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June 29, 2006 Housing News: The Wait Is Over...
and as everyone claims they expected, the Federal Reserve Board raised the prime interest rate to 5.25%. Mortgage rates have responded by jumping to nearly 7%, stoked by prognosticators' fears of inflation--and yet, that same interest rate rise has spurred a spike in stock prices. So much for housing being the soundest of investments, eh? That flapping noise you hear is the flock pulling all of their money out of REITS and into the hedge market. ;) The more I think about it, the more I think this constant obssession with inflation is just going to mean more pain for homeowners and buyers. People are already stretched too thin with overextended credit card debt, mortgage debt, high gas prices, etc., and the higher interest rates go, the tougher it's going to be for them to keep up with their regular payments. I can't wait to see what the average jump in variable APRs is going to be. Robert Reich firmly believes that Bernanke is fighting the wrong enemy, letting his desire to prove his Wall Street cred overwhelm his analysis of market realities. Money quote: If anything, there’s too much capacity relative to demand. This is a recipe for deflation. Prices can begin to drop because buyers hold off, expecting further price decreases. It happened in Japan in the 1990s. It’s already starting to happen in certain housing markets in the United States that had been red-hot but are now cooling so fast home prices are dropping. Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy. Look what’s been happening to American wages. Absolutely. This is a stagflation market if it's anything, and as Reich points out in a separate editorial, the failing housing market has been propping the economy up. Once those housing and construction jobs start collapsing, what will be left? Here's a tip for ya, Ben...if you're gonna raise interest rates as if wages were increasing, it helps to actually increase the wages, ya know? Posted at 12:18 PM | TrackBack June 27, 2006 Buying and Selling: Homes "Out of Reach"
A fellow blogger tipped me off to this great USA Today story about the horrific levels of price inflation in the housing market, specifically San Diego--but applicable to the country as a whole. Of course, if you're a smart and savvy housing blogger myself, you already know that prices are beginning to avalanche, but they're still so far above the mean that it will take years for them to truly flatten at affordable levels. Money quote: Cortney Henderson is one of the faces of America's housing affordability crisis. She never could have qualified for a mortgage here — where the median home price is $607,000 — had she not had the $27,000 she made as an egg donor to use as "reserves" in her bank account. What does it tell you about the state of our distended, bubblicious, and brutally overpriced market that an intelligent, educated woman not only needs constant financial help to maintain her mortgage, but had to sell her eggs to make the cash for the down payment? Talk about borrowing from our children to pay for our parents, eh? Posted at 06:23 PM | TrackBack Buying and Selling: Bombs Away
Another day, another housing slump report from the National Association of Realtors. Now, let's see if we can puzzle this out: New home demand is slacking, but new home construction is rising. The Commerce Department recorded a spike in new home demand for May. And now the NAR says that existing home demand is slumping. So, what have we got? It literally doesn't make sense. Homebuilders are flooding the market with inventory, but demand for new and existing homes is dropping, except when it isn't. We need some serious macro-level economic analysis to make heads or tails of these insanely conflicting reports. Luckily, Mish's Global Analysis is on the case: U.S. MAY NEW HOME SALES UP 4.6% TO 1.23 million VS 1.15 million EXPECTED One must use caution in interpreting the above sales data. The data does not include cancellations yet cancellations have been skyrocketing at many homebuilders lately. In addition we have been seeing housing inventory numbers go up month after month. More and more people “want out”. It simply is not possible at these prices. This will just add to price pressures down the line. For now, local economies are still being supported by all this construction activity but when it ends, the jobs will go with it. Add it all up and talk of a "soft landing" is pure nonsense. Let's see where we land first, and then we can talk about how soft it was. True indeed. It pays to know all the facts, now more than ever. That means parsing all the data you can find and doing comparisons the same way you would when purchasing a house itself. Take no one source as gospel, and don't let anything or anyone claim that they are the authority when it comes to real estate. Homebuilders want the boom to continue, because as long as those contracts don't get canceled, they make money. Realtors want to deny the existence of a slump, just as flippers, speculators, and hoodwinked owners do. But the other shoe is ready to drop, and it'll come down like Fat Man and Little Boy. Posted at 02:10 PM | TrackBack June 26, 2006 Buying and Selling: Spiking The Punch
For those who think there's a big conspiracy between lenders, the gov't, and so on to promote home buying in a bubble market, I gotta say, it's looking more like one hand is not washing the other. Today the Commerce Department reported yet another "unexpected" spike in new home sales. Now, if you recall, Commerce also said that new home construction was up, even as the MBA report said that demand was down. Oh, we'd NEVER claim that the current administration would release misinformation or anything like that, but they should at least be getting their compatriots on the same page, yes? Things like this just make it tougher for buyers and sellers to really make informed decisions. It contributes to an atmosphere of anxiety, which is the LAST place home buyers should be in when making the biggest decision of their lives. I must once again pimp June Fletcher and the Real Estate Journal, for today she offers some sage advice on knowing the truth about a local market. Do your research, talk to your people, and make lots of comparisons. Impulse buys are for things like handbags, DVDs, and so on. When it comes to the brick and mortar, don't drink the Kool-Aid until you're sure it hasn't been spiked. :) Posted at 12:42 PM | TrackBack June 22, 2006 Buying and Selling: The End of Cities?
Interesting article in the Washington Post today about the continuing spread of families to outer suburbs. As I've mentioned before, this is a fascinating, decades-long demographic shift that actually makes me think of old feudalist baronies in England in the like. As conditions in cities become so expensive that only the very rich can afford to live there, you'll have legions of working poor commuting long distances to provide rich city residents with services, while middle-class and workforce housing types are fleeing further and further into the exurbs. Ironically enough, the exurbanites' desires for city-like amenities will lead to more planned communities, more sprawl, and more urbanization. Once you've had a taste of the Starbucks and Whole Foods, it's tough to give it up. :) It's a tough call. Stay in the city, and risk higher prices, more safety concerns, and less space for your family. Move to the country, and risk longer commutes and..well..higher prices. :( We really need to rethink our models of sustainability and development so that people can own homes and raise families without retreating so far into the hinterlands that they might as well move into caves. By the same token, we need to encourage better usage of urban resources to make our cities safer, more livable, and more attractive. Or else they really will become castles on the hill, surrounded by dingy serf dwellings for miles in every direction. (Hat tip to Bubble Meter and the Economist's View.) Posted at 03:54 PM | TrackBack June 21, 2006 Fed Watch: Missing The Mark
Today's MBA report shows even more reduction in home loan demand, coming on the heels of yesterday's Commerce report saying that new home construction is on the rise. Now, if this isn't a textbook example of a glut situation, what is, really? Too much supply, too little demand. In the MBA's mind, the chief culprit is the continuing rise in interest rates, and already there is a ton of handwringing about there will be more from the Fed. Money quote: "You've seen the Fed do it over and over again. They raise rates a bit too much, then adjust later," Chan said, noting that the full effect of rate hikes aren't felt throughout the economy for many months after the fact. Indeed. Just as the full effect of cutting rates so sharply in 2001 didn't really come to pass until beginning last year. What goes around... Posted at 02:58 PM | TrackBack June 20, 2006 Buying & Selling: Builder Blues
Cute little guy, that Bob The Builder. Got the can-do spirit and everything, and it seems national home builders are feeling the love: The Commerce Department reported that builders started construction at a seasonally adjusted annual rate of 1.957 million units last month, an increase of 5 percent from the April construction pace. The better-than-expected increase came after declines of 5.5 percent in April, 7.5 percent in March and 5.9 percent in February. Now, this would seem to be good news, but if you read down a little further, or read this press release from the National Association of Home Builders, it would seem that confidence is not high: “We now expect new-home sales to be off by 13 percent from the record posted in 2005. Single-family starts, supported by large builder backlogs of unfilled orders and some continuing reconstruction in the wake of last year’s hurricanes, should be down by about 9 percent from the 2005 record.” The smart home buyer is putting their risk on an existing home in this market, rather than rolling the dice on the increasingly frenzied output of homebuilders desperate to put up anything and everything they can. While this can only help prices in the long run--too much supply and too little demand will lead to prices dropping in order to move out the inventory--in the short term, it's going to mean more order cancellations and falling profits, which could mean heavy job losses in the construction sector. There're some great comments at Calculated Risk that emphasize this point: Here in Sarasota florida the building of condos, and homes is going non stop in an almost feverish manner. I have been watching 2 recently completed 12 story towers on busy highway 41 here in Sarasota and day or night i look into the open bottom floor and do NOT see one car parked and not one light in the condos above and yet a third ugly tower is now under construction. What gives? Like Bob said, "We can get it done....," but what happens then? Posted at 03:17 PM | TrackBack June 19, 2006 Mortgage & Loan: The Controllers
"Someday - and that day may never come - I'll call upon you to do a service for me...." The Consumer Federation of America has declared war on the NAR. I can't tell you how great it is to see something like this in major media. Every blow struck in favor of alternative listing services, FSBOs, and the like is a victory for home owners, home buyers, and everyone else who wants to control the biggest financial transaction of their lives. Realtors can benefit from this as well...when all of the fakes, charlatans, and scumbags are cleared out of the market, the good ones will be able to flourish without having the negative stereotype hanging over them. Of course, for there to be buyers and brokers, there has to be a market, and right now things aren't looking so good. But perhaps the financial pain we're about to go through will help push out everyone who thought flipping overpriced condos and fixer-uppers was the true and holy path to riches. It had best be the case, because otherwise things're looking gloomier by the moment. Donald Kohn is the latest appointee to the Federal Reserve. Note the heavy emphasis on "containing inflation," even at the risk of a "slowing economy." I don't suppose they're really paying any serious attention to the growing tales of ph3r and loathing in the housing market... Posted at 05:51 PM | TrackBack Mortgage & Loan: The Housing-Identity Theft Connection
An interesting article from the L.A. Times details how the sudden anti-immigration movement is hurting the Latino home buyer demand. What the article doesn't say, of course, is that much of this sudden strength in Hispanic home buying comes from predatory lending and extremely weakened credit standards. Not only that, but illegal immigration has been a tremendous salve to the home building industry. Where else are you going to find a huge pool of cheap labor that works for peas and doesn't ask questions? Of course, to get these folks jobs, they need IDs. And in the classic American entrepreneurial spirit, there is a cottage industry of ID theft surrounding the Social Security number. It's truly a Devil's bargain. Reducing illegal immigration will further deflate an already weakened housing sector and bring the economy to a halt. But allowing it to continue not only enables workers to be victimized, but endangers millions of unsuspecting Americans whose IDs are being tossed in a hat and given out at the local day labor site. There are no easy answers, and to even address the question will force us to make some very hard choices about what is important to us. Here's the definitive article about this problem, courtesy of MSNBC's Bob Sullivan. Highly recommended. Also check this out. Posted at 03:02 PM | TrackBack June 18, 2006 Mortgage & Loan: The Phantom Menace
Economist Paul Krugman finally puts it all on the table and says what many of us have been thinking--that the crusade against inflation is a big shell game: It would be an exaggeration to say that there's no inflation threat at all. I can think of ways in which inflation could become a problem. But it's much easier to think of ways in which the Federal Reserve, wrongly focused on the phantom menace of a new wage-price spiral, could be slow to respond to bigger threats, like a rapidly deflating housing bubble. The reason why wages have stagnated is because of the heavy emphasis on consumer credit and financing a living you can't afford. Housing is key to that, and the result was flooding the market with cheap money, no-interest loans, and relaxed mortgage standards to push people into using homes as ATM machines. Meanwhile, the war in Iraq caused oil prices to spike, which has led to price increases across-the-board due to higher shipping costs--and that was BEFORE the destruction of the oil rigs in the Gulf thanks to Katrina and Rita. The reasons why people aren't saving are twofold. The economy has encouraged them not to, in every way, thanks in no small part to Greenspan himself. The other reason is that now that people have seen the likes of Enron and such--where average Americans saved, invested, and did everything right, and STILL got burned--they feel as if there's no percentage in putting money aside when it can be destroyed later. So the cycle of negative spending, credit reliance, and housing gambles continues. We've been bamboozled, misled, and manipulated in a way that would have done Palpatine himself proud. And like Palpatine's pupil Darth Vader, Bernanke may not prove equal to fulfilling his master/mentor's will. Where will that leave us, I wonder? Posted at 06:51 PM | TrackBack Hurricane Housing: Big, Not Easy
It's heartening to hear that, as in the case of any disaster reconstruction, real estate is fueling much of New Orleans' recovery. And even if the Louisiana-run insurance costs more, that means more dollars going into state coffers, as opposed to private pockets. Still, there's something a little ghoulish about statements like this: "To use a terrible analogy, it's like watching 'Gone with the Wind' for the fifth time," said Arthur Sterbcow, president of Latter & Blum Inc., the 90-year-old real estate firm based in New Orleans. "It's completely predictable. The market reacts the same way each time. It's like watching a football game and having the play book in your hands." I don't think even the most well-worn playbook accounts for the failures of the levees due to incalculable stupidity, but hey, I've been wrong before. On the other hand, despite Haley Barbour's alleged ins with the GOP, the fables of the reconstruction in Mississippi don't seem to be going so well: At minimum, says Rand, the Coast needs 27,000 affordable housing units. “It’s a crisis,” says Mark Bernstein, leader of the four-member Rand field team that spent most of the last eight months in the stricken area. I think if people stopped yelling about the admittedly egregious misuse of FEMA money and started focusing on what still needs to be done to rebuild, we might actually make some headway. But that would involve putting aside boilerplate cliches and thinly veiled racist diatribes to really get some work done. Can't have that. Not when there're much more important things to do. (Image courtesy of Katrina Destruction. Well worth looking at.) Posted at 01:23 AM | TrackBack June 16, 2006 Home Improvement: Home Depot's Downward Spiral
Those of you who shop at or hold considerable stock in Home Depot may want to start rethinking that: An internal review at The Home Depot Inc. found about $10 million in unrecorded stock option expense, the nation's largest home improvement store chain said Friday. The Atlanta-based company said the amount is not material and it does not plan to restate any of the past year's financial results. Hmm, wonder where those extra monies might have ended up? Perhaps in the supremely generous pay package of CEO Robert Nardelli? I pause to quote a scathing entry on Nardelli from the AFL-CIO blog: Maybe Nardelli learned how to guarantee his retirement security by watching two people with whom he has worked closely in the past: Jack Welch and Richard Grasso....Welch, who was famous for sending jobs offshore to save labor costs—and bragging about it—took away such a lavish retirement package that the U.S. Securities and Exchange Commission (SEC) fined GE for hiding the details of the package from investors. Truly, one has to wonder if the apple doesn't fall very far from the tree at all. Posted at 05:22 PM | TrackBack Mortgage & Loan: Bad Rate Rising
For those of you with home equity or credit card loans that were hoping for a pause in interest rate hikes, you may be SOL: "We may face more inflation pressure than currently shows up in formal data," Poole said, emphasizing that his objective was "to make a general point and not to conduct a full analysis of the current situation." He also said that the views expressed in his speech were his own and "do not necessarily reflect official positions of the Federal Reserve system." Heh. Let's see how quickly the market reacts to that little dismissal of responsibility, eh? Too many business writers and analysts just take it on faith that inflation must be contained in order to ensure strong purchasing power of the dollar. Read this comprehensive Wiki definition of inflation and decide for yourself if it's a worthy cause or not. Posted at 12:16 PM | TrackBack June 15, 2006 Buying And Selling: 200 Miles And Runnin'
200 entries later, and we're still chugging along. Thank you to all the readers, commenters, sellers, buyers, prognosticators, analysts, bulls, bears, pundits, and so on that make this a blog worth writing. No thanks to the flippers and speculators, of course. :) I find I really enjoy the WSJ's Real Estate Journal for its simple, no frills, no-bull$&!t advice about buying and selling real estate. Today they have some useful advice for selling your home in a slow market. I don't agree with all of it, particularly the part of commuting four hours a day just to own a house that has more value. If I spent that much time driving back and forth to work, I'd forget what my kids looked like, let alone how much my house is worth. Your mileage, as they say, may vary. Credit bureau TransUnion is developing a rental screening database to keep better track of deadbeats and the like. Stuff like this is going to become much more prevalent in the next few months, since rental prices are rising as people evacuate the housing market. Take it from me--one missed rental payment will haunt you as bad as any late mortgage payment...sometimes even worse. And let's not even get into the concept of these folks hoarding data on you without your consent. On a happier note, the Consumer Federation of America has a great downloadable brochure (in PDF form) on how to determine what kind of investment package is right for you. It used to be that you could trust your broker, lender, agent, etc. to handle this for you, but in the "ownership society," you're expected to not only manage your own current finances, but your entire portfolio up till retirement and beyond. I'm all for consumer empowerment, but let's be real--just as there are people who simply should not be owning houses, there are people who can't manage their money without help or advice. Stuff like this is a great way to teach you what you need to know so that you can invest and buy without the fear of having the sheep shears come out for the fleecing. Posted at 11:25 AM | TrackBack June 13, 2006 Housing Market: How Will This End?
Harvard released a study yesterday that claimed the housing boom will end with a whimper. Now, on its face, I agree with that, for reasons I've stated before--different markets will have different responses and adjustments to changes in economic stability. D.C.'s housing slump isn't going to be thsame as, say, Scottsdale's. However, the fact is that this study was commissioned by some very powerful interests in the real estate sector, designed to get us to feel good about using our homes as ATMs, and Ben Jones points this out nicely. Check the comments for a list of who funded that study. Hovnanian? KB Home? Home Depot? Unbiased market analysts to a man, I dare say. :) Even more egregious are Ben Bernake's comments about how well Americans manage their finances. Uh, yo, dude, uh....negative savings rate ring a bell or two?: More importantly, the cocktail of low interest rates and rising home values has dramatically stimulated retail consumer spending. However, with interest rates now rising, households are left with an almost unprecedented negative savings rate, and dangerously high debt levels and debt service costs. The economy hinges on housing. Implication: Based on the speculative excess we have observed, we believe this housing boom will almost certainly be followed by a long and painful housing bust. We expect that a continued rise in interest rate spreads and decline in housing sales and prices will push the U.S. in recession by late 2006, and this recession will deepen in 2007, as the housing “wealth effect” turns into a “poverty effect.” As defaults accelerate, lenders’ underwriting will tighten significantly, leading to a precipitous drop in new home sales. It's no wonder Bernanke is getting a drubbing in the press. To be fair, the guy is the ultimate metaphor for the modern real estate buyer. He got conned into what he thought would be an amazing deal with years of appreciating value, only to find it's a crappy fixer-upper that's falling apart and the ARM is about to reset. Will Bernanke be able to "flip the property" that is the trembling U.S. economy? Based on what I'm seeing so far, the market isn't buying, on every and any level. Posted at 09:55 PM | TrackBack June 12, 2006 Housing News: Return Of The King
You didn't really think David Lereah and his minions could take us out, could you? Come now! So let's see, what's been going on while I've been on my quest? The Fools themselves, normally as bullish as one could get, have taken the wind from beneath Lereah's wings. The lovely Velvet in Dupont offers an unkind ode to Alan Greenspan. The Street is getting extremely skittish over news of potential rate hikes--and we're already on hike 17, are we not?! And homebuilders like much-battered Hovnanian are admitting that they're out to give the market a facial due to their, ahem, "drooping" profits: On a recent conference call, Ara K. Hovnanian, the president and chief executive officer of homebuilder Hovnanian Enterprises Inc. said that real estate investors "have largely pulled out." "Investors were a bigger part of the market than many thought, including ourselves," said Hovnanian, whose company builds primarily in the Northeast. Would-be flippers are not only not buying new properties, they're selling what they already own, adding to the record number of homes already on the market. I couldn't make it up if I tried, kids. The legendary Bubble Meter, who is Gandalf to my Aragorn for sure, conducted what I think is the definitive rent vs. buy discussion. No matter which side of the fence you fall on, these comments are worth a read. Ben Bernanke thinks that new risk management plans are essential to ensuring banks remain liquid and don't take on more than they can chew. Yo, Ben, I have a simple risk management plan for you. It goes something like this: DON'T. LET. BANKS. LEND. MONEY. LIKE. IT. GREW. ON. TREES. Man, it's good to be back. What else have I missed? Posted at 10:52 PM | TrackBack Go back |
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