Posted on 09/20/2005 5:30:47 AM PDT by TigerLikesRooster
Soft landing or crash?
S&P sees gradual unwinding of housing bubble
By John Spence, MarketWatch
Last Update: 2:11 PM ET Sept. 19, 2005
BOSTON (MarketWatch) -- The popping of the red-hot U.S. housing market will likely play out as a steady deceleration of prices followed by stabilization, rather than a dramatic national downturn, Standard & Poor's said Monday.
"The bubble should end with a fizzle, not a bang," said S&P Chief Economist David Wyss in a conference call Monday, adding that it's difficult to nail down exactly when the market might weaken, and what the implications might be for the overall economy.
Still, Wyss indicated that rocketing home prices in several parts of the country are unsustainable and cannot go on forever. Looming interest-rate increases are another potential problem that may affect two sectors linked to the housing market: home-builder stocks and real-estate investment trusts.
Credit rating and investment-research agency S&P unveiled multiple reports on the global housing market Monday.
Currently, the average U.S. home price is roughly 3.1 times the average household income, the highest in history and up from an average of 2.6 times since 1960, according to S&P. Driven by low mortgage rates and looser lending standards, home-ownership levels of 69.4% are also at an all-time high.
Yet most of the price appreciation is concentrated in sizzling markets in California, Florida and the Northeast. For example, on both coasts, housing costs have risen at least 30% above the normal home price-to-income ratio, S&P calculated.
Despite regional dangers, S&P estimates it would take a 30% decline in national home prices, combined with a 50% drop-off in new-home starts, to drive the economy into even a slight recession, Wyss wrote in a recent report.
"We think such a scenario is unlikely," he said.
Tiny bubbles for home-builders
U.S. home-builders have been one of the most volatile and closely watched stock sectors in recent months, with heated debate devoted to the existence of a housing bubble. Over the past year, the Dow Jones U.S. Construction Index (DJ_HOM: news, chart, profile) has gained 48.4%.
Part of the reason the sector's stocks have been on investors' radar screens is that many of the largest builders do significant business in the country's hottest markets.
The 19 home-builders rated by S&P accounted for about 25% of the 1.6 million new single-family homes purchased in 2004, said S&P credit analyst James Fielding. They operate in only 25 states and approximately half of their revenue comes from California, Florida and Texas.
Therefore, home-builder earnings could take a hit if there is a cooling in the hottest, most profitable housing markets.
In the most likely scenario, Fielding sees rising long-term interest rates making homes less affordable in the important coastal markets. This could lead to a leveling-off of prices and higher cancellations in the speculative markets, with builders "slow or unable to quickly adjust production and overhead to lower demand," he wrote in a report.
"As a consequence, profitability weakens bur remains above historical averages, resulting in a deceleration of positive ratings momentum," Fielding concluded.
Mixed outlook for REITs
Historically low home-mortgage rates and a lack of rental demand have weakened fundamentals in the REIT market, according to S&P equity analyst Raymond Mathis.
However, REITs have managed to outpace the broad market so far this year. An exchange-traded fund tracking real-estate stocks, StreetTracks Wilshire REIT Fund (RWR: news, chart, profile) , is up 9.9% year to date, 6.4 percentage points higher than the S&P 500 Index (SPX: news, chart, profile) over the same period, according to investment research firm Morningstar Inc.
"The stocks are not tracking fundamentals, but responding to the housing bubble," Mathis said in the conference call Monday.
In particular, he sees a bubble in the valuation of multifamily residential REIT stocks, which he believes are overvalued by about 13.6%.
Yet rising interest rates and falling home prices could be a good thing for REITs as "new households and even some existing homeowners gravitate toward rental housing," S&P said.
John Spence is a reporter for MarketWatch in Boston.
It is going to get ugly...greed and soft landings don't mix...
Damn, I must be living in a shack. My home's worth is just under twice my annual gross.
It is funny - I couldn't afford nor would I pay what my home is "worth" now - and neither would my neighbors for their houses...maybe that is a sign...
Greed makes people only see soft landing on the horizon.
Its already happening. I see it in my neighborhood. The speculators and gamblers are getting tapped out with higher gas prices and taxes and have no more left. Plus, the upside potential simply is not there for many of these shacks. Because people perceive that the appreciation has already occurred in many of these places, there is more of a reluctance to get in at these prices.
The other fact is that the housing boom has been fueled by greed and misrepresentation. Many RE brokers have sold people a bill of goods like Carlton Sheets without telling people the truth. Many people are buying houses now that don't appraise at the sale price and are getting sticker shock at the fact that they are now more liklely to lose money than to gain appreciation.
Another reality is that the rising taxes are simply too much for many people to carry.
I am not wishing for a crash, but a return to some norm would be nice.
Wow...wish I could find a place like that! Around here, anything like that is bulldozed to build things that are "affordably starting at..." 8 times my annual gross.
The "bubble" and the "burst" are both an example of schrodlingers cat. As industry folk observe and COMMENT on the bubble and burst, they are in effect, affecting the outcome of the process. This may be a stretch, but if the news wasn't regularyly touting the inflated market value of homes based on location, and if "G Money Greenspan" wasn't mucking about controlling the economy, well, who knows...
We might be able to pay cash for durable goods...
We might be able to pay cash for medical expenses (provided doctors were out of the insurance game)
We might be able to keep more of our own money...
Just me, but I'd just as soon leave the cat in the box to deal with the prussic acid*
Top sends
* http://www.lassp.cornell.edu/ardlouis/dissipative/Schrcat.html
Greenspan has been controlling the economy for quite a while, which is responsible for a huge chunk of the current problem.
Commercial real estate in NE has crash, burned, and been buried with not a whimper in the MSM.
I have seen warehouse, 40,000', $2.00/ft, NN!! and vacant 100,000' litter the arewa.
Going back to a "normal market" will destroy many, many people -
Those who bought homes they could not afford
Those who bought homes with 3-5 year teaser rates
Those who bought just knowing they could sell in 3-4 years for a nice profit
Those who took out home equities for credit card just knowing their house will bail them out again and again
Those who are "flipping" and speculating without any real knowledge or way above their heads (like with their life savings).
etc.
Only if you see long-term interest rates spike up quickly. 1 out of ever 4 properties being bought in the market these days is by speculators. Once the market tops out and I believe your starting to see it since I see a lot of people being priced out of the market, expect a period of flatlining prices, and then a multi year period were prices decline each month to couple of months, but gradually. England and Australia's real estate bubbles occured before the US, and the real estate prices there have been gradually dropping each month now.
The key is the interest rates. If they rise quickly, you'll get panic sellers and foreclosures happening for those who have non-fixed rates on their loans. Would suck for banks, speculators, and people who bought at the high.
Would be a goldmine for those waiting on the sidelines wanting to buy. Another factor is all the baby boomers who are looking to buy second homes. That might continue to fuel the soft landing as well. First it was the refi's, then it was the entry level home market, now its the 2nd home market thats hot.
If they rise slowly, it will be a soft landing. And some markets, the really extreme ones like San Jose, Hawaii, Seattle, NYC, Boston are going to see hard corrections no matter what.
Example: I was born and raised in Hawaii on Oahu. The house we grew up in, my Mom still lives in. It appreciated over 300K in the past year. From 650K to 950K IN ONE YEAR. That type of appreciation cannot be sustained no matter what.
"Worth" is now.
Like the Stock Market, you never lose money unless you sell.
Some like to ride out the storm on their ship while others take to the life boats at the first big wave. Then again some go down with the ship.
Don't forget the tough luck of people you mentioned will echo through economy. Your list, though short, encompasses millions of people.
Housing will appreciate 10,15,20% a year, year in and year out- forever. Don't ever expect a correction. In just ten years the AVERAGE house will be well over $400,000, pricing completely out the average worker, which is a good thing in the long run for the invester class.
Buy a house if you can, actually buy 1,2,3 as many as you can!
hahahah.. yea it'll be a fizzle, just like Nasdaq circa the summer of 2001.
Starts 2,009 -1.3% Permits -2.2 2,124
with starts and permits like this the real estate market will not crash any time soon
Warning ! Are you aware that CBS market watch is a poorly disguised DNC operation ? This is left wing news group
that is privately owned by a serious DNC operative.
Its not a new source but a DNC newsletter
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