Housing Bubble Rolls Over
It's finally happening. Some of us, who have been writing about the US housing bubble for several years now, underestimated how long it would last. But as Ben Jones has exhaustively documented at his excellent Housing Bubble 2 Blog, bubble cities around the country are all starting to see the following trends:
- Rising inventories since January 1, 2006 (e.g., up over 8% for San Diego)
- Order cancellations for new homes
- Local evidence mass new home overbuilding relative to fundamental demand
- Huge share of demand (over 25%) accounted for by speculators
Jones provides this choice quote from a "housing bubble denial" economist:
- 'There is a bubble a bubble in the number of articles about the housing bubble,' Leslie Appleton-Young said of the 'hype.' She added, 'The median price of a U.S. home has never declined.'"
It has also frequently been argued that housing is not over-priced "given low interest rates", which is sort of true, although it would have to be acknowledged by anyone making htis argument that higher interest rates would lower housing bubbles, which has been denied by some of these same economists. But in a nation that has a central bank, interest rates cannot be considered a "fundamental" factor in the formation of prices because interest rates are not entirely set by borrowers and savers, they are set by the central bank. The interest rate argument ignores the role that interest rate price fixing, the the resulting credit expansion plays in generating unsustainable run-ups in credit-sensitive assets.
In fact, most Americans believe that there is a constitutional right to have ever-rising property appreciation. A new Federal Reserve study of housing bubbles disputes this:We turn to Steve Sjuggerud for a summary:
- a new 71-page study by the Federal Reserve. The Fed looked at real estate markets in 18 major countries over the last 35 years. The results were amazing...Most people believe that "you can't go wrong in real estate." And that "real estate doesn't go down over long periods." But based on the findings in this important study, that's simply not true...
While real estate rises over the long run, there are distinct periods where it falls. In short, based on the Fed study, right now we are right at the point where home prices should turn over and head downward again.
The Fed found that housing booms peak, on average, four-to-six quarters after that country's Federal Reserve first starts to raise interest rates. Here in the States, the Fed has raised rates for five quarters now. Based on history, we should be extremely close to the top.
What happens after the peak in real estate prices? The Fed then hits us with a whopper: "Subsequently [after the peak], real house prices fall for about five years, on average, and their previous run-up is largely reversed." Wow. Want another 'wow?' Across the 18 major countries... and across the 35 years of the study... the median real price fell over the five-year period after the peak was about 15%.
Now that's nationwide... of course, some areas will fall much more than others. Again, keep in mind that, on average, the "previous run-up is largely reversed." Ouch!
Comments (19)
Vince Daliessio
What I want to know is, when and where can I get one of these surplus houses at a big discount, LOL?
Damn Austrian resistance to econometric models is biting me in the butt again!
Published: January 18, 2006 10:07 AM
Vince Daliessio
Despite the flippant style of the above comment, it is a serious question. Homes in my area (Southern NJ, near PHL and Wilmington DE) are selling for $500K and up, new and used. I could probably realize no more than $200K for my shack IF I pumped a bundle of precious savings into it, with $100K still owing, except of course if the bubble is actually popping I will realize nowhere near as much. Meaning, basically that I am stuck in my beautiful asset for the forseeable future.
So tell me - how did this little experiment in devaluing the dollar help homeowners again?
Published: January 18, 2006 10:12 AM
Stefan Karlsson
According to this report, the average down payment have fallen to only 2%, with 43% of first time buyers making no down payment at all.
Published: January 18, 2006 11:21 AM
edhopper
I would suggest that you listen to whatever the National Association of Realtors say........
and plan on the opposite. LOL
Published: January 18, 2006 11:27 AM
Ohhh Henry
Time and time again, I have heard Canadian "establishment" economists explain that Canadians don't really have a negative savings rate, it's just that their savings are all in the form of home equity.
Just wail 'til you hear the chorus of non-savers crying that government should raid the assets of savers in order to bail them out.
Well, actually they won't put it that way, they'll just demand a bailout and leave one to presume that they know of the existence of a fantastic money machine somewhere which funds government aid programs without causing any harm to income, savings, employment or investment.
Published: January 18, 2006 12:03 PM
Vince Daliessio
To quote myself on another thread;
"Savings accounts, after taking into account monetary inflation and interest taxation curently yield net negative returns. Thus are Americans not only failing to save, but actively borrowing others' money and spending that too, since interest received is taxed, while interest paid is not (and in the case of mortgages and home equity loans is subsidized)."
Possibly oversimplified, but as good an analysis as any I have seen. By inference it includes marginal utility. For ordinary folks, it costs too damn much in time and energy to find safe, secure returns to capital, and it's taxed and inflated away anyway, so why not just spend it, even better if you can get a tax subsidy to do so, by buying and refinancing houses. Yeah, this will be a good thing.
Published: January 18, 2006 12:41 PM
homeimprovementninja
This artificially created housing bubble only benefits the state. A homeowner who sells his now-appreciated asset will only have to buy some else's bubble when he moves to a new home. THe beneficiaries are the local governments who get increased property taxes on the now-inflated assesed price of your home.
Published: January 18, 2006 1:29 PM
A.B. Dada
I cashed out of my properties in 2005 and bought a few large repossessed mobile homes. You can buy up to 2000 square feet for under US$30,000 and take advantage of the bubble in "real" houses. For those who are upside down, though, they're mostly screwed. (FWIW I'd never even been inside of a mobile home until the day I bought my first, and my heating and electric bills are 20% of what I paid in my home of the same size).
For now, I'm happy to be out of the bubble. I won't buy a house again until I see prices fall at least 40% in the Chicago area.
Published: January 18, 2006 3:33 PM
Sven Thommesen
The link to Gary Schilling's article hits a newer edition of that newslettr. A better link is this one:
http://investorsinsight.com/otb_va_print.aspx?EditionID=256
Published: January 18, 2006 6:47 PM
Tracy SAboe
Couldn't you sell your house and rent for a few years, and then scoop one of these overpriced houses up at bargan prices in a few years?
Tracy
Published: January 18, 2006 6:47 PM
Bubble Forum
New home & condo industry 'business model' has converged with the automotive business model... large national corps with intensive marketing structures, in-house financing, tight subcontractor relationships, etc. Result is high overhead & fixed cost that must continually be feed new orders... they have to keep building & pushing those homes 'off the lot'...
I've been predicitng for months that when the slow downs occur we'll see incentives like 'cash back' and 'special interest rates'... just like cars... to try and manufacture demand. Now we see it happening around the country.
Published: January 18, 2006 7:17 PM
Vince Daliessio
Tracy asks;
"Couldn't you sell your house and rent for a few years, and then scoop one of these overpriced houses up at bargan prices in a few years?"
This could have worked for me a few years ago when I was still single. However, I don't think that I could get my wife to go along with that now!
Published: January 18, 2006 7:41 PM
Dewaine
For what it is worth, the actual rate of inflation is probably above 8 percent, regardless of what the Fed will tell us. Therefore, taking on debt of less than about 8% would actually be profitable.
The best choice might be to take out a second mortgage and buy about six pounds of gold.
Published: January 19, 2006 12:13 AM
Dewaine
Also, if you don't get another mortgage, then the terrorists will have won. Mortgages are like the war bonds of the police action in Iraq (and Iran, etc.).
Published: January 19, 2006 12:39 AM
David White
"The best choice might be to take out a second mortgage and buy about six pounds of gold."
I've wondered about this myself and am curious as to what others might think.
Published: January 19, 2006 8:02 AM
Matthew Armstrong
I just read a piece on MSNBC regarding the sharp drop in home construction in Decemeber. So most "economists" believe that price gains will slow from the double-digit gains seen this year. The main problem with looking at price gains is how do you measure prices?
As Dewaine alluded to, the real inflation rate is much higher than that provided by the CPI etc, as asset prices don't show up in that index. If the Fed-generated money inflation is essentially supporting a housing bubble, then double-digit price gains can easily represent real price decreases. Has anyone plotted gold prices against median housing prices? I'd be curious to see what that looks like.
Published: January 19, 2006 8:38 AM
Yancey Ward
David White and Matthew Armstrong,
FYI.
Housing and Gold
Published: January 19, 2006 9:06 AM
Matthew Armstrong
Yancey - Thanks, exactly what I was looking for (and exactly what I expected). Now to find some money to put into gold! And in no way will I be moving from renting to owning anytime soon.
Published: January 19, 2006 11:00 AM
David White
Yancey,
Thanks for the link. Very interesting.
For what it's worth, I posted my question on the discussion forum of USAGold, and while I didn't get a lot of responses, the ones I did get said that's exactly what they'd done.
I think I'll do the same, as it simply doesn't make any sense to have so much money tied in a non-income-producing asset, the price of which has probably peaked, when I can invest most of that money in a commodity that is beginning to spike, transforming the world in the process.
Published: January 22, 2006 4:50 PM