Posted on 04/05/2006 11:15:28 AM PDT by ex-Texan
Half Say Burst Has Begun or Will Shortly, According to Phoenix Lending Survey Results; 93 Percent of Lenders Predict Housing Prices Will Drop 10 - 20 Percent
Northeast and West Coast Likely to Be Hardest Hit, Say Lenders
Two-thirds of lenders nationwide believe a real estate bubble currently exists in the United States - and half of them believe it has already begun to burst or will burst in the next six months, according to the results of this quarter's Phoenix Management "Lending Climate in America" Survey.
A significant 93 percent of lenders surveyed expect an anticipated housing correction to result in real estate prices declining 10 to 20 percent across the country.
"In the minds of lenders, the housing bubble has moved from 'Loch Ness monster' myth status to an economic reality that could have a significant, negative impact on the lives of many Americans," said Michael E. Jacoby, Managing Director and Shareholder of Phoenix Management Services. "A year ago, 46 percent of lenders believed we were in a housing bubble. Today, that number has climbed to 66 percent - and many of them believe a correction is imminent and could lead to a drop in housing prices of up to 20 percent."
When asked when they believed the housing bubble would burst, thirty percent of lenders said it has already begun to happen. Twenty percent predicted it would occur in the next one to six months, and 27 percent thought it would happen seven to 12 months from now. Nine percent said it would occur in 2007.
Among the 92 lenders who participated in this quarter's survey, only nine percent said they did not believe a housing bubble existed.
When asked which area of the country was likely to be most affected by a housing correction, 30 percent of respondents named the Northeast, followed closely by 27 percent who predicted the West Coast. Fourteen percent named the Southeast, and five percent, each, named: the Mid-Atlantic, the Mid-West, or said all regions will be affected equally.
Half of all lenders believe a housing correction will result in real estate prices dropping up to ten percent. Forty-three percent of lenders said the decline would be as high as 20 percent.
Despite their belief in the existence of a housing bubble, real estate was not the issue that lenders thought posed the greatest threat to the health of the U.S. economy.
When asked to select from a list of six issues that had the most potential to hurt the U.S. economy, 38 percent of lenders named the federal budget deficit. That was followed by the war in Iraq (18 percent), the trade deficit (14 percent), the sluggish job market (12 percent), low household savings rate (9 percent) and the real estate bubble (9 percent).
Overall, lenders remain wary about the future of both the economy and their customers.
For the first time in five years, they believe the short-term outlook for the economy is stronger than its long-term outlook.
"When we asked lenders how they expected the economy to perform over the next six months, they assigned it a high 'C' grade," Jacoby said. "But when we asked them how it would perform in the second half of 2006, they downgraded the economy to a low 'C.'
"Clearly, there are lingering concerns about whether the economy has fully rebounded in a meaningful way."
Lenders also reported lukewarm growth plans by customers. Twenty-two percent said their customers planned to make new capital investments. Sixteen percent, each, said their customers planned to: enter new markets, introduce new products or services; raise additional capital; or make an acquisition.
Only 14 percent of lenders said their customers planned to hire new employees.
Lenders expect loan demand to remain relatively unchanged, although 39 percent predicted international lending would increase in the next six months. They also remain on the alert for loan losses, with 65 percent predicting an increase.
When asked which industries were the most attractive to their lending institution, lenders named the same three that have topped the list for more than three years - Light Manufacturing (75 percent), Service Companies (73 percent), and Industrial Distribution (72 percent).
Start-ups/New Ventures were deemed the least attractive industry to lend to, with 65 percent naming it unattractive.
Roughly 75 percent of lenders reported plans to maintain their existing loan structures in the $1 million to more than $10 million loan size categories.
Two-thirds of lenders plan to maintain their interest rate spread and fee structures on similar credit quality loans. In the under $1 million loan category, 32 percent of respondents said they planned to increase the interest rate spread and fee structure.
Nearly all lenders expect the Fed to raise rates in the coming six months, but they predicted a smaller rate hike of a half-point or less, compared to previous quarters.
About the Survey
The Phoenix Management Services "Lending Climate in America" survey is conducted quarterly to gauge shifts in lenders' attitudes toward the economy. Ninety-two lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during January and February.
About Phoenix Management Services
Phoenix Management Services (www.phoenixmanagement.com) is an operationally-focused advisory firm, providing turnaround, crisis and interim management and investment banking services to middle market companies in transition. Since 1985, Phoenix has aggressively advocated on behalf of its clients in over 700 assignments nationwide across a variety of situations and industries.
First, 350 for a condo sounds like a bubble since condos can be constructed for about 50-100k. Second. your argument sounds like "it is different here". I hear the same thing from many different areas all the time in these threads. It's different in No. VA because everyone wants to move here because jobs pay well or in Phoenix because everybody goes there from CA, etc etc. But it can't really be different everywhere (besides the obviously stagnant rust belt, etc) can it? Doesn't that sound like it is different this time (e.g. internet stocks in 1999)? IMO, it is rationalization instead of realism.
That sounds like it may be a good idea. I will give it some serious consideration. As a single guy I probably don't need all that my buying power can get me.
This is just an anecdote, but a guy in my office bought an "investment" property at the peak last june. The rental market went soft and he was unable to rent for 6 mos. Now it is finally rented but at a small cash flow loss. The property is tied to an adjustable rate HE loan on his primary residence. The "plan" is to sell at a profit as soon as this temporary lull is over. Also he even talks about having more HE to tap to do it again.
Your co-worker will regret his risky gambling habits sooner rather than later.
Thanks for posting this article. I know you have beating this drum for a long time -- I will use this information to my advantage.
That ain't the half of it. Take a look at gold & silver prices, value of the dollar, the balance of trade,etc, etc....
I forgot - Katie going to the Collective Broadcast Service...
Unintentional, but fairly accurate. ;)
well, it was constructed in 1992. Its 1200 sq ft and from studying comps on other properties, the area near downtown Seattle that I'm looking at averages about 280 to 300 per sq ft for condos of quality. There are many other factors as well. One other thing is that most two bedroom/two bathroom condos being built around there these days are all 900 to 1000 sq ft. Apartment sized condos. The developers just try to pack them in as tight as possible now. the 200 sq ft makes a big difference in livable space.
So the price is pretty much the median for that area.
And while its easy to say, "Hey just wait 3 years and prices will have come down". I don't really believe that. Thats 3 years wasting your money on rent where the money is going to someone else, instead of into your own investment.
Finally I get the heeby jeebies every time someone uses the term investment. If you consider it an investment then consider it a highly leveraged investment in which you can lose all your money and go into the hole. But my best guess is prices will not drop significantly in the next 3 years (so no point in waiting for that to happen) but neither will they rise significantly for the next 10 or so while they revert to trend.
The thing is, is that when the market changes, all the buyers just suddenly walk away.
Why pay more today when you can pay thousands of dollars less next year?
Once the riff of declining prices becomes a reality, as it is today in MANY markets, the buyers decide to wait..And why not?
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