We have a decidely nuanced view of Real Estate: While not neccessarily a bubble, it has been the prime driver of the economy since rates were slashed to half century lows 3 years ago.
Our expectation for the slow motion slow down rests on Real Estate cooling (which its been doing since August), home construction and sales slipping, and prices slowly sliding. That may stop the Fed from tightening appreciably further (2 and through?). Mortgage rates staying below 6.5% allows Real Estate to maintain a moderate level of activity — but one that is obviously way off its prior white hot pace.
I suspect this could happen more slowly than those who think Real Estate is a full blown bubble ready to pop. Indeed, one of the comments in "Top Ticking Real Estate is Different Than Stocks" notes that:
"Last weekend I first heard the term "real estate soufflé" proposed on the radio to replace the term "real estate bubble." Even when the soufflé falls as it comes out of the oven, it doesn’t pop like a bubble."
That seems to make a lot of sense to me. Its consistent with last month’s final Home Sales slipping to to a minus 0.3%, from a prior 3 month average gain of 4.6%. While down on a month to month basis, the absolute levels still remain historically high. Mortgage Rates have been bouncing between 6 and 6.25% — still historically cheap.
Barron’s Alan Abelson is even more Bearish than I on the prospects for Housing & Real Estate:
"On that score, our conviction has been mightily strengthened by clear signs that the great housing boom is rolling over. Exhibit A is last month’s steep drop in the sales of existing houses — 5.7%, to be precise. Yes, we’re well aware that the Commerce Department reported that sales of new single-family homes rose 2.9% in December. But the figures don’t jibe with the rather downbeat findings of the housing industry. And as to which we find more credible — Uncle Sam’s or the builders themselves — it’s no contest."
Merrill Lynch’s David Rosenberg has become a regular in his column. His views on the end of the housing boom, and its impact on the macro economy are also pretty bearish:
"To that astute economic observer David Rosenberg of Merrill Lynch, the startling collapse of sales of existing single-family homes in the October-December span — they fell at a 36% annual rate — is persuasive proof that the bull market in housing has metamorphosed into a bear market.
What marked the extended and powerful cycle, he reminds us, is that it was built on cheap credit and incredibly relaxed loan standards. Some 43% of first-time buyers, David recounts, put zero money down on their home purchases last year; by contrast, two years earlier, 28% bought a house with no down payment. Well over a quarter of the mortgages in ’05 were of the dicey "buy now, pay later" variety. Not exactly sturdy underpinnings for a boom, especially with credit likely to get increasingly less cheap and the regulators fretting over lending standards.
The backlog of unsold inventories in the resale housing market last month shot up 26% above the December ’04 level to a 5.1 months’ supply; that compares with the low of 3.8 months in January of last year. Inventory of new homes stands at its highest level in nine years. The overhang of unsold units in the condo market constitutes a formidable 6.2 months’ supply. And pricing is beginning to reflect the inventory bulge: December’s median price of $211,000 for an existing home was virtually unchanged from last spring and down 4% from the August peak."
There’s little there I disagree with; If anything, we only differ on how long this will take. I have no clue, but I suspect it will be a more gradual process than many expect.
"For the economy, David asserts, the end of the housing boom could be
a serious drag on economic growth. Considerably more serious, we might
interject, than most of the sunshine gang, whether in Wall Street or
D.C., care to admit. In the past three years, the surge in housing
prices, he calculates, accounted for nearly 40% of the expansion in
household spending via home equity cash-outs. Merely stagnant home
prices, by his reckonings, would shave a full percentage point off
consumer spending growth in the coming year. An outright decline
obviously would have that much more of an impact.Just the direct effects of the raging bull market in housing, he
figures, chipped in 25% of the overall growth in GDP since 2003. The
real-estate boom, he goes on, was responsible for a cool 20% of the
rise in total retail sales, while enlarging the nation’s payrolls by
around a million jobs.As David wonders, "So who picks up the baton now that the housing parade is over?" Who, indeed?""
The sunshine crowd will tell you that Business is ready to pick up the baton; they certainly sang that from on high after Q3 GDP showed a big uptick in Corporate Capex. Of course, they have been saying that for years now. And as Q4 GDP has revealed, Q3 capex is looking more and more like an outlier . . .
>
Source:
UP AND DOWN WALL STREET: Fun and Games
ALAN ABELSON
Barron’s MONDAY, JANUARY 30, 2006
http://online.barrons.com/article/SB113840713897658794.html
I’d say at least half of the real estate bubble crowd believes it will take a few years for the air to escape. So the souffle argument, while it may be a better metaphor, offers a distinction without much of a difference.
David Rosenberg has made some very good points. But, since you have cut & pasted a portion of the text, does he draw a conclusion with a plan of action in the full paper?
People have to live somewhere, and as long as they have their jobs and can make the mortgage payments then the market probably won’t collapse. I doubt folks who can make monthly payments are going to voluntarily sell at a loss; especially if they’re underwater in a mortgage (plus real estate fees and commissions).
As long as they have their jobs.
So, a catalyst has to come for the collapse. Higher unemployment. In the 90’s we had base closures that affected some areas.
I agree that the real estate downturn is going to be more of a slow-motion trainwreck. Here in Southern California, which is most assuredly experiencing a housing bubble, I think the real ugliness will not begin until some of the following take place:
1. “Teaser rate” mortgages start to reset en masse for those who don’t have an equity cushion to draw on. This won’t happen until prices have been flat for a while, because to the extent that prices are still rising, borrowers will have some home equity to offset higher payments.
2. Job losses in the massive real estate/construction/mortgage complex of industries causes enough financial hardship that people are forced to sell. Again, this will take a period of protracted flatness and decreased sales volume before it really takes effect.
The key here is that home prices don’t decline substantially until a lot of people are forced to sell. While I firmly believe that day is coming for Southern CA, it’s still a ways off.
rich
Its useful to be cautious about predictions.
Note that Alan Abelson at Barrons has been a perennial bear. And in this past weekends Barron’s Current Yield column the same David Rosenberg that Abelson quotes:
“MERRILL LYNCH’S DAVID ROSENBERG, one of the most celebrated and controversial economists during the current rate cycle, knows about change all too well. In late 2004, he publicly asserted that the fed-funds rate would peak at 2%, less than half the level of today. “I was wrong as wrong could be,” he told Barron’s last week.”
So these folks are not that credible.
It well may be that RE deflates like a souffle or bursts like a balloon. But it also may stay flat like the UK and Australia 2 years after the top.
Barry it would be very useful to your readers to provide some context of the track record of the prognosticators that you quote.
What is the difference between a soufle and a bubble? Another metaphor claiming to be an insightful advance on ‘bubble’ was ‘balloon’ and I again missed the nuance. Bubbles pop and balloons deflate or so these control freaks impressed upon me. Didn’t I undersand that? Was there any hope for me and my stupid alarmist bubbles? What’s so cheerful and reassuring about a sagging gooey balloon/ greasy punctured soufle?
Lighten up with a bubble, people. It pops and you just blow another. So easy. Like you’d never make it trading commodities with soufle attitudes.
Last bubble: that housing market that Greenspan and Richardson documented as pulling out some $600B, was dough that propped up quite an array of other smaller soufles, no?
I wish I could remember where I heard the term “real estate soufflé.” It might have been KCBS or KGO in the SF Bay area.
Anywho, another point made in that same radio piece was that money formerly going into home purchases will now go into equities. To the extent that contention may be true it would bode well for the markets. But I find it kinda hard to buy.
No mincing words here:
Via Infectious Greed:
Gary Shilling’s column in the current Forbes makes me want to lie down for a good long rest — like until 2007 or so:
This year I’ve got ten investment themes that I’ll flesh
out in future columns. Eight should unfold in this calendar year; the last two may not start until after 2006. First and foremost, the current housing weakness will develop into a full-scale rout. As spelled out in my Oct. 3 column, it’s clearly a bubble and is nationwide. Median home prices need to fall 29% to return to their normal relationship with rents and 35% to relink with the Consumer Price Index. The 20% decline I predict may be exceeded.
http://www.forbes.com/membership/signup.jhtml?comingFrom=magazine&gotoDescription=See%20The%20Story&gotoURL=%2Fforbes%2F2006%2F0213%2F134.html&storyURL=/forbes/2006/0213/134.html&storyURI=/cms/template/story/mag/story.jhtml?story=/forbes/2006/0213/134.html&_requestid=4637
“Median home prices need to fall 29% to return to their normal relationship with rents and 35% to relink with the Consumer Price Index.”
LMAO! WHAT IF RENTS GO UP? (They are in Phoenix as condo conversions take units out of service)
Housing Souffle is great. Perhaps I’ll add it to my list: http://matrix.millersamuel.com/?p=230
One of the things that drives me crazy about the 1-2 punch of existing versus new home sales stats every month is that they are not in sync with each other. Existing home sales in December reflect conditions that existed in October since they are based on closings in December. Remember the swirl of bad economic news then? The New home sales are based on contracts signed in December.
Fill In The Blank With The Latest Catchphrase: Housing Expansion
Its been subtle, but there has been a change in housing market terminology over this past year. There have been several distinct segments to the trend, in terms of how what terminology is used to describe it.
Housing Boom [January to Ju…
“The New home sales are based on contracts signed in December.”
Johnathan (or Barry): Are they based on when the contract is signed or also when it closes?
The situation in housing is scary because there is not a solution unless prices stay flat for at least 10 years. If they resume rising in price in a year or so, then the speculators will be back with even more fervor. If they crash, they’ll take the world economy with it. A flat price would be unplalatable to the 80% of the GDP that feeds on the ATM house card. It would mean that the dollar would have to go down, hopefully SLOWLY, to stop the unrelenting loss of our manufacturing base and help restore some semblence of sustainability of our economy. Bankers, bondholders, the mortgage brokers, the majority of the voters, et al, would be screaming bloody murder because of the higher interest rates. The politicians in power would probably be voted out, so this scenario is highly unlikely.
The optimists are totally blind to the realists who are ready to pounce. It’s not just the financially distressed who will dampen the market but people like me…
I’m willing to take a larger than 100K loss on my house (30% of the current value of my house) to take advantage of a larger drop in a better location!
Leverage goes both ways!
I’m astounded by the cavlier attitude of some posting here. The “money” isn’t going to “flow” into equities. The “money” is evaporating. Gone. Poof. The perfectly reasonable 35% (over 3 years or so) is $6 trillion or $63,000 per second.
Pepole who think they can “move up” will discover vastly more stringent lending standards. They may find they could not qualify for the mortgage they currently hold.
I don’t need the lending. I’ve been saving while everyone else is spending.
We’re fine unless people HAVE to sell – that is when the market gets ugly. As long as people don’t have to sell to meet their debts or whatever, the housing market will ease down, but not crash.
d:
Not necessarily.
The area I’m looking at is full of 60+ who bought in the 60s & 70s, are looking to retire and bought at less than 30K while houses go for anywhere from 400 to 700K today. Many will take their house off the market if they don’t get their asking price but many won’t want to sacrifice their retirement and will settle for a lower than market price. Already we’ve seen seen a couple of estate deals go buy.
Because of arbitrage, unbalances don’t usually last. Investors have not been pragmatic and it’s going to catch up.
My 27 year old friend “owns” three homes here in San Diego. I think he got stated income loans because he has good credit. Don’t know how he pulled it off but he’s now trying to get out. I was just in downtown San Diego a couple blocks north of Petco Park. For rent/sale signs all over the sidewalk, for sale signs in a large percentage of the windows. Homeless people on most corners with signs pointing to new condos. Oh and five cranes within eyesight working on condos which will soon appear as supply.
But there is no bubble, just froth.
My 27 year old friend “owns” three homes here in San Diego. I think he got stated income loans because he has good credit. Don’t know how he pulled it off but he’s now trying to get out. I was just in downtown San Diego a couple blocks north of Petco Park. For rent/sale signs all over the sidewalk, for sale signs in a large percentage of the windows. Homeless people on most corners with signs pointing to new condos. Oh and five cranes within eyesight working on condos which will soon appear as supply.
But there is no bubble, just froth.
My 27 year old friend “owns” three homes here in San Diego. I think he got stated income loans because he has good credit. Don’t know how he pulled it off but he’s now trying to get out. I was just in downtown San Diego a couple blocks north of Petco Park. For rent/sale signs all over the sidewalk, for sale signs in a large percentage of the windows. Homeless people on most corners with signs pointing to new condos. Oh and five cranes within eyesight working on condos which will soon appear as supply.
But there is no bubble, just froth.
My 27 year old friend “owns” three homes here in San Diego. I think he got stated income loans because he has good credit. Don’t know how he pulled it off but he’s now trying to get out. I was just in downtown San Diego a couple blocks north of Petco Park. For rent/sale signs all over the sidewalk, for sale signs in a large percentage of the windows. Homeless people on most corners with signs pointing to new condos. Oh and five cranes within eyesight working on condos which will soon appear as supply.
But there is no bubble, just froth.
My 27 year old friend “owns” three homes here in San Diego. I think he got stated income loans because he has good credit. Don’t know how he pulled it off but he’s now trying to get out. I was just in downtown San Diego a couple blocks north of Petco Park. For rent/sale signs all over the sidewalk, for sale signs in a large percentage of the windows. Homeless people on most corners with signs pointing to new condos. Oh and five cranes within eyesight working on condos which will soon appear as supply.
But there is no bubble, just froth.
I’m willing to take a larger than 100K loss on my house (30% of the current value of my house) to take advantage of a larger drop in a better location!
Posted by: D. | Jan 30, 2006 10:46:15 AM
REALLY? WHAT’S YOUR PHONE NUMBER?
Larry:
Sorry, I’m married, long term.
OMG. D: I WANT TO BUY YOUR HOUSE, NOT YOUR LIFESTYLE! I WANT TO “ASSIST” YOU IN BOOKING THAT $100K LOSS ASAP.
Larry you hottie!!
I’m willing to take a larger than 100K loss on my house (30% of the current value of my house) to take advantage of a larger drop in a better location!
I’m hoping so. It is the only way I could afford to move without being crippled by taxes.
“Existing home sales are reported when a sale closes, generally a month or two after there is a sales agreement, while new home sales are recorded when a sales contract is signed, which can come months before a closing.”
http://money.cnn.com/2006/03/24/news/economy/newhome_sales