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 ...
Thanks Pilsner. That matches my memory.
See post 74 for Pilsner's explanation of what happened in Texas.
Just crazy.
BTW - what part of the County are you moving to?
While there plenty of stories of speculators really banking on a zero down turnaround or homeowners who went out and spent their re-finace money on a bunch of toys, the reality is that the vast majority of homeowners have done NOTHING.
Whether the house is worth $800k, 600 or 400 doesn't mean one iota as long as the mortgage is lower and the monthly payments are manageable. Without any huge job losses on the horizon, most people will continue to meet their debts.
Dear Iron Eagle,
There are still a few pockets of affordability in the DC area, mostly in Prince George's County, MD.
However, even many of the neighborhoods there are getting pricey.
I sold a house near Bowie in 2000 for a bit over $200,000. The fellow who bought it from me sold it this past year for over $350,000.
The neighborhoods where my wife and I grew up have seen about 100% appreciation in the last five years.
As for Arlington, well, heck, it's nearly walking distance to downtown, as well as in the middle of its own business district.
Folks are going to pay for location. Always have, always will. You take a couple of government middle managers, say a GS-13 and a GS-14 (or their equivalent in the so-called private sector), married, and their household income may near, or even top $200,000. With those kinds of bucks walking in the door every month, it isn't a stretch at all to get to a six hundred thousand dollar mortgage.
I asked a buddy of mine who is very knowledgeable about all things financial, and he says one thing that is beginning to drive the housing market is that a lot of parents of baby boomers are now dying, and many are leaving substantial assets to their boomer kids. Not enough to go live on the Riviera, but enough to put 20% down on a $700K or $800K house.
I'm a boomer, myself. My mother died in late 2003. My father's health isn't great, and I help him with his estate planning. I know that when he dies (he's nearly 80), his four kids will come into a modest fortune.
If I weren't already in the house in which I want to live, it would certainly give me enough, when combined with what equity I already have, to put down one very hefty downpayment on a new house.
As well, folks are still hesitant about the stock market, and buying a bigger house is an alternative means of investing for a lot of folks.
I think that there are a few regions that may be ready to burst. I don't think the Washington, DC metro area is one of them.
Yet.
sitetest
As I recall, Greenspan did nothing but down talk the high stock prices until the bubble burst.
Many many people are crammed into existing housing and are looking to move out.
They are building and SELLING $400,000+ houses in Charles County MD...nuts...
More than that. Here's one for 500k.
http://www.realtor.com/FindHome/HomeListing.asp?snum=16&frm=bymap&mnbed=0&mnbath=0&mnprice=350000&mxprice=650000&js=off&pgnum=2&fid=so&mnsqft=2000&mls=xmls&vtsort=&typ=1&poe=realtor&exft=inewhome&ct=Waldorf&st=MD&areaid=36211&areaid=15569&sid=04629C705861C&snumxlid=1041125692&lnksrc=00001
Dear dakine,
Yeah, well. What can I tell ya?
My old neighbor's 1800 sq foot house, built in 1959, in College Park, went last year for well over $300,000. I sold my house (identical model) in the early '90s for less than $140,000. 140% appreciation from then till now. Most of that appreciation is in the last 48 months.
And by now, the house is probably valued at over $375,000.
Ouch.
sitetest
The rate of relief from taxes due to "depreciation" was changed. I lived in Austin at the time and there were 14 high rises under construction becuase if you had sufficient tax liability elsewhere, you could build a high rise and leave it vacant and still come out ahead on the depreciation benefit. When it was changed, many of these high rises stopped work. Companies backed out of deals to move to Austin, and I had to sell a house for half of what I paid for it. Ouch. Never had that happen to me in California, but it may happen there soon.
Of course it will not happen if California continues to be the job engine of the recovery. Jobs mean the bubble is sustainable.
I bought my house in Chuck County in '95, no way I could afford it now...Who is going to buy my house when I want to sell? Hopefully, some sucker...hahaha
Dear dakine,
I bought my current house four years ago.
I couldn't afford it today.
A house down the street that's about half the size, about 25 years older, with a carport (no garage), terrible lot, ugly as sin, just sold for $550,000.
I'm afraid to even ask what my house is worth now. I just know I couldn't afford it.
There are houses in BOWIE, not NEW houses, but OLDER houses, going for $300,000, $400,000, even $500,000. The little Levitt houses in Bowie are in the $300,000s. There are houses in BOWIE built in the early 1990s, middling-sized houses - 2500 sq ft, 1/4 - 1/3 acre, going for OVER $500,000!!
But, hey, like I said, you're a GS-14 and your wife's a GS-13, a half-million dollar mortgage is no sweat. You're a GS-13 and your wife is a GS-11, and a $300,000 mortgage is no big deal. Add in the equity from the little townhouse you're selling in Wheaton, and you've got a $400,000 house.
There's a lot of money sloshing around the Washington region getting absorbed by real estate.
sitetest
Dear Destro,
There are enough significant differences between the circumstances of Japan's economy and ours that it's difficult to predict that our real estate market will go the same way as theirs.
sitetest
I am moving to Ashburn -- the new community of Brambleton.
Thanks for posting that as that was exactly my memory as well. Greenspan, despite all the black helicopter "plunge protection team" stuff never, ever talked up the markets. In fact he was criticised because they took dives when he tried to talk them down. Every time it was Greenspan taking away the punch bowl (usually reservered for times when the Fed increases interest rates).
Of course. Our bubble -if there is a bubble - will be regional not nationwide - because we are a big nation.
That makes sense.. interesting.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.