, wrenching correction
has the potential to sink the entire economy.
``Act now and cut off the pinky, or wait till later and risk
slicing off the entire hand,'' Rosenberg said in an interview
last week. ``Either way it hurts, but you can still type with
nine fingers.''
Greenspan disagrees. While he said on July 21 that home
prices may be ``unsustainable'' in some regions of the U.S., the
Federal Open Market Committee he leads decided in June that it
wouldn't use interest rates to address ``possible mispricing,''
according to minutes of the meeting made public on July 21.
``The Fed is in some sense caught in a box,'' said
Rosenberg, who estimates 60 percent of the U.S. is experiencing a
housing-price bubble. ``Housing has been this giant locomotive
driving just about everything.''
Rosenberg credits housing with 40 percent of the 2.3 million
jobs added since the 2001 recession. In a report to clients last
week, Lehman Brothers Inc. said related industries accounted for
more than a third of the nation's economic growth over the four
quarters that ended in March. Fed data show appreciation helped
add $5.2 trillion to consumers' balance sheets during the current
expansion, or 68 percent of all wealth creation.

`Froth'

An end to the housing boom would leave U.S. growth ``well
below potential,'' Drew Matus, senior economist at Lehman
Brothers in New York, said in an interview.
Greenspan told Congress in testimony July 20 and 21 that
there is ``froth in some local markets,'' repeating a phrase he
used in May to describe the run-up in housing prices. While
there's a risk of ``disastrous'' results for individuals with
mortgages that depend on appreciation, he said, it's unlikely
that localized price declines would hurt the national economy.
``There's enough of a risk that the Fed should be
preemptive,'' Maury Harris, chief economist at UBS Securities LLC
in Stamford, Connecticut, said in an interview. He recommends the
Fed keep pushing up its short-term rate, now at 3.25 percent,
until market forces raise mortgage rates as much as 0.75
percentage points. Mortgages are linked to long-term bond yields.
Rosenberg says it will take at least three more quarter-
point rate increases to slow home-price gains to their long-term
average. Citing Greenspan's froth comment, he last week raised
his year-end rate forecast a half-point to 4 percent.

Cash Machine

Roach recommends the Fed use its ``bully pulpit'' as a bank
regulator to tighten lending practices. ``We're in a dangerous
place,'' he said in an interview.
Greenspan is right that concerns about a nationwide bubble
may be overstated, Neal Soss, chief economist at Credit Suisse
First Boston in New York, said in an interview.
The median U.S. home price surged 51 percent to $219,000 in
June from the beginning of the expansion in November 2001,
according to the National Association of Realtors. The 15 percent
jump from June 2004 was the biggest 12-month gain since 1980, and
evidence is mounting that more investors are speculating in real
estate, adding to volatility. The run-up was the focus of a
special presentation at the last FOMC meeting.
Consumers extracted $1.62 trillion from their homes through
equity loans since 2001 and spent as much as half of that, Jan
Hatzius, a senior economist at Goldman, Sachs & Co. in New York,
said in an interview. That helped buoy spending even before the
economy was healthy enough to steadily create jobs starting in
mid-2003.

Builders Prosper

Bob Rasche and Howard Wall at the Federal Reserve Bank of
St. Louis estimate that 22 percent of the jobs added since the
2001 recession were linked to housing, the economists said in an
e-mail. Rosenberg justifies his higher figure by broadening the
definition of housing-related to include industries such as home-
improvement stores.
Whoever is right, the job growth generated by housing and
related industries helped offset losses elsewhere in the economy.
Manufacturers slashed payrolls by 1.5 million workers since the
recession.
Builders are prospering, with Commerce Department figures
showing the industry headed toward its best year in more than
three decades.
Huntingdon Valley, Pennsylvania-based Toll Brothers Inc., the
largest U.S. luxury-home builder, has a 12-month backlog of
orders worth $5.87 billion and is the best performing stock in
the Standard & Poor's 400 Midcap Stock Index over the past 12
months. Builders Hovnanian Enterprises Inc. and Ryland Group Inc.
also are in the top 10 in the index.
``My backlog is fabulous,'' Toll Chief Executive Officer
Robert Toll said in an interview. ``Pinch me.''

Behaving Irresponsibly?

The Fed contributed to the housing boom by lowering the
target for its overnight bank lending rate, the nation's
benchmark, to a 45-year low of 1 percent in 2003 to revive the
economy after the recession.
``The Fed behaved irresponsibly'' by ``over-stimulating
housing,'' Edward Leamer, director of the Anderson Forecast
Center at the University of California, Los Angeles, said in an
interview.
While central bankers have raised their target rate in nine
straight policy meetings since June 2004, mortgage rates remained
near four-decade lows. They are tied more directly to the yield
on 10-year Treasury notes, which are set by markets.
Greenspan is no stranger to asset bubbles. The surge in
technology and Internet stocks continued for more than four years
after his warning of ``irrational exuberance'' in December 1996,
then burst and contributed to the eight-month recession in 2001.

The Fed's Role

Greenspan's position then, and one he reiterated last month
in a letter to Representative James Saxton, a New Jersey
Republican, is that markets rather than the Fed should determine
the correct price of assets. The Fed's role should be to help the
economy recover if a bubble does burst, he wrote.
Former Fed Governor Lyle Gramley said in an interview that
central bankers may not have that luxury this time because
housing is driving so many of the economic variables the Fed
targets. Eventually, he says, policy makers will have no choice
but to act.
``The Fed is probably going to raise interest rates somewhat
faster because of the housing price bubble,'' said Gramley, who
is now a senior economic adviser at Stanford Washington Research
Group in Washington. ``If they can engineer a monetary policy now
that brings a nice smooth end to this run-up in home prices,
they're less likely to have economic instability down the road,''

fdl

Title: Hole in the Housing Bubble
Source: NY TIMES
URL Source: http://www.nytimes.com/2005/07/05/re...05aussie.html?
Published: Jul 6, 2005

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.

03typeS6spd

repost in the same thread (#164)....

geez do you seriously want the market to crash or something... this is over a month old and still doesn't impact us with a different setup than australia

fdl

I didnt see the original post, its a long thread cut me some slack I was talking real estate with an Australian friend on the weekend , and he told me how the bubble seems to be deflating over there. So I did some googling and found that article.

Yes, its australia and it doesnt neccesarily "impact" us but its still very relevant. Right now most people are under the impression that not only will house prices keep rising forever, but they also expect huge %20+ increases every year. (as demonstrated in a poll i posted a couple months ago). People need to realize that the market CAN crash or flatten. Its possible, maybe even likely. Dont bury your head in the sand. Its ok to be hopeful but you need to prepare for rough weather.

03typeS6spd

well most people are stupid to a point unfortunately...

and watching the idiots lose all their money is fine with me, but crashing and flattening are two entirely different scenarios

crashing will hurt everyone, flattening will teach anyone who thought they could make a quick buck that you still have to earn it if you aren't in the initial group who figures it out...

however, even at a peak rate of arm-based financing (in the US), we still won't have the massive swings that australia is susceptible to strictly based on rates

03typeS6spd

and i was just picking on you cause you always post the "about to burst" articles...

Silver™

Well only 40% of the people in your poll said that they thought prices would go up more than 10% during the next 3 years. That is not unreasonable

fdl

ya. But I was surprised how many people expected %20+. And what if we dont see 10%? Not everyone is prepared for that and its not completely unplausable.

03typeS6spd

i have seen 15% since your poll

fdl

Its only been like a month I think. Thats impossible.

And if it is true that your home value went up that much so quickly, do you think that is heathy appreciation?

Silver™

I don't think people were being unreasonable, I don't think anyone realistically predicted more than 20% growth.

https://acurazine.com/forums/ramblings-12/3-years-value-homes-my-area-will-310890/

You will never have everyone prepared for a the housing market to flatten or even decline in some areas, same as people will not always be able to prepare for job loss, recessions, etc... Some people just have to learn the hard way I guess.

Fibonacci

Homeowners: Upside-down is no way to be

Americans own a lower percentage of their homes than in the past, increasing risk.
August 5, 2005: 12:55 PM EDT
By Les Christie, CNN/Money staff writer


NEW YORK (CNN/Money) - So much for the American dream.

As more and more people have rushed to be homeowners, they actually own less of their homes than they have in decades...adding another risk factor to the overheated real estate market.

On average, homeowners have 56.3 percent equity in their homes, according to Demos, a public-interest research group. In 1973, equity averaged 68.3 percent; in the 1950s, it was upwards of 80 percent.

Two main factors are at work:


Homeowners are starting off further behind. In the past, the standard downpayment was 20 percent. A 2003 National Association of Realtors survey reported than less than half of all home buyers now put that much down; many obtain 100 percent, even 103 percent, financing.


Homeowners are yanking out cash. From 2001 through 2004, Americans took $330 billion in equity out of their homes, according Freddie Mac. In 2005 alone, they'll pull out as much as $160 billion.

Demos's senior research associate and author of A House of Cards: Refinancing the American Dream, Javier Silva, said that, even in the absence of a real estate crash, many families "are facing a financial crisis," partially because they've taken on more mortgage debt.

Already, the average American's financial obligations ratio (FOR) -- all your regular bills you must pay each month compared with income -- has expanded to 18.45 percent. That's up from about 15.5 percent in the early 1980s, and among the highest since the Federal Reserve began calculating the statistic.

Put to new uses
Until recently, according to Silva, homeowners cashed out home equity to pay for home renovations, college tuition, or maybe to start new businesses, all of which are reasonable motives.

Today, though, Silva says, many mortgage brokers have convinced consumers to cash out equity to buy new cars, boats, or other big ticket items.

But using home equity that way, he says, "is extremely risky. You're pulling equity out of your home ?that's your family's security. And you're mixing bad credit with good."

He means that instead of paying off, say, a car loan in three or four years, paying for it by cashing out home equity adds the car cost to your mortgage. With interest rates so low, that may sound tempting.

But over a 30-year, six percent mortgage, that $20,000 car will cost more than $43,000, including interest, and you can still be paying for it long after it has hit the scrap heap.

Retiring bad debt
Some are also using home equity to pay off credit card debt.

Gerri Detweiler, author of The Ultimate Credit Handbook, has mixed feelings about cashing out home equity to pay off plastic. "Done properly, it can be beneficial," she said.

Before cashing out, though, Detweiler says your other financial fundamentals should be on solid ground -- don't take this step if you just got hit with a big pay cut -- and make sure you can handle the bigger mortgage payment.

And just because you can pay off it high-interest debt with low-interest debt, doesn't mean you shouldn't address why you're racking up debt in the first place.

If you just keep spending, you'll be worse off, because you won't have as much home-equity cushion.

Code red
Silva worries that if housing prices flatten out or decline, some newer homeowners who have built up little equity, could find themselves "upside down" -- owing more than their houses are worth.

And, if interest rates rise, homeowners with adjustable rate mortgages may not be able to keep up higher payments or sell the house for what they paid. Foreclosures could spike and the supply of homes for sale soar. That could send real estate market into a tumble.

"That's the scenario I'm most afraid of," said Silva, "and it's one that few economists acknowledge."

The thinking is that houses will maintain their value, as they have in the past, when housing never fell much more than 10 percent to 15 percent. "But prices are much higher than before in many markets," said Silva. Overinflated real estate, potentially, has a lot further to fall.


http://money.cnn.com/2005/08/04/real...ex.htm?cnn=yes

Fibonacci

Cash-out refis soar

Americans are using refinancing to take cash out of their homes -- but that can be a risky strategy.
August 5, 2005: 11:09 AM EDT
By Les Christie, CNN/Money staff writer



NEW YORK (CNN/Money) - The pace of mortgage refinancing has not slowed, according to a new report from Freddie Mac. But the primary reason for refinancing may have changed.

In a growing proportion of refinancings, homeowners are taking major amounts of cash out of the transactions.

In the quarter ended June 30, 74 percent of Freddie Mac-owned loans that were refinanced resulted in principal amounts larger by at least 5 percent.

Only 9 percent of refinancings resulted in lower loan amounts.

In other words, nearly three-quarters of homeowners refinancing a $100,000 loan wound up with a loan principal of at least $105,000, usually more...the difference between the size of the old loan and the new loan is being taken out in cash.

In 2003, that was the case only 33 percent of the time. Back then refinancing was rate driven, according to Bob Moulton of Americana Mortgage Group. Homeowners reworked mortgages to take advantage of lower interest rates so they could reduce their monthly bills.

Now they refinance to put cash in their pockets or to pay for big purchases.

Where's the money going?
The homeowners spend much of the money on their homes. The latest figures from Harvard's Joint Center for Housing Studies report that Americans paid out $133 billion for home improvements in the 12 months ended June 30.

Others take out cash to buy motor vehicles, pay for the kid's college, or to pay down other debt, all of which can be legitimate uses for the money, especially if it enables homeowners to avoid or eliminate high-interest debt such as from credit cards.

Borrowers shouldn't drain their home equity for frivolous purposes, however, and then hope for increasing house prices to replenish it. That could be risky.

"For the typical family, home equity accounts for the bulk of their wealth," said Frank Nothaft, chief economist for Freddie Mac.

Fortunately, most families are practicing responsible refinancing. "The average loan-to-value ratio after refinancing is still 70 percent," Nothaft said, which means homeowners are being pretty conservative.

He also points out that the number one use the money is being put to is home improvement, "which enhances the home's value."

Other good uses include retiring more expensive debt. Mortgage loans are far better for the borrower than high-interest credit card or auto loans and can even have advantages over student loans, said Moulton, "The government is a partner in paying off mortgages." Not only are interest rates lower than other loans, the interest is also tax deductible.

Moulton reports that some of his customers are using their cash-outs to buy more real estate. "I have a client who is looking to tap $400,000 to buy a second home in the Berkshires."

That's only risky if real estate prices drop.

Freddie Mac expects rising mortgage rates to dampen enthusiasm in the housing market later this year. If that occurs, homeowners would have to grow home equity the old fashioned way, by paying off mortgage loans.


http://money.cnn.com/2005/08/02/real..._out/index.htm

Silver™

It’s hard to go long without seeing a newspaper column fretting about an immediate collapse of the “housing bubble.” However, when we look at overall housing prices there is little evidence of a nationwide bubble. There are instead many localized, rapidly appreciating markets. The causes of the appreciation can vary. Some markets may have bubbles, others likely do not.

Home-mortgage rates in the United States have been near historic lows for the last few years. This has without a doubt kept payments down and helped push housing prices higher. It hasn’t caused a nationwide “bubble,” however. From 1999 to the end of 2004 the median sales price of a home appreciated at a rate of just under seven percent. That’s good growth, but it does not signal a nationwide bubble. In fact, after adjusting for inflation, 12 states actually had lower prices at the end of the five-year period than they had at the beginning.

The housing price run-up has occurred only in particular states and metropolitan regions. Only eight states have had real prices increase by 50 percent or more from 1999 until the beginning of 2005. Even within states it’s often localized markets that have seen much of the run up. Cities like Boston, Washington D.C., Miami, Las Vegas, and San Francisco have seen substantial increases on an already pricey base. Each market has both national and local factors that influence prices. In some cases, these factors justify even the very high prices we see today.

The San Francisco Bay Area provides an interesting case study. With the median home price up to $644,000 and appreciation at 18 percent over the last year, many fear this is a prime example of a bubble. However, it isn’t a craze of speculative buyers who have driven prices up here. Neither is it the availability of new mortgage products. Sure, zero down and interest-only loans have helped more buyers demand homes than would have otherwise, but in the face of greater demand, prices have only been bid up because builders have not expanded production rapidly enough to supply the greater demand.

The Bay Area isn’t cursed with a shortage of land. There is plenty of it. But builders are not allowed to build on it. Over a million acres, nearly a quarter of total land in the region, is public parkland, state and federally owned beaches, mountains, forests and green spaces or protected farmland, wetland, natural habitat or watershed. All are off limits for development. The land that is “available” for development is severely restricted. Cities around the region impose large lot zoning, limit building permits, impose long wait times and delays, and enforce urban growth boundaries to limit development.

Sixty percent of Bay Area cities are not producing enough new housing to meet the state’s guidelines for their “fair share.” Until the 1970s California home prices were in line with national averages. It’s only once they started adopting land use and urban growth controls that prices began to climb. Over the last 20 years the number of government restrictions on building have only increased. As growth controls have tightened, prices have escalated.

Although California was an early adopter of growth restrictions, these types of ordinances now exist in many housing markets. Economists Edward Glaser of Harvard and Joseph Gyourko of the University of Pennsylvania studied the effect government restrictions have on housing prices in a number of markets around the country. They found that 90 percent of the difference between physical construction cost and the price of new homes could be attributed to government restrictions on building. Only 10 percent of the difference was due to intrinsically scarce land.

Government restrictions on building can’t explain all the high-priced markets in the country. Las Vegas and Miami seem to be exceptions where new construction has expanded rapidly but prices still surge. In these cases, speculative bubbles may be at work. In Miami as many as half of the buyers of new apartments resell the unit before ever moving in.

Housing markets are driven by many factors. If interest rates go up or we have a recession, it may hurt prices in many markets. Those most at risk will be the markets where speculation has been greatest. Other markets, driven by supply restrictions, won’t see as great a decrease and may just slow their appreciation. In those markets the risk is that government will rapidly ease restrictions. In California’s political climate at least, that’s not a likely event.

http://independent.org/newsroom/article.asp?id=1548

Fibonacci

Damn, this thread sounds like a broken record.

Nutshell...if you want to buy a home and plan on staying a while and can afford it without wacky finanancing - GO FOR IT.

If you don't plan on staying for a while and can't afford it without wacky financing - BEWARE.

matelot

define "wacky finanancing"

VTEC11

By wacky he's probably referring to interest only loans, negative amortization, and/or no money down deals (100% or more financing).

zamo

negative amortization = you owe more each month

Fibonacci

U.S. Housing Market Is `Close to a Peak,' Realtors' Group Says
2005-08-09 13:11 (New York)


By Kathleen M. Howley
Aug. 9 (Bloomberg) -- The U.S. housing market is ``close to a
peak'' and home prices will rise in 2006 at about half the rate of
this year, according to the National Association of Realtors, the
industry's largest trade group.
The median price of an existing home will increase 5.2
percent to $215,200 next year, the smallest gain since 2000 when
prices rose 4.1 percent, according to a forecast released today by
the Washington-based group. Sales of previously owned homes will
fall 3.6 percent and sales of new homes will drop 4.5 percent,
according to the forecast.
``The housing market is probably close to a peak right now,''
David Lereah, the group's chief economist, said in a statement.
This year, a shortage of homes on the market and mortgage
rates that tumbled in June are fueling the biggest price increases
in a quarter of a century, the association said. The median home
price will gain 11 percent to $204,600 in 2005, the Realtors
forecast. That would be the biggest jump since 1980, when prices
increased 12 percent.
The median price is the point at which half the homes sell
for more and half sell for less.
The group forecast that sales of existing home will advance
2.9 percent to a record 6.98 million in 2005. Sales of new houses
will expand 4.8 percent to a record 1.26 million.
``It's a great time to sell, but it may be a better time to
buy about a year from now when the market should come closer to
balance,'' said the association's president, Al Mansell.
The average U.S. rate for a 30-year fixed mortgage will be
5.9 percent this year and 6.5 percent in 2006, according to the
group's forecast. Measured weekly, the rate unexpectedly fell to a
15-month low of 5.53 percent at the beginning of July, gaining
since then to reach 5.82 percent last week, according to Freddie
Mac, the No. 2 U.S. mortgage company.

mantis23

I hope the market forcasts are accurate as I'm on pace to buy in may / june of 2006.

fdl

lol, thats what I said last year ... about this year

fdl

Toronto condo market could crash. 12000 new condos this year, 17000 next year.

zamo

^^ Thats can happen to condos in Miami. The demand is lower than the supply

fdl

The question i have is, what (if any) effect would a condo market crash have on the broader housing market in that particular region. i.e. if condos suddenly became significantly cheaper would single detached homes also drop?

Doom878

There's lots of investors down here. Where did you see this?

The Herald reported recently we're in the top 40 in the country in housing least affordability. Palm Beach was least affordable and Ft. Lauderdale was slightly more affordable than Miami.

I lucked out on the bubble. I just bought a townhouse last month for $170k and the nearby comps are going for $208. I technically paid $190,000 less a $20k gift because of the condition and am currently doing minor renovations. I do eventually want to move up to a single family so I don't want prices to go too far up. My biggest concern will be taxes.

dom

Practically every Toronto real estate colunmist has gone on record and said we'll start seeing a decline by the end of this year with a total rollback of about 30-40% when its all said and done.

fdl

In the condo market? or the overall GTA housing market? Thats pretty sever if its the latter and I havent heard that. Got a link?

mantis23

Did you follow through?

fdl

I purchased a home a few weeks ago.

dom

Perhaps I overstated every Real estate columnist but there was an article in Sunday's Sun but I can't find a link. The columnist basically guaranteed a drop in the market starting late this year. But its definently something I've been hearing for some time now.

30-40% isn't all that bad considering people have seen 50%+ growth in their property values since 2000/2001.

fdl

I just read an article today saying the analysts expect 4.5% growth next year

30-40% would be huge. Similar to what happened in the late 80's.

dom

I just read the same article. At thestar right?

Let me see if I can find that sun article. That site is prety confusing.

zamo

Read some article last week. You can find some here: http://news.google.com/news?hl=en&ne...nG=Search+News

fdl

This is from Saturday.

http://www.torontosun.com/Money/2005...61664-sun.html