Posted on 09/23/2006 9:38:39 AM PDT by GodGunsGuts
Reality setting in on real estate
September 2006
American’s castles (homes) are middle class walls of separation from poverty and want. As goes the house goes the family’s ability to fend off tough times and leverage past wealth for opportunity. Borrowing to bridge low income periods, college costs, medical expenses, bail, renovations, retirement and unemployment are all common. This is the proper frame of discussion for the impending debt/depreciation storming of the castle. A few basic facts are worth repeating. $1.06 Trillion in residential mortgages were written in 2005. Nearly 70% of Americans own their residences. The home is by far the largest asset “owned” by the bottom 80% of citizens. For the last 10 years, and particularly the last 6, things have gotten pretty darn wild in the real estate world. Perhaps unreal estate would be a better phrase?
Housing prices, refinancing, building and improvement, buying and fixation have mushroomed. Many have made significant gains in home asset value- at least on paper. There is no longer debate that things have gone way beyond anything that might be sustained. Such debates are silly and are better handled by psychologists and psychiatrists than economists. As a member of the latter, I will defer to those equipped to comment from real knowledge and experience.
The coming return to earth will be uneven, disorderly and proceed in fits and starts. This we know from past episodes and our extensive and growing experience with bubbles- the new engine of the American Macroeconomy. The housing troubles ahead are serious and this is largely symptomatic of the greater shake-out in progress. A significant portion of the middle class is no more. Housing is about to turn onto another serious problem for these beset masses. It will join health coverage and cost, pension woes, massive debt, intergenerational demands and stagnant wages. All of these afflictions are related and interacting. Wages have not kept-up, health care costs run several times the rate of inflation, and college tuitions soar. Aging parents require help with medical costs, children cost more and their early career wages don’t come close to supporting a middle class existence. Thus, longer and more expensive support is often required. There are no savings and pensions are shaky. Rising house prices were a godsend to many- financially and psychically. This will soon run contrary.
Housing appreciation has been the lender of first and last resort to millions of families. Refinancing, cash out or interest rate lowering, has paid for more than meager gains in wages- even after some very modest tax relief. After tax income gain, skewed up by salary scales and taxation changes, was about $375 billion in 2005. Depending on which estimate you accept; approximately $550 billion was extracted through cash out refinancing. It is clear that housing appreciation has become the crutch for many limping families. Rising home prices- unsustainably above trend and already decelerating- have been an essential enabler of bill paying and consumption. Housing appreciation thus, did more for American families last year than wage and salary increases. This is set to reverse. Mortgage News Daily has recently reported an ominous sign of desperation:
During the first quarter the median ratio of old-to-new interest rates was 0.98 which means that one half of borrowers who were refinancing mortgages ended up with a new loan with a rate that was two percent higher than the old rate.[1]
Thus, refinancing is clearly driven by the need for cash from appreciated housing more than rate changes - which should be discouraging. Such refinancing reached record levels across the first quarters of 2006 and accounted for just under half of the mortgages owned by Freddie Mac. 17 consecutive interest rate hikes were no much for the needs and wants of home owners.
Financial firms and employment have been massively assisted by the housing bubble. They are vulnerable to price stagnation and decline. The most recent FDIC Quarterly Banking Profile, while upbeat, offers some remarkable numbers. Across Q4 2005 residential home equity lines and mortgages accounted for 38% of new loans and leases.[2] This simply states that families and financial institutions are dependent on housing price gains. Households also gained - many directly and some indirectly - from the employment generated by housing. Across the early years of the post equity market meltdown (2001-2004), housing and related sectors accounted for over 40% of US private sector payroll growth. Since rate hikes began to effect markets, housing and related sectors have tumbled to account for less than 15% of private sector payroll growth. This is an ominous trend. As housing has cooled new jobs creation has cooled in tandem.
The fragility and risk associated with housing gains is very serious. The Office of Federal Housing Enterprise Oversight (OFHEO) releases a housing price index (HPI) for every quarter. In the 21 most recent quarters (Q12001-Q12006), the mean annual increase measured each quarter was 9.32%. In the 21 proceeding quarters the mean quarterly increase was 4.8%. Thus, as economic growth and labor earnings growth cooled, housing price appreciation rates doubled. In the last 5 years the average house has increased in price by 57%. Over the same period real GDP growth was 15%. The most optimistic White House Estimate of real after tax compensation increased by 8%.[3] Unreal estate price increases are just that. Brace yourself for a dose of reality that will fall heavy on the shoulders of those least able to bare the load.
Here the risks are extreme and the potentially impacted group is large enough to have macro significance. ACORN, a community advocacy group released, The Impending Rate Shock, on August 15, 2006. This report examines 130 metro areas and offers a first glimpse at the extent of risk and fragility of housing finance for lower income Americans. In 2005 adjustable rate mortgages (ARM) accounted for 24% of all residential loans and 75% of sub-prime loans. One million households have either received sub-prime loans or are at risk of foreclosure from mortgage burden. The average sub-prime ARM term to adjustment is 2 years and the base rate is the London Inter-bank Offer Rate (LIBOR) with added charges often equaling 5%. As of today LIBOR is 5.40%. The short adjustment horizon of sub-prime ARM means that many face dramatic upward readjustment soon. This will produce difficulty paying, increased default and lost purchasing power in affected communities. In short, housing wealth effects are in the process of resetting to run in reverse. Clearly this will occur sooner and more extensively in some places than others. This will last several years and be more than large enough to have negative macro effects on a par with the positive effects that we have seen across this long boom- now over!
We believe a pronounced housing slowdown will be followed by localized absolute declines in mean residence price. Given the exaggerated macro benefit that robust housing appreciation, refinance and associated activity have had, we are looking for a virtuous cycle to turn vicious with national and international implications. Low and middle income Americans will have to cut back on all forms of discretionary spending. The coming drastic reduction in purchasing of exports by suffering members of middle class- and soon to be former middle class Americans- will have global impact. Those who earn their keep producing and distributing to these masses will share in the pain as consumption spending is ratcheted down to levels at which America's families can service debts and stay within modest and pressured incomes.
What is good for housing may have been good for America. Likewise we fear the return of reality to real estate will exert a pronounced downward pull on national economic performance and have global economy implications.
(Max Fraad Wolff is a Doctoral Candidate in Economics at the University of Massachusetts, Amherst and editor of the website GlobalMacroScope.)
[1] mortgagenewsdaily.com/532006_Mortgage_Rates.asp
[2] FDIC Quarterly Banking Profile (http://www2.fdic.gov/qbp/index.asp).
[3] www.whitehouse.gov/cea/lazear20060502.html
How is my laughing at your ignorance in any way cutting off my nose? My investments have been doing very well. And I'm not making a crooked gold broker rich in the process.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus
How are you making money, if your don't sell that bright shiny yellow stuff someone else is keeping for you, under lock and key and charging you for doing so? :-)
How I make (one hell of a lot of) money trading gold is completely lost on you and your dishonest pack of hyenas.
"one heck of a lot of money" is debatable. What's a heck of a lot of money to one person, is pocket change to another. And those who REALLY make one heck of a lot of money don't brag about it.....they don't have to. Those who do the bragging, are liars.
And I still say that those who must brag about something, are making up for their own short comings. ;^)
I posted the chart for another purpose. But now that you mention it...good point!
Seeing how you can't comprehend the English language, I thought I'd post a visual. Don't know what to do after that. Would it help if I used a Telegraph? Smoke signals? Cave drawings?
http://money.cnn.com/2006/09/22/real_estate/help_home_for_sale_young_ballanco/index.htm?cnn=yes
As you know, when rates moved from 3% in mid 2003 up to 5.25% in mid 2006, we were doomed. Now that rates have moved from 5.25% down to 4.6%, we are even more doomed.
for someone as maniacal and sinister as you.
Wow, maniacal and sinister! Now you've done it. That knock at your door is the Plunge Protection Team. Off to Gitmo with you. Buh bye.
From that point on the expansion of government power took place through the use of new technology ~ to wit: computers.
Hilarious skit from Saturday Night Live (a rerun but I saw it for the first time last night). I plan to reference it as often as possible.
Don't Buy Stuff You Cannot Afford
Wife.....Amy Poehler
Husband.....Steve Martin
.....Chris Parnell
[ open on couple trying to balance their checkbook ]
Wife: (sighs) I just can't get these numbers to add up.
Husband: Like we're never going to get out of this hole.
Wife: Credit card debt, does it ever end?
CP: [walks in] Maybe I can help.
Husband: We sure could use it.
Wife: We've tried debt consolidation companies.
Husband: We've even taken out loans to help make payments.
CP: Well, you're not the only ones. Did you know that millions of Americans live with debt they cannot control? That's why I developed this unique new program for managing your debt. It's called [presents book] "Don't Buy Stuff You Cannot Afford."
Wife: Let me see that... [grabs book, reads] "If you don't have any money, you should not buy anything." Hmm, sounds interesting
Husband: Sounds confusing.
Wife: I don't know honey, this makes a lot of sense. There's a whole section here on how to buy expensive things using money you save.
Husband: Give me that... [grabs book, looks at it] And where would you get this saved money?
CP: I tell you where and how in Chapter 3.
Wife: Ok, so what if I want something but I dont' have any money
CP: You don't buy it.
Husband: Well let's say I don't have enough money to buy something. Should I buy it anyways?
CP: No-o-o-o.
Husband: Now I'm really confused!
CP: It's a little confusing at first.
Wife: Well what if you have the money, can you buy something?
CP: Yes.
Wife: Now take the money away. Same story?
CP: Nope. You shouldn't buy stuff when you don't have the money.
Husband: I think I got it. I buy something I want, and then hope that I can pay for it right?
CP: No. You make sure you have money, then you buy it.
Husband: Oh, THEN you buy it. But shouldn't you buy it before you have the money?
CP: No-o-o-o.
Wife: Why not?
CP: It's in the book. It's only one page long. The advice is priceless and the book is free.
Wife: Well, I like the sound of that.
Husband: Yeah, we can put it on our credit card.
CP: [shakes head]
Announcer: So get out of debt now, write for your free copy of "Don't Buy Stuff You Cannot Afford." If you buy now you'll also receive, "Seriously, If You Don't Have the Money, Don't Buy It!" Along with a 12-month subscription to "Stop Buying Stuff Magazine." So order today!
Ping to 158.
Sounds to me like they got really greedy. They probably can't afford the new house unless they get $349K for their current one. But the current one isn't worth that much. The current one is probably in the $250 - $275 range. They would make a really nice profit even if they got that.
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