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 ...
NO there is a big Rental bubble, with apts, condos, houses, staying on the market for up to 6 months with out a rental....
NO there is a big Rental bubble, with apts, condos, houses, staying on the market for up to 6 months with out a rental....
true of the stock market too...if we use that as logic, then stocks cannot bubble...
$60 a square foot here in D/FW for a new two-story 3/3/2, 75x150 lot, in a great suburban school district.
Funny we see the same market differently. The government props it up to a certain extent. Renters have been buying for 2 years, but most that were incline to buy have done it. DC has gentrified all over due to the "shortage" bringing in thousands of "new units". Watch the next year as rates go up. I expect you will revisit the market of 90-92. Bottom line in fewer buyers will qualify at 6 1/2 to 7 %, which by the way is still a low rate for 30 year money.
Buddy, I got bad news for you. If ANYBODY in the mid-atlantic region has a bubble... it you. You may have a "housing shortage" (caused by some slow-growth policies if you're in Loudoun County), but you've got a serious "income gap" forming as well. There just no way to maintain demand at pricing levels well beyond the reach of the average income.
That's the easiest way to burst the "bubble mythology" of those who speak of a national bubble. Mention that the National Assoc of Realtors survey shows that the median household income still qualifies reasonably comfortably for the median house pricing. Game over... rates would have to go up a LOT for housing in general to become unaffordable at these prices.
NOVA is simply not the same situation (and no, it's not just "bitterness" at losing out on an extra 100k or so). A modest townhouse over an hour's commute from Falls Church/Arlington/etc costs over $400k (sometimes well over). You need to have about a low six figure income to qualify for that... and we're talking a townhouse here. How many 100k jobs are there for people willing to commute in THAT far? What about the people buying the single-family homes?
I know what I'm talking about here... companies are suffering severe employment shortages because you can't fill a 30k, 35k, 45k/yr job any longer (and heaven help you if you're looking to fill a 11$/hr job) because nobody can afford to LIVE anywhere close to where they would be working.
I'm NOT saying you're going to lose your shirt... but don't expect the runnup to continue much longer... and you may have to go through a couple rough years while things settle out.
Rents have taken a big drop here in Chicago. Lots of renters were suddenly able to buy when mortgage rates fell. Rents probably won't recover until ARM rates force marginal buyers out of their houses and back into the rental market.
Agreed. Supply is very short of demand here in the DC metro are. Very short. I just met with my realtor to discuss strategies for selling my 1,500 square-foot colonial in North Arlington. The Realtor said, after touring the tiny home in a GREAT neighborhood, "My strategy is to tape a contract to the front door -- ask for 729K -- and see if it takes someone more than one day to offer 750 or more -- no contingency, no appraisal, and no inspection!"
I sure hope he is correct.
On the flip side -- I bought a new home further out in America's fastest growing County -- Loudoun County Virginia. There is a waiting list to buy new construction. I bought my new home on Christmas even for 649K. It is currently selling for 700K, and the realtor said that by the time they finish building it in Septeber, it will be selling for $740-760.
The truth be known though, I am selling my current home this spring because I do fear a bubble, and I would rather cash out now -- as the value can drop in my new home, because I will be there until I die -- so I can ride out any adjustment.
It happened in Japan -- and they still haven't recovered.
Yeah.... but Fort Worth/Dallas is still suffering from some employment problems...
...and you left off the property taxes and insurance rates make that house cost a LOT more than a comparable priced property elsewhere.
Yes, Texas was hard hit. However, some of that is attributable to change in legislation which pulled the rug out from under a lot of developers. This not only popped the bubble but added to the resultant downside. I don't remember the specifics on the legislation.
The Texas bust started out as energy related then Congress changed the rules in '86. Previously many types of real estate deals were treated favorably for income tax purposes. Basically you were taxed less so a smaller pre-tax return on investment wound up being a larger post-tax return on investment.
As a part of the (the name escapes me) tax reform bill Congress put an end to much of that. Well and good, ecept Congress didn't grandfather existing deals. Lots of real estate deals had been put together not because they made sense as real estate deals, but because they made sense as real estate deals given their tax advantages, which Congress had just taken away. Given the double whammy of regional recession and Congressionally caused recession you woulnd up with a collapse of prices, especailly in commercial real estate.
I don't know. I'd figured I'd bought at the top of the market. Lots of folks were saying, "This is it, prices can't go any higher." And, I felt I was overpaying, even on top of that.
That was February, 2001.
Since then, my house has appreciated 60%.
If you have NO other debts, a loose mortgage criteria, great credit, a good down payment, a following wind, AND go with a low-rate interest-only ARM... you COULD qualify for six or seven times your gross income.
But that would prove a "bubble", because that's the "mania" that defines the "top". Those conditions simply don't last.
The bubble pops when inteest rates go up.
The real estate market is a craze right now...esp w/condos. Check out some of these tactics and tell me it doesn't sound just like the late 90s...
http://www.nytimes.com/2005/03/01/national/01spec.html?ex=1111467600&en=9a3c519c1b954155&ei=5070
Third fastest IIRC, but who's counting. :-)
I hope you enjoy the county... I know we did. Do what you can to keep the Democrats out of county political power (and kick the current chairman off the board) and you'll love living there.
If you can afford to keep the home regardless of where the market goes (got a fixed-rate mortgage?) you'll be just fine.
Our house there sold the day it was listed and has probably gone up another 100k since we sold it a year ago. But I have no regrets (well... the 100k would be nice....) and we made the decision to move South. We've got four kids and just couldn't afford to continue living there (I don't think I could qualify for my old home if we moved back now without sinking all of our savings in to it).
But now I live five minutes from the office, have no traffic... and you couldn't buy a house like mine for less than seven figures anywhere close to the old job (certainly not five minutes... that would be McLean and would cost 1.5MM easy.
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