Posted on 10/14/2006 9:48:44 AM PDT by GodGunsGuts
'The US housing bubble will disappear'
By Laurie Osborne, Editor
Published 11th Sep 2006
That the US housing bubble will disappear someday is a certainty. That it will blow up catastrophically is a fair bet, warns The Daily Reckoning's Bill Bonner.
Observing recent statistics, Bonner calls the evidence "formidable".
The total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – eclipsing the combined GDPs of those nations.
Consumer spending and residential construction have accounted for 90 percent of the total growth in the American GDP over the last four years, and more than 40 percent of all private-sector jobs created since 2001 have been in housing-related sectors, including construction and mortgage brokering.
America made some of its biggest gains this past year, with average prices of homes rising 12.5% in the year and prices in Florida, California, Nevada, Hawaii, Maryland and Washington, DC, rising more than 20 percent, while in Palm Beach County, Florida, it rose over 35%. Sales of existing homes in the US set a new high at 7.18 million in April.
Some foreign countries showed bigger gains than the US in the last year, with prices up by 23.6 percent in South Africa, 19 percent in Hong Kong and over 15 percent in Spain and France. But average house prices have actually fallen by 7% in Australia since 2003; Sydney's bubblicious prices have plunged by 16%. In Britain, sales have contracted by a third from last year and have also slowed down in Ireland, the Netherlands and New Zealand. In Britain and Australia, these declines followed what were only very modest interest rate increases.
23 percent of all American houses bought last year were for investment and in Miami, one speculation hot spot, 70% of condo buyers are investors/speculators.
Last year, 42 percent of America's first-time buyers – and 25 percent of all buyers – put no money down.
In California, 60 percent of all new mortgages this year are interest-only or negative-amortization.
House prices in relation to rent have hit all-time highs in the US, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. In the US, the ratio is 35 percent above its 1975-2000 average. The price to rent ratio is a cardinal indicator of over valuation.
Let's recap. I have demonstrated that housing has risen faster than GDP, inflation, and personal incomes on a nationwide basis. I have also demonstrated that there has been a spike in household debt as a percent of assets (in the face of falling interest rates!), a spike in household debt as a percent of GDP, and a spike in risky loans (interest only, option ARMS, etc). Your argument, is a shift in capital flows, and a limited supply of homes in suburban metro areas explains the nationwide bubble away. Do I have the current state of our debate correct?
Does that mean the gold rally is likewise unsustainable?
Veblen was very near when he placed born businessmen in the interstices of commerce. It is not the goods but in the dynamics. Consider that last year's cell phones have little value even though they are the same now as when they first appeared. My 87 Caprice is nearly the same as when new yet its value is about 50 cents, and the Caprice factory could produce many more of these 87 Caprices with no value. How can value drop to nothing when it is the same object?
Consider that factories can produce unlimited goods with very litle labor, which is very common anymore. Then consider that it matters not at all where the factories are. Thus, the factories can be in China yet it is America that is wealthy. Consider also that a factory in China can be running at breakeven and paying no dividend or perhaps 3% to the supposed owners. Wealth creation is clearly not there.
Goods and manufaturing are involved, but are not the source. All manufacturing, mining, and agriculture could be done in space by robots and the country could be getting wealthy even faster. Tell you what. I will write a novel and you will write a novel. I will sell my novel to you for $1 million and you will sell your novel to me for $1 million. Instantly we will both be millionaires and our capital will be invested in these valuable novels. There is no difference between this and art collectors or Caprice collectors, or gold collectors.
I've seen some investors lose some big bucks by betting that economic ratios "have to" return to historical levels. Those economic ratios don't have to do anything. They respond to supply and demand and investor preferences. The housing market got somewhat overheated last year, as all markets do near the end of a big rally, and we will see a correction of 5-20% in prices from the peak depending on the area, but I don't anticipate a major financial crisis because of the housing correction. Keep in mind that a relatively small percentage of homeowners bought their houses near the top in 2005.
Some of the larger investment banks are already predicting a rolling-back of interest rates in 2007. That should prevent any meltdown if not even continue the rise of home prices.
Things have apparantly slowed a little bit, with fewer turnover this year than in recent years, but prices are barely budging. The homes are just sitting in inventory a little longer.
We'll check in again in 6 months and see where we are at, but if the Fed rolls back rates it should mean this is just a temporary flattening of the line and possibly a good time to buy in advance of future appreciation. And anyway, if a person/family can fix in a 30 year rate with payments they can reasonably afford, it doesn't matter because everyone needs a place to stay and over 30+ years, while values will fluctuate, at the end of the term the value should be much higher and anyway the home will be paid off.
Do you know of any US housing charts that resemble the following? Given the current geopolitical rumblings and the triple deficits, it would appear that gold has one heck of a long way to go on the upside. Oh, and remember the Toddler rule: study and try to digest each chart at least three times before responding. If you're still confused, you might want to call over some of the neighborhood kids to help explain them to you. LOL!
LOL!
We're doomed. (Is this guy for real?)
Did gold double since 2001? Did housing?
Will gold go higher? Maybe. Will gold go lower? Maybe. But if your scary housing charts mean housing must decline, after a smaller % gain than gold then some people could make the same prediction about gold,
If you're still confused, you might want to call over some of the neighborhood kids to help explain them to you.
Maybe when the kids are done explaining what a bid-ask spread is to you.
I thought it was going to burst about a year ago. I think I missed it.
The Buy-Gold gang has some interesting participants don't they.
*have some*
1) As previously noted, homes close to major metro centers have increased a lot in price because of buyer preferences for shorter commuting times.
2) People have forgotten the Great Depression and home buyers are less conservative now and are willing to take on bigger mortgage loans and housing payments.
3) Newer houses are bigger and more luxurious than they used to be.
4) People are living longer and so more houses are needed per 100K of population to house the "empty nester" retirees.
5) As has been widely reported the personal savings rate is around zero now as investments in financial assets are being diverted into investments in housing. A lot of people now believe housing is the safer long-term investment, and if it declines in value they can at least live there and enjoy a nice big house. I do think this last trend is not so good and young people need to invest more in financial assets and somewhat less in real estate.
But all in all, I don't see these trends changing much in the next several years, so if interest rates stay fairly stable then home prices shouldn't decline too much from the 2005 peak. I would say that this upward trend in home prices has about run its course, however, and I think the market used up about the next 3-6 years of gains all between 20001 and 2006, so prices will probably be roughly flat in most areas for the next several years (...a minor correction followed by a slow rebound). But the most attractive, close-in suburbs could continue to appreciate slowly after a small correction in 2006-2007. Just my opinion based on 35+ years of watching the economy and the real estate markets.
How about if we rename the "Pollyanna view" the "Petronski view" in your honor? We can define it as "there is no real estate bubble" or "real estate only goes up". You decide.
Neutron-bomb mortgages. When they blow up the building remains standing.
The "other things" included a normal RE cycle downturn, proportional to the preceeding euphoria.
Interest only loans are OK if people would rather invest their capital in something other than their house. I'd like to know what percentage are negative amortization, which is really only appropriate for elderly retirees or speculators. I don't see any reason why interest only loans will default in large numbers. Employment is still strong and people should be able to make their mortgage payments.
but but but some still think adding a koi pool will add $100,000 to their home value
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