Posted on 03/14/2005 9:33:12 AM PST by Destro
The Fed sees bubbles -- and keeps them secret
In public, the Federal Reserve says there's no housing bubble. But the Fed also said there was no stock market bubble in 1999. Behind closed doors, the governors knew there was.
By Bill Fleckenstein
Our Fed chairman has argued (most recently last October, in a speech to America’s Community Bankers Annual Convention) that for a variety of reasons, real estate cannot experience a bubble. Yet anyone with a pulse can see wild speculation taking place all around them.
At the height of the stock-market bubble in the first quarter of 2000, it was becoming progressively more difficult for me to adequately describe (in my daily column) the market action. So, in an attempt to capture the mood of the day, I began to share stories of insane behavior that were being e-mailed to me by regular readers. I dubbed this series "The Mania Chronicles," and you'll find excerpts from it in Chapter 3 of the Archives section of my Web site. (Readers of the Contrarian Chronicles can access the site for the next week by using the password/username: mania/mania.)
The kind of maniacal behavior that we saw then toward stocks and which we are seeing now in real estate tends to come at the end of a speculative mania. It is almost always coincident with rising supply, which helps to satiate the inflated demand.
As I have pointed out, the true danger in the real-estate bubble is that folks are often speculating with more than 100% leverage. When it all ends (and though we don't have a timeline for exactly when that will be), the banking system and other financial entities will be left with the bad assets, which will severely impact the economy.
(Excerpt) Read more at moneycentral.msn.com ...
The FDIC just completed a study on housing bubbles. Their prognostication is that the bubble will not burst but that housing prices could well stagnate for some period of time as and when mortgage rates go up. There could be a couple of markets that burst, but they would represent special economic circumstances.
Tiny bubbles, at the Fed...
Yes and no. Rates obviously impact monthly payments, but rate increases often coincide with growing economies. There have been periods of rising rates AND rising prices because more people are working and making higher salaries.
Mike
Southern Calif. took a major hit from '89 to '95 mainly because of massive military downsizing. If So. Calif. were to take a hit in the near future, it will be relatively minor due to the fact there is a housing shortage.
They usually can't. And if they could (speaking as a banker here) they would lose their shirts. We're not really IN the real estate business. It's why foreclosed houses usually get sold at auction and not by Realtors.
No I don't think so. Development pretty much dried up during that period. There was something about the way properties were treated from a tax standpoint that either affected the profitability of the developments or somehow created a liquidity crisis.
In Washington state, there was (may still be actually) an attempt by banks to sell real estate. BTW, the house I rented was going into forclosure and another guy (an investor) came along and bought it pretty cheap. There were two mortgages and one of the companies almost killed the deal.
I'll go them one farther. I think generally stagnant prices (say...growth at or below the rate of inflation) will be the norm for the next 3-6 years (probably starting late this year). I expect quite a few local markets will see small to medium sized declines in value (5%-15%) with a couple areas like Northern VA seeing drops in the 15%-25% range. That's simply not a "bursting bubble", but the effects on many people (given the leveraged nature of real estate ownership) could be significant. But most people will just be giving back some profits (Northern VA has gone up more than that in just the last year).
And that last parenthetical gets a "#$%#$^" from the guy who sold his house there a little over a year ago. :~]
Agreed. A bubble can be real, however, in real estate, it will always continue up after a burst, you just hold your property a little longer. (by the way, if you're referring to the bubble in the 80's, that was a result of Congress screwing around with the tax code and changing the rules for shelters mid-stream. The market was flooded with people trying to sell. The underlying economic factors did not change)
Agreed. A bubble can be real, however, in real estate, it will always continue up after a burst, you just hold your property a little longer. (by the way, if you're referring to the bubble in the 80's, that was a result of Congress screwing around with the tax code and changing the rules for shelters mid-stream. The market was flooded with people trying to sell. The underlying economic factors did not change)
yup,
Now we are on the upside as far as employment is concerned.(It's really only begining to turn around, the only thing slowing it is employers believing that that don't have to pay anybody anything, but that is changing) Even with modest interest rate gains, I would bet on the worst being a stagnation of prices. But I just don't see that happening yet, there are still people who want to own and supply is limited.
In my local neighborhood in the Bay Area(200 homes 800k+ price tags), there were two months without a single home for sale. We receive a couple of cards a week from realtors asking to sell our home to their ready buyer. Last week two house went up for sale and both were gone in a couple of days. I don't know the sale price but I would bet on more than the asking.
"Didn't this happen locally in the Southwest in the 90s??"
Yes. In the Pnoenix area it was partially due to a phoneyed up S&L scandal. McCain (I am no fan of this jerk) was caught up in it. I built a house in 1985 and due to a financial bind purposely created by myself, I wanted to sell it. No way, Jose. So I borrowed a bit and kept it. I managed to come back. I finally sold it at profit in 1996.
Nationally, there's a fight between the Realtors and the banks over whether Banks should be able to get into the business of helping customers buy and sell real estate. That doesn't mean we currently have any expertise in it. It hasn't gone anywhere.
BTW, the house I rented was going into foreclosure and another guy (an investor) came along and bought it pretty cheap. There were two mortgages and one of the companies almost killed the deal.
I'd be speculating, but it sounds like the house had a mortgage and a home equity loan on it. The bank holding the home equity product is in subordinate position in terms of collecting on the proceeds of any foreclosure, but they have some rights. I'd guess that the holder of the first mortgage was ready to sell the house, but for less than enough to cover any of the second loan. The second bank probably moved in to buy out the interest of the first and try to get some of their money back.
All of this aside. The bank doesn't get to "profit" off the deal. If the house sells for more than is owed on the loan (perhaps with consideration of foreclosure costs etc...) the excess just goes back to the customer.
well here in Northern VA. there is no bubble, we have a housing shortage, because those paying rent for years now want to buy. And they are in big numbers, I don't for see any slow down in value, because we have a housing shortage.
>>well here in Northern VA. there is no bubble, we have a housing shortage, because those paying rent for years now want to buy. And they are in big numbers, I don't for see any slow down in value, because we have a housing shortage.<<
So there is an apartment "bubble?"
My question is who is living in all these homes being built? If its people here already then there must be many many many apartments sitting empty.
If its immigrants (illegal and legal) then I suspect we have added 20+ million of them in the past 15 years. And that number may be much higher.
Fed has steadfastly refused to raise interest rates to reasonable levels.
+++They have raised rates 6 times already with more to come. What would you have them do, raise rates 3 points in one shot?
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