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.
He feels cornered. He's lashing out now....LOL
Smart move durasell. There are strings attached to everything these days. I would be intwined to string along, but looks like you have cornored the market.
You are right, Miami gets a lot of speculators.
However, the rest of FL is doing okay...we keep getting more people in the state as we have no state income tax!
LOL! I'm game. I'm tired anyway. But I doubt it's going to end anytime soon. Pedro just pinged his hyenas. They should be along any minute.
The patsies in the piece are the people who left their money sitting in money markets or bonds as they yielded 1-4%, in a currency that fell in real terms.
"Pedro just pinged his hyenas."
Pot, kettle, black.
String won't hold all my gold together, nor is it strong enough to lift gold. Perhaps you should fashion some rope out of that string. In fact, perhaps you could use your string to start the very first industry after the Apocalypse!
"Interest only loans are OK if people would rather invest their capital in something other than their house."
Sure, as I understand the loans, they make sense for people with variable income, or for example a young doctor who knows in a few years his salary will jump.
Problem is...they have not been sold for those reasons. They were taken advantage of by greedy mortgage brokers, greedy real estate agents, and greedy people.
I was surprised to learn a while ago they are not new, and were being heavily used in the Florida markets before the 1929 crash. There ws a similar housing/land boom in Florida then that eerily echoes this one, just on a national level.
"I'd like to know what percentage are negative amortization, which is really only appropriate for elderly retirees or speculators."
So would I - those are the numbers that scare me.
"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."
A large number of people who bought in the last couple of years are expecting 10-20% appreciation, and overbought to make a bigger profit. The key word is "expecting" - there's been a lot of articles lately from frustrated sellers with a massive sense of entitlement that they cannot sell their homes for 200K more than they bought at, and grudgingly drop their price 10K on a 900k home.
Most of these people can barely afford the interest payments, let alone the principle when it kicks in, and have zero savings and their salary growth cannot hope to save them - wages are still slow or stagnant compared to house prices. Add in rising taxes, HOA fees, cost of living (in an indulgent lifestyle), and you get financial disaster just waiting to happen. IF you have a normal mortgage, IF you have a stable job, anddon't have to sell because of relocation, divorce, or any other reason, IF you live in an are unaffected by this mania, you should be fine.
Sadly, that leaves out a lot of people. A LOT of people.
They were told by all their freinds and brokers and realtors that all they had to do is refi when the loan resets, and they'll be fine - and cash out any equity gains at the same time. After all, property always goes up, they're not making any more land, and besides, Suzanne researched this! (One of the more annoying and telling commercials that fed this mentality)
They cashed out equity - if any - to pay bills and taxes and furnish their huge McMansions, buy Hummers and Beemers, and take the kids on super expensive all-inclusive Disney Cruises, get mommy breast implants and tooth whitening, and buy all those nice plasma tvs and home theaters. I had family members do this, and they are scared sh*tless right now.
Problem is, you don't have much luck refinancing a loan you can't afford when your house is worth less than what you bought it at, and you have zero equity and zero savings.
We're not talking about people who made rational decisions, and put down 20% on a mortgage they can afford, and have cash reserves in investment and savings. We're talking about people who are living on a shoestring as it is, who could only afford the inflated properties because of the creative and risky loan packages sold to them, and to whom saving means nothing. They bought with 0% down, "stated" income (unverified income statements), and only cared about the monthly payment NOW instead of the long haul, and did'nt read nor understand the terms of the mortgages they signed onto. Walmart greeters making 24K a year bought 500K condos. Oh, yeah, this is gonna hurt, and hurt bad.
These people may actually survive, if they start to sell off their toys, learn to live n a budget, and refinance. They may have to work longer, work multiple jobs, but they may keep their house. They may not. My feeling is, in the next couple of years, you will see new loan products designed to keep these people in their homes, or a possible Fed bailout of some kind. People will not retire as young as they'd like. Retirement may mean several part time jobs. A lot of people see their houses as their nest egg, and will lose that investment in falling prices and stagnant markets. They'll add their homes to the market this year and next, refuse to lower their price, because if they do, they lose it all. It's going to be really scary for a lot of people in the next couple of years...the question is, will the naysayers on this thread be there to help them, or even pick up the phone when they want to ask them why they did'nt warn them?
We're also talking about people who bought multiple properties to take advantage of the low rates and insanely easy credit to flip houses to make money. This group is the truly f#cked, they will be in serious trouble very soon. Becoming a flipper became a trendy thing to do, just like daytrading in the .com fiasco. Hell, there were at least 4 TV shows dedicated to it! Everyone talked about it, jumped in, many people left good jobs and careers to flip houses. It was the talk at water coolers, coffee cafes, and cocktail parties across the country.
The percentage of these people vary according to region, but they're everywhere. They were attending seminars that advocated buying houses in Buffalo, NY, Boise, Idaho, Utah...and now a lot of those seminars are telling them to buy overseas, in Vietnam, Thailand, South America. It's truly a locust-like plague. More people than you think got into the game, and stand to lose everything, or owe to a bank (or banks) the rest of their lives.
It was fueled by the same insanity that made people lose their savings to internet stocks, and it's been cheerlead by the media and the usual suspects on this thread. For all of the numbers and theories thrown around on this thread, a lot of it fails to address the psychology of this boom, which defies logic and requires leaving principle and common sense behind. As I read it, we're in for a bumpy ride, of dead cat bounces, rallies, and greater fools buying a falling knife down to the bottom.
As for employment, I've seen that the bulk of new jobs in California were real estate related, which are now drying up. Cabinet makers, granite counter installers, construction workers, painters, they're all feeling the drop in business. A lot of real estate offices which sprang up in the last 5 years are closing. Mortgage brokers are seeing a drastic reduction in business (they'll make up for it with "savior" loans for the McMansion crowd).
The more the naysaying here on FR gets, the worse the reality gets. I hate that we're facing a storm like this, and that the GOP, should they hold their power, will have to deal with it. I don't want this to happen, but it is, regardless of how much whistling past the graveyard happens in threads like this, or how nasty and snarky they get. They fail to address the psychology of what's been happening out there for the last couple of years, how disasterous it could be, and how lousy it could be that our side gets the blame for it, when it hits. I'd rather Hillary get the blame for the worst case scenario in this, but I don't want her anywhere near the office, I don't want the scenario to play out, and I fear her and the Dems response to it more than I fear the GOP's. I don;t want it to happen at all, but every week, I see the bubble crowd's predicitions come true, and the naysayers on these threads become more shrill, abusive, and hollow.
http://thehousingbubbleblog.com/
These guys havent been wrong, yet.
So that's what you think that was. Practice may help you master the art.
Wow, you're clever enough to score above gerbils, chipmunks and squirrels.
Keep studying!
We had an explosion of storefront lenders out here over the last few years. Mining the sub-prime market, even the sub-sub prime. Some of these clowns have been caught steering borrowers to junk when the borrower could qualify for a conventional loan. They prey on the lack of knowledge of the borrowers. High prepayment penalties are standard. These lenders don't keep the loans, they package them and sell them off to hedge funds and other buyers of CMOs.
Truth is advancing on his left flank, reality on his right.
Twine may hit a snag, and you'll be tied to a bad investment.
An out of date definition. First time buyers have been taking on negative amortization loans by using Payment Option Arms. This has been big business in California for two years.
I believe in civility in all online exchanges.
Humor sometimes helps to restore it.
Good post. The mystery is why some people get so excited at the mention of this. I know a few realtors who don't want prices to fall because commisions go with them, but otherwise it's just anger at prudent finance and the business cycle. The naysaying is a good window into common wisdom.
KNX radio runs a business hour every weekday here in LA. Real estate is a regular feature. They feature analysts from the California Assoc of Realtors, the business schools at UCLA, USC, Chapman, people from the lending world, and so forth. I have repeatedly heard that the figure for POAs, interest only loans, 100% financing, and similar exotic products has been over 40% of all lending here for the last two years.
This probably isn't the case in most of the country. It has been driving prices here, and it's been great if you don't mind spending $440 a sq ft for a house with no yard.
Too often it's Sisyphus pushing his rock up the hill. But I admire your effort.
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