Housing Bubble Reaches ‘Profound’ Stage

Housing Bubble Reaches ‘Profound’ Stage

- Unrealistic Perceptions Abound
- “Worst Nightmare” of Freddie Mac Economist Comes To Life

(Seattle) – (08/06/04) New signs are rapidly emerging that a dangerous house pricing bubble has taken hold in the US. What’s surprising is where the most troubling signs are found—in arguments of individuals claiming there is no such bubble—such as Fannie Mae and Freddie Mac, who sit atop the world’s largest pile of mortgage debt--and make money as ever more (and larger) loans are made.

Recently, Freddie Mac’s economist said house bubbles might only exist when prices go up rapidly—but in order for a bubble to form, economic problems would have to exist which impact affordability in the long term. In a recent presentation at UCLA, Amy Crews Cutts, the deputy chief economist at Freddie Mac, said she believed job growth was on the verge of catching up with house prices. This was a bold prediction, considering the level of home price ascent recently, which month after month, has been breaking records. Nevertheless, some people probably believed her analysis.

Now, just a few weeks after Amy gave her speech, we learn that the nation is in the midst of her worst nightmare--US Job growth for July was once again weak, and the months prior were also revised down. Moreover, there are signs that average mortgage payments are going up, which is starting to sap funds from consumers budgets—a dramatic turnaround from a year ago when refinancing was adding to consumer budgets. At the same time, recent reports show wage growth below inflation, and more college grads without jobs (Economic Policy Institute, et. al).

Moreover, increasing evidence shows the house building industry is sapping resources from the potential recovery of non-construction jobs, due to a peculiar detail of US inflation accounting which defines rises in construction materials and homes to be completely outside of other calculations (“owners equivalent of rent”). In short, housing inflation can spiral out of control, and money will still be lent regardless. That’s because in the early 1980s, the US started calculating housing costs in terms of apartment cost, which set off a long cycle of house price inflation.

But the housing industry has grown large—and other industries which might provide jobs are being out-competed by house building, with inflation rates for some materials in the triple digits, and lenders making home loans no matter how high. Indeed, a number of recent corporate announcements show jobs being moved offshore due to high US prices. Caterpillar, among others, had an earnings shortfall due to high inflation.

Yet, a recent consumer confidence survey show confidence is at a recent high—even though jobs and wages are scarce. The reason given? Numerous US news articles cite Americans happy with the price rises of their homes. With housing starting to weigh both on the consumer budget and the job recovery, consumer confidence is headed for a fall--because it is false, since it is consuming the basis of its own perception. (1)

What’s for sure, is until the housing bubble shows signs of correcting significantly, jobs and perceptions can’t be set right, and the economy will be in a state of disorder much like that of the high-tech bubble.

(1) "Consumer Confidence Surges to High Level, AP News 08/06"

[displacedtexan]

1. Lots of scared homeowners here in Baltimore!

There has been a gigantic renovation boom here in the last 3 years. People have a mortgage and a renovation loan (some are higher monthly payments than the mortgage!).

Hundreds of 14 ft wide rowhouses are for sale at $250K- $699K... and no one is buying.

Those rowhouses are now for rent ($1500K- $3000K), in order for owners to cover the mortgage and renovation payments, but they are still empty.

If mortgage rates keep going up, owners will lose those houses.

It's truly scary. I'm glad I waited to invest in a house after I moved here.

2. I don't think rates will have to go up to cause problems

Simply incomes not going up will do the trick to unravel the bubble. Everyone thinks it has to do with interest rates, so then when interest rates don't go up much, they still feel safe.

The Federal Reserve did some math recently which says houses can only be 2 percent or so higher in the next few years. That number was calculated a month or two ago, and I bet house prices already went up that 2 percent just in that month or two!!!

[Frodo]

5. Please supply a link to those Federal Reserve calculations?

I don't remember hearing that.

[slappypan]

13. "Home-price growth seen slowest since '70s"

Home-price growth seen slowest since ’70s

Fed estimates only 2.6 percent rise over next 3 years

WASHINGTON - U.S. house prices are likely to grow at the slowest pace in more than three decades as interest rates climb and land prices take a tumble over the next three years, researchers at the Federal Reserve have estimated in a new study.

The study, published on the central bank's Web site recently, asserts that if U.S. disposable income and short-term interest rates climb as much as Wall Street expects them to, nominal existing-house prices would increase a cumulative 2.6 percent over the next three years. That would mark the lowest rate since the government began keeping records in 1970. The number implies high odds that house prices will decline in inflation-adjusted terms.

Study was by Davis & Heathcote, also estimated US land prices decreasing by about 6%.

17. Thanks for finding the story; I quoted from memory

2.6 percent makes sense. I remembered "around 2 percent"

Income growth is really really bad, and real inflation is high, so the value makes sense.

[rapier]

3. notes

The bubble is regional. California the epicenter of course as the median home price there is up $65,000 over the last 12 months. Obviously that is a bubble.

While the congnative dissonance apparant in the arguments of the bubble debunkers as pointed out in this threads head is funny, or sad, the saddest thing is that our economic, financial and political leaders, champions of capitalism every one, are suffering an even more profound delusion. To wit, that the inflation of assets creates wealth.

Adam Smith is spinning in his grave. Inflation of assets does not create national wealth. It creates wealhty people but overall it "creates" no wealth at all. Classical capitalism enshrines INCOME PRODUCING investment as the font of all wealth. Inflated home prices or the inflation of other assets isn't wealth bulding, it's a game, a trick, involving excess liquidty moving into 'hot' areas as a result of a disfunctional credit system.

[ramapo]

4. Regional = Where there are lots of people

NY Metro, California, Washington, DC, Anything close to water...Prices are insane!

What's it like in Chicago area and other MidWest regions?

If my salary had risen to keep up with the increase in home prices then I'd be rich!

[shrike]

8. depends on where you go in the Midwest

Prices are VERY high in Chicago and its tonier suburbs. However, in some of the smaller towns in mid-America, you can still get a house for under $100,000 -- then again, where would you work, no jobs ...

[jwirr]

14. Lake Superior

Even little towns in rural areas close to water are insane. Houses 70 years old are selling for $120,000. Needless to say most of us cannot afford housing in our own towns.

21. Nice post

The thing leaders have forgotten is that in the attempt to create the "housing american dream", they have tried to repeal the economic cycle.

This isn't China under Mao, is it?

[Porcupine]

6. The Bubble is Leaking badly...

I work for a large property management firm in a N. California university town. Rents here are cheaper than anywhere in the state making it the cheapest place in the State to send your kid to school rather than have him live at home.

We cannot find enough renters to fill our buildings. We are dropping rents every week. At the same time the number of people who are trying to rent out property as investments is going up. It's a bizarre equation. More property owners trying to rent to fewer willing or able renters.

Eventually we will reach the tipping point and people will start dumping buildings. I give it a year or so.

[rapier]

7. notes

While your local situation may be a bit exaggerated within the story of rent costs, particularly for single family homes, lies an interesting tale. I know your talking about apartments but I want to change the subject a bit since the thread is really about home prices.

I dint think there is a single place in the country where the rent on a single family home covers the mortgage/tax/insurance cost, at least as calculated using todays home price and interest rate.

On that basis homes are a bad investment. The thing to know is the income producing potential of any investment is the ONLY basis upon which to judge it as an investment. Buying something hoping, or in real estates case, assuming higher pries later isn't investing, it's speculation.

This argument isn't just semantics. Only investment which generates real cash flow profit deserves the name investment. You can look it up; read Adam Smith. While many here are skeptical or worse of Smith and the term capitalism this isn't the place to go into those issues. Skeptic or not, the fact is that what is called investment and capitalism has been hijacked by speculators and con men posing as capitalists, or imagining they are capitalists. Ken Lay wasn't a capitalist, he was a con man. He even has himself conned, the poor schmuck.

You can buy a home and rent it out at a loss and call it investment because the price is sure to go up you think, but ask yourself is wealth created? Are jobs created? Income? Of course not. Payday comes only when you sell or when you borrow against your rising equity. And why does everyone want to buy so that demand keeps prices rising? Well of course because everyone knows prices are going up. Besides, there is unlimited money available to loan to you so you can buy.

Therein lies the tale. Unlimited credit availability for homes is driving the demand side. The whole game based upon easy credit. A trillion dollars will be lent this year for residential RE. Of course prices Will rise in this case. A trillion dollars will be lent and 'invested'. Suppose that credit dries up a bit? What happens to prices then.

[German-Lefty]

10. Not an Investment - but a place to put your cash

Only investment which generates real cash flow profit deserves the name investment. You can look it up; read Adam Smith.
Cool I never thought of that way.

I would like to disagree with you, though. Where should the typical American store his wealth?
Cash/Bonds - look out for a currency meltdown if foreigners loose confidence in our debt
Gold Bars - screw that
Stocks - after the last meltdown this doesn't seem too smart
real estate - sure it's a real asset

Stocks/private investment seem like the only things count as a real Adam Smith investment. The problem is that though some Americans have money to invest, they don't because they have no faith in the corporate system right now.

If it's true that we can't trust companies to privately invest in, then it does kind of make sense to try to get yourself a big fat castle to live in while you wait out the storm. It's not an investment, but is a way to tuck something away.

Of course the real problem we as a society have to fix is that nobody trusts Wall Street and that nobody trusts Main Street either because of uncertainty.

[slappypan]

11. rapier

Just would like to thank you for your many thought-provoking posts, you are always worth reading.

[German-Lefty]

9. Previous Thread -- So when will it really happen?!?

See my old Post: "Fannie Mae/Freddie Mac Meltdown?!?"
http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=8012

I'm still trying to wrap my head around it completely. This bubble popping has been predicted for years now as being right around the corner. It still hasn't happened.

[tomreedtoon]

12. We will never own homes.

There is no way a normal, middle-class citizen can ever own a home again, unless they win the Lotto or begin dealing cocaine. Home ownership, in fact, is probably a sign that a person is dealing drugs.

It doesn't matter about saving money; you can run your car until the wheels fall off, eat Kraft Dinner every night for years, and never buy new clothes, and you'll never save enough for a down payment.

And by the way, kids, this has been true for decades, but never more than during Bush's administration.

[Blue Wally]

15. Yet......

The percentage of people owning their own home has steadily gone up even in the last four dismal economic years.

[West Coast Democrat]

16. I think he means actually having no mortgage on a home...

outright owning a home. Home "ownership" is a misleading term.

19. Meaning of ownership

Nowadays, you can own a home with no money down, and without a salary to pay for it, until foreclosure.

The whole thing can happen quite quickly, as many people are learning, according to the most recent stats.

18. Something big has to roll over to knock the Fannie around

Las Vegas recently rolled over in regard to real estate--that is a sign.

I would think the California market, alone, could cause some kind of panic, because of the high prices, and negative job growth recently.

The Fannie MBS notes could be re-valued per a more proper assignment.

20. My prediction came true!

I said on 08/06:

With housing starting to weigh both on the consumer budget and the job recovery, consumer confidence is headed for a fall--because it is false, since it is consuming the basis of its own perception. (1)

Today (three weeks later), guess what--consumer confidence plummeted!

Associated Press
Consumer Confidence Plummets on Job Market
Tuesday August 31, 9:07 pm ET
By Anne D'Innocenzio, AP Business Writer

Consumer Confidence Fell Sharply in August Over Renewed Worries Over Job Prospect
http://biz.yahoo.com/ap/040831/economy_16.html