Global House Prices

Aussie first home buyers strike

2011-03-30T21:29:00.000-07:00

Seems as if the Aussies have finally said enough is enough. An online campaign to boycott the housing market in protest of excessively high prices has gone viral.

According to Prosper Australia "The Home Buyers Strike was launched to warn prospective home owners that now is not the time to enter the market."

Prosper and GetUp campaign websites:

http://www.prosper.org.au/2011/03/31/what-we-want-buyers-strike/
http://suggest.getup.org.au/forums/60819-campaign-ideas/suggestions/1595687-first-home-buyers-property-buyers-strike?ref=title

Mainstream media has also picked up on this:
http://www.smh.com.au/business/beware-a-buyers-strike-in-property-20110331-1cgwh.html
http://www.smh.com.au/business/property/first-home-buyers-urged-to-go-on-strike-20110330-1cge8.html
http://au.news.yahoo.com/thewest/a/-/newshome/9101416/house-buyers-strike-attempts-to-cripple-the-market/
http://www.heraldsun.com.au/news/more-news/first-home-buyers-strike-growing/story-fn7x8me2-1226030974559
http://www.abc.net.au/news/stories/2011/03/31/3178706.htm
http://www.theglobeandmail.com/globe-investor/personal-finance/personal-finance-reader/rob-carricks-reader-home-buyers-on-strike/article1961202/

Bubbles Down Under

2011-01-14T01:04:00.000-08:00

I have been a keen observer of the Australian housing market as it presents a curious example of textbook bubble dynamics.

This interesting article over at Seeking Alpha prompted me to revisit the current situation.

The common belief amongst locals is that Australia really is different - some will even list a plethora of justifications for its grossly overpriced housing and begin recalling many clichés they have been conditioned to believe.

Australia has become horrendously expensive compounded by a booming currency, yet the locals, swimming in a tide of record debt levels, seem to keep finding ways of paying for ever increasing houses.

Here are a few pieces that go some ways to explaining the various factors contributing to the bubble that has been described as "Australia's biggest Ponzi scheme":
http://www.abc.net.au/news/stories/2010/09/24/3021480.htm

http://www.morganstanley.com/views/gef/archive/2010/20100817-Tue.html#anchor25c64a02-aa03-11df-8410-d952cf7db8be

http://www.businessinsider.com/the-party-is-over-in-australia-as-debt-and-living-costs-surge-2011-1

http://www.unconventionaleconomist.com/2010/11/battle-of-bubbles-revisited.html

http://brontecapital.blogspot.com/2010/12/fish-and-chips-in-kiama.html

http://www.nickhac.com/2011/01/why-do-consumer-goods-in-australia-cost.html

Is this country one of the last bastions of mass delusion? The evidence suggests it is, many Aussies beg to differ. What say you?

Not out of the woods yet

2010-08-24T23:54:00.000-07:00

Economic reports continue to point to the downside with the latest data showing worse than expected numbers for existing home sales:

Stocks lose big on home sales shock

Housing Bubble link share

2010-05-03T23:30:00.000-07:00

This post is intended to be a work in progress, listing some of the better links relating to the global housing markets.
Please feel free to contribute by adding your favourite (housing related) links to the comments below.

Safe as houses: Compare countries' house-price data over time
S&P/Case-Shiller Home Price Indices
Teranet - National Bank National Composite House Price Index
Rightmove House Price Index
Home.co.uk Asking Price Index
ESRI House Price Index
Demographia
Housing Bubble Facts and Figures
Real estate bubble
Roubini Global Economics
Fortune: Where housing is headed
FT: In depth / UK Housing
CNN/Money: Top housing markets
Global house prices: Froth and stagnation
House prices: Safe as houses

http://globalhouseprices.blogspot.com/

What if regulation prevented the housing bubble?

2010-04-07T20:32:00.000-07:00

Interesting piece suggesting a lack of political will to prevent the housing bubble from spiraling out of control: "Alan Greenspan said Congress would have intervened had the central bank tried to slow down the risky housing bubble."

The experience in the US should be a lesson to all other nations still in the midst of housing bubbles (Australia... I'm looking at you!). Using regulation designed to prop up ailing markets only exacerbates the problem in the long run. Unfortunately our short-termism will never allow for a pragmatic approach of moderating bubbles as they become apparent.

Aussies fighting over houses

2009-08-20T01:41:00.000-07:00

Appears that they are a little slow to catch on down under...

While the rest of the world is well into the correction phase of their respective housing bubbles, Australia is still well and truly in denial. So much so, in fact that a fight broke out between competing bidders at a recent auction for a house in Sydney:

"one auction at Parramatta two weeks ago had 19 bidders, and a fight erupted between buyers for a property worth about $550,000"

Home price declines continue accelerating

2009-01-10T19:39:00.000-08:00

From the the most recent S&P/Case Shiller Home Price Index release:

"The chart above depicts the annual returns of the 10-City Composite and the
20-City Composite Home Price Indices. Following the lead of the 14 metro areas
described above, the 10-City and 20-City Composites set new records, with annual declines of 19.1% and 18.0%, respectively."

The dominos begin falling

2008-07-11T18:41:00.000-07:00

IndyMac Fails, who's next.. Fannie, Freddie? Place your bets.

Office of Thrift Supervision steps in and closes IndyMac Bank; FDIC takes over operations

"IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures."

"The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said."

A bailout for borrowers?

2007-12-06T04:13:00.000-08:00

A couple of interesting developments today:

The Bush administration has outlined a plan to help homeowners facing a jump in their mortgage payments by freezing rates for five years.
Bush to unveil plan to help homeowners

The Bank of England cut its benchmark interest rate by a quarter percentage point to 5.5%
UK interest rates trimmed to 5.5%

Mortgage losses mount

2007-11-28T04:23:00.000-08:00

Wells Fargo Plunges Into the Mortgage Muck With $1.4B in Losses on Home Equity Loans

Nothing much new here, just another example of a financial institution confessing to billions in losses on home equity loans, but the following quote helps to put the situation into perspective:

"Wells Fargo's chief executive, John Stumpf, spooked investors even further two weeks ago when he described the current real estate slump as the worst since the Great Depression and reiterated earlier projections that the bank's home equity losses would continue to rise next year."

No bottom in sight for housing

2007-11-13T01:29:00.000-08:00

Home prices to keep sliding with no bottom in sight

According to Robert Shiller "predictions for a bottom within the next year or so are probably wrong, with price declines in 2008 possibly worse than those seen this year."

"There is a probability of a continuing decline for a period of years, bringing prices in many cities down in the 10s of percent," Shiller said

"The bottom is hard to predict," he said. "I do not see it imminent and it could be five or 10 years too."

Housing values must decline 40-45% to revert to the mean

2007-09-26T18:39:00.001-07:00

They say a picture tells a thousand words.

According to Robert Shiller's index of American housing prices going back to 1890, we are in the midst of a bubble of unprecedented proportions.

Now for some rough, back-of-the-envelope calculations:

Considering only data from the post-war period (which is probably more accurate and relevant), we can assume that the mean post-war housing value is somewhere between 110 and 120 on the index.

We know that all market values tend to revert to the mean, so what can we expect to happen in this case?

Based on these figures a rough estimate of a reversion to the mean would require housing values to decline approximately 40-45% from their 2006 value on this index.

Join the dots, here comes the credit crunch

2007-09-17T18:40:00.000-07:00

Conditions in the global financial markets have changed significantly in recent weeks.
Credit is going to be a lot more difficult obtain - all borrowers should be mindful of this, particularly those that are planning on refinancing ARMs.

There are quite a few telling signs that should be raising the concerns of those inside the industry and market regulators alike:

Hedge funds collapsing - The test was a big "If" - and hedge funds failed
Run on the bank in the UK - Chancellor steps in to halt bank run
Central Banks adding excess liquidity to markets around the globe - Fed, ECB inject liquidity as foreclosures rise
Credit spreads widening - Wall Street Credit Costs Soar on Spread to U.S. Rates
Greenspan pointing the finger of blame - Greenspan alert on US house prices

Greenspan warns on interest rates and house prices

2007-09-16T22:42:00.000-07:00

Greenspan reportedly warns on rate cuts

"Former Federal Reserve Chairman Alan Greenspan said his successors at the U.S. central bank should be cautious about cutting interest rates because of inflation risks, and he forecast home prices will drop further"

"Greenspan said the U.S. housing slump is likely to deepen more than many analysts expect, with home prices falling by at least a "large single-digit" percentage amount and perhaps by a double-digit percentage"

Home Prices: Steepest Drop in 20 Years

2007-08-28T16:52:00.000-07:00

Home Prices: Steepest Drop in 20 Years

S&P Says Housing Prices Fell in 2Q by Steepest Rate Since Its Index Was Started in 1987

"U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987"

"The decline in home prices around the nation shows no evidence of a market recovery anytime soon"

"The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch."

2007 is going to suck

2007-03-10T02:07:00.000-08:00

At last... an open, honest assesment for the prospects of the housing market by someone who should know:

"I don’t want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year"

- Donald Tomnitz, CEO of D.R. Horton Inc., the second-largest U.S. homebuilder by revenue.

House prices fell in most US markets last quarter

2007-02-17T00:13:00.000-08:00

Home prices fall in more than half of nation's biggest markets

"NEW YORK: Prices for single-family homes fell in more than half of the 149 biggest U.S. metropolitan areas in the last three months of 2006, according to data released by a trade group for real estate agents."

"The figures from the National Association of Realtors on Thursday show that the housing market weakened noticeably in many parts of the country at the end of last year."

"You have two kinds of weakness here," said Jan Hatzius, an economist at Goldman Sachs. "There is the traditional economic-driven weakness in parts of the Midwest, and there is the bubble-bursting weakness. That's what is bringing down the national home price appreciation rate."

Another myth shattered... yet again

2006-10-26T17:30:00.000-07:00

We revisit the 'prices never go down' myth again this month just to hammer home the point.
Following on from last months decline, we see larger fall in prices again this month... seems the correction is gathering momentum.

New-home prices drop 9.7% from 2005, biggest fall in 35 years

"The median price of a new home plunged in September the largest amount in more than 35 years, even as the pace of sales rose for a second month."

"That was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970. The weakness in new-home prices was even sharper than a 2.5% fall in the price of existing homes last month, which had been the biggest drop on record."

Another myth shattered

2006-09-25T18:30:00.000-07:00

'Prices never go down' - How many times have we heard that one.
Ooops... dont look now because:

Existing-home prices fall for 1st time in 11 years

The collapsing U.S. housing market crossed another milestone in August, as the median sales price of existing homes fell for the first time in 11 years and for just the sixth time in the past 38 years, the National Association of Realtors said Monday

The median sales price fell 1.7% year-over-year to $225,000 in August.

Sales of existing homes fell 0.5% in August to a seasonally adjusted annual rate of 6.3 million, the industry group said. It was the lowest sales pace since January 2004. Sales have fallen five months in a row. Sales are down 12.6% in the past year.

Realtors said the price decline shows the market is stabilizing, but other economists said the correction has a ways to run.

Meanwhile, inventories of unsold homes rose to a 13-year high.

Hard Landing For Housing Already Here

2006-09-17T19:02:00.000-07:00

Some figures from this article:

The Hard Landing For Housing is Already Here

- 32.6% of new mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000
- 43% of first-time home buyers in 2005 put no money down.
- 15.2% of 2005 home buyers owe at least 10% more than their home is worth.
- 10% of all home owners have no equity in their homes
- $2.7 trillion in loans will adjust to higher rates in 2006 and 2007.
- 70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.
- Homeowners face higher payments as mortgages are reset. Generally, monthly payments rise between $200 and $500 depending on the size of the mortgage.
- According to Reality Trac, August foreclosures were up 23% over July and 53% over a year ago.
- The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.
- New home sales are down 22% and existing home sales down 11%.
- The NASB housing market index has recorded an all-time decline.
- The housing affordability index is at a 15-year low.
- The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.
- The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001. From 1976 to 1996 it never was above 220.
- According to the NAR the year-to year prices of existing homes are now flat. A short time ago they were rising at a yearly rate of 16%.
- Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, however, prices have been dropping in the North East, West and Mid-West.
- Sales incentives are now estimated at 3% to 7% of selling prices.

The Housing Bubble and Its Implications for the Economy

2006-09-13T18:02:00.000-07:00

So what was the outcome of the recent hearing titled "The Housing Bubble and Its Implications for the Economy" by the US Senate Economic Policy and Housing and Transportation Subcommittees. The usual spin and warnings about ARMs, affordability, soft landings etc...

Real estate, finance experts raise red flags at 'bubble' hearing

Housing inventory has tripled and quadrupled in some areas with declining sales, he said, and "these areas are vulnerable to outright price declines, particularly if interest rates were to rise further."

The ratio of home prices to income levels, and mortgage debt-servicing costs to income "have greatly increased in some markets to worrisome levels," he said, with Florida, California, Arizona, Nevada, Virginia and Maryland exhibiting "trends far above the local historical norm."

But the latest housing boom is unique in some ways from past experiences, he said. "The number of boom markets is substantially higher currently than the historical experience."

"In addition," Brown said, "the use of ARMs (adjustable-rate mortgages) and non-traditional mortgage products is unprecedented and could have an impact on future market performance."

ARMs accounted for about 30 percent of all conventional mortgage loans in 2004 and 2005, according to the Federal Housing Finance Board, and the share of ARMs was higher among sub-prime mortgages, Brown said in testimony.

The real estate downturn "still has some distance to go, if only to work off excess supply in markets for both new and existing homes (including the condo market),"

This is a time of "payback" in demand for home ownership, he said, as the boom served to "pulled demand forward." Demand for housing began to fall off in third-quarter 2005, Seiders said.

Home prices are at "historically high levels and have already started to stretch past many traditional affordability boundaries," and Lawler stated in his testimony that "several factors may constrain appreciation rates in the near future."

Gallup: Investors Worried Real Estate Situation Will Get Worse

2006-08-28T18:47:00.000-07:00

The latest Gallup Poll provides further evidence for deteriorating conditions and sentiment for real estate:

Investors Worried Real Estate Situation Will Get Worse
Investor optimism continues steady decline, reaching another new low for the year

"These most recent data simply confirm the widely held perception -- noted by Gallup last month -- that housing activity has slowed significantly in 2006."

"the August UBS/Gallup Index of Investor Optimism poll shows investors are worried that the real estate markets are continuing to deteriorate. The new poll also shows that investor optimism continued its steady seven month decline, reaching a new low point for the year in August."

"7 in 10 investors believe conditions in the residential real estate market nationwide are getting worse, not better -- up from 63% in June."

Interest rates move inexorably higher

2006-08-02T23:35:00.000-07:00

Interest rates around the world appear to be ratcheting upwards yet again, with the latest round of increases being made by Central Banks around the globe.

The Reserve Bank of Australia just raised interest rates by 25 basis points, the European Central Bank is likely to increase rates again soon as is the US Federal Reserve when its meets next week.

Perhaps most significantly, even Japan is participating, having recently ended its zero interest rates policy and increasing rates for the first time in six years.

Global House Prices
http://globalhouseprices.blogspot.com/

Soft Landing

2006-07-27T18:31:00.000-07:00

To all those that believe the soft landing spin, here is a great quote from the Countrywide Financial CEO in this piece:

Mortgage lenders grapple with deflating housing bubble

"I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out," Countrywide Chief Executive Officer Angelo Mozilo said on a Tuesday conference call. "I have to prepare the company for the worst that can happen."

Do ARMs make housing more affordable

2006-07-18T23:29:00.000-07:00

Re-visiting the theme of the ARM, many are still deluding themselves that using these products makes housing 'affordable'.

Exotic, but dangerous

Nontraditional mortgages may be the only way some people can afford a home. But the buyers should beware.

Rising home prices have caused people to look at exotic mortgages as a way to get into a house with small down payments and little monthly notes. These mortgages are a break from the traditional 30-year, fixed-rate loans. In some varieties, the borrowers only pay the interest on the note; in others, the interest rates adjust with the market.

Part of the demand for these mortgage programs is the steady rise in home prices, which have gone up an average of 33% across the U.S. since 2002. For many middle class families in hot housing markets, such as southern California, Atlanta or Las Vegas, taking out a loan and spending the first 10 years paying only the interest on it, or getting a 40-year mortgage is the only way to afford a home.

Carby says the new mortgages have been developed to manipulate monthly payments to a level the borrower can afford.

"There are people wanting to buy property at any cost, in any situation," Carby says. "It's all about making a unique fit to go with a person's income."

But now, Fishbein says there are $1.5 trillion in adjustable rate mortgages set to reset in the next few years. In the past year, interest on an adjustable rate mortgage (ARM) has jumped from 5.1% to 6.3%. That means homeowners will face a huge upswing in their monthly mortgage notes. The swing is so significant, that Wall Street analysts estimate one out of eight people could end up defaulting on their mortgage.

Easy Money

2006-07-16T20:21:00.000-07:00

Some interesing snippets from this article on debt of all sorts:

Credit-card debt engulfs America as spending outweighs income

Cardweb.com, a credit-card industry Web site, says average debt per card-holding household more than doubled from $4,300 in 1994 to $9,300 in 2004. Most families' debt is much lower, the Federal Reserve says. But that high average suggests the families that do get into trouble are carrying huge debt

But some homeowners can't escape credit-card debt be-cause they have turned it into mortgage debt. They took out home equity loans to pay off creditors. That's happened a lot. Nearly one-third of equity loans in 2004 went to pay off debt, according to the Federal Reserve.

Some buyers could not afford a big down payment in the roaring housing market of recent years. The mortgage industry created no-equity loans. The buyer keeps payments low by paying only interest until he sells the house at a profit. Some buyers took loans with “negative equity.” They borrowed more than the house was worth.

Lenders also provided adjustable-rate mortgages, which start with a low interest rate that changes according to market trends. Seventeen percent of adjustable mortgages sold in 2004 and 2005 offered a starter rate of 2 percent or less.

Higher interest rates will affect millions of adjustable-rate mortgages. Rates are expected to increase on a quarter of all outstanding U.S. mortgages either this year or next, according to Economy.com.

Cagan's report estimated that one in eight adjustable mortgages sold in the past two years could default. About 5 million households nationwide and $300 billion in loans could be affected.

Shilling studied 44 boom-and-bust housing cycles occurring in 18 countries since 1970. Inflation-adjusted prices rose an average 28 percent in the five years before a housing bubble burst. Home prices fell 22 percent in the five years afterward.

Boss said one difference from past generations is that people now accept large debt more casually, and some even expect to live in debt. For her book, Boss chronicled a well-to-do suburban family who bought a big house in a gated community, joined a country club and spent on lavish vacations. Their lifestyle was built on debt. They had $100,000 in credit card charges. They paid the debt down to $40,000, then ran their cards back up to $100,000 before heading into bankruptcy.

Living in a bubble

2006-07-11T00:15:00.000-07:00

Here is an interesting article about 'the good old days' of Japan's bubble economy - makes a little real estate speculation seem tame by comparison.

Japan's young workers dream about living in a bubble

"Japan's young, used to hard times following a decade-and-a-half in the economic doldrums, have developed a yearning for the heady times of the "bubble" era of the late '80s and early '90s when it seemed the Japanese juggernaut was poised to take over the world"

"Every one of my older co-workers says that it was a time when you didn't have to work hard, went out drinking every night and still made heaps of money"

"There wasn't a company around that didn't have a shortage of workers. Companies had to fight tooth and nail to get their hands on even a single new employee. Just going to a company's recruiting explanation meeting would get you treated to a night out at an expensive ryotei restaurant and the company would still pay you 50,000 yen 'transport costs' just for turning up for an interview. It was a dream time to be looking for a job," a man identified only as Mr. N who works at a major contracting company tells R25. "Companies would continue the handouts once they'd promised jobs, too. We got to go on a weeklong trip where we were plied with drinks every night at girlie bars. We drank every night. A friend of mine got a job at a company that took him on a weeklong golf trip to Guam."

Collapse of bubble inevitable, could cause recession

2006-07-03T20:05:00.000-07:00

Various factors are consipring to burst the real estate bubble, most notably, the Fed raising interest rates. This piece from the Center for Economic and Policy Research highlights concerns with the current state of the US economy and the potential for recession caused by a collapse in house prices.

Fed Treading on Thin Ice as U.S. Housing Bubble Weakens

"Since the mid-90s the country has accumulated an enormous housing bubble, as house prices nationally have risen nearly 70 percent after adjusting for inflation. In some bubble areas, mostly the east and west coast, the real increase has been over 100 percent. Since house prices have historically increased at about the same rate as inflation, this means that more than $5 trillion of excess paper wealth – similar to the stock market bubble of the late 1990s – has been created. Just as bursting of the stock market bubble caused a recession in 2001, the collapse of the housing bubble will almost certainly do so."

"Rising mortgage interest rates will finish off the housing bubble if oversupply and a psychological reversal of the speculative mania don’t do it first. This party is about over, most unfortunately for the majority of Americans who never got to join in the festivities."

Instant Gratification

2006-06-26T21:00:00.000-07:00

Here's a great rant on the shortsightedness of the average investor and the poison that is the instant gratification mindset.

Danger! 'Mad Money' and the 'Power of Now'
Need for 'instant gratification' is undermining American investors

"It's instant gratification in both cases. And yes, I'm talking about Jim Cramer and Eckhart Tolle. Total opposites, yin and yang. But they do have something in common."

"Both are helping people ignore, dismiss and deny reality."

"Step back: If you look past the myopic narcissism inherent in what those two preach you'll see America's economy and stock markets at a crucial turning point. Reminders of 2000 are exploding all around us, examples like:"

"Yale economist Robert Shiller, author of "Irrational Exuberance," says America's housing bubble is the worst since 1890, a totally psychological bubble unlike the post-WWII boom which was based on strong fundamentals and demographics."

"And in his latest Forbes column, economist Gary Shilling says the coming "house-price collapse will be far worse than the 2000-02 bear market on Wall Street and will bring a serious global recession.""

"And yet we're psychologically oblivious of the coming storm. From Washington and Wall Street to America's 95 million investors, our collective psyche seems clueless and unprepared for the coming bear."

"Unfortunately, this focus on the "NOW" is an insidious long-term trend undermining America, our economy, our markets and our future as a world power."

"This trend is headed downhill. During the same 25-year period America has fallen from a nation saving 10% annually to taking on massive foreign debt to feed our obsessive short-term consumption and make up for our zero-saving rate. In short, America's obsessive need for instant gratification is weakening our ability to think long-term, beyond instant pleasures. And that's weakening America by weakening individual Americans."

Biggest bubble ever

2006-06-21T18:59:00.000-07:00

Here is yet another confirmation of what most of us already knew (and others refuse to admit) - the housing bubble is the biggest in history. It is not supported by fundamentals and is predominately driven by speculation and psychology.

Housing boom is biggest on record
Economist: Increase in U.S. prices possibly psychological

"The recent housing boom is the biggest the United States has ever recorded, but its underlying reasons may have been psychological, economist Robert J. Shiller said on Friday. New data also suggest the market might be at the end of a cycle, he added."

"The only time since record-keeping began in 1890 that compares to the recent residential real-estate market is just after World War II, the Yale University professor said during a presentation on U.S. home prices, held at Standard & Poor's in New York and broadcast to journalists on the Web."

"I don't see why home prices should be shooting up that strongly," Shiller said, adding that speculation may have played a role. "It's a sign of concern."

The real estate bubble is bursting

2006-06-15T20:14:00.000-07:00

REAL ESTATE BUBBLE IS BURSTING
3 of the top 9 reasons that the real estate bubble is bursting

Whilst this article appears to be a plug for the authors e-book, it does present compelling arguments for the bursting of the real estate bubble and a good analysis of bubble markets.

"The first reason that the real estate bubble is bursting is rising interest rates. Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. These low interest rates allowed people to buy homes that were more expensive then what they could normally afford but at the same monthly cost, essentially creating "free money". However, the time of low interest rates has ended as interest rates have been rising and will continue to rise further."

"The second reason that the real estate bubble is bursting is that new homebuyers are no longer able to buy homes due to high prices and higher interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers is growing everything is fine."

"This double-edged sword of high real estate prices and higher interest rates has priced many new buyers out of the market, and now we are starting to feel the effects on the overall real estate market. Sales are slowing and inventories of homes available for sale are rising quickly."

"The third reason that the real estate bubble is bursting is that the psychology of the real estate market has changed."

"The psychology of any bubble market, whether we are talking about the stock market or the real estate market is known as 'herd mentality', where everyone follows the herd. This herd mentality is at the heart of any bubble and it has happened numerous times in the past including during the US stock market bubble of the late 1990's, the Japanese real estate bubble of the 1980's, and even as far back as the US railroad bubble of the 1870's. The herd mentality had completely taken over the real estate market until recently."

"The bubble continues to rise as long as there is a "greater fool" to buy at a higher price. As there are less and less "greater fools" available or willing to buy homes, the mania disappears. When the hysteria passes, the excessive inventory that was built during the boom time causes prices to plummet."

"With the changing in mindset related to the real estate market, investors and speculators are getting scared that they will be left holding real estate that will lose money. As a result, not only are they buying less real estate, but they are simultaneously selling their investment properties as well. This is producing huge numbers of homes available for sale on the market at the same time that record new home construction floods the market. These two increasing supply forces, the increasing supply of existing homes for sale coupled with the increasing supply of new homes for sale will further exacerbate the problem and drive all real estate values down."

How to Profit From a Cooling Real Estate Market

2006-06-13T20:07:00.000-07:00

Some great points made in this piece by Robert Kiyosaki:

How to Profit From a Cooling Real Estate Market

"All over the U.S. there are stories of a rise in real estate foreclosures."

"Also, a glut of new property supply, especially condominiums, is coming on line."

"As interest rates rise and the number of eager new buyers begins to diminish, adding supply to an already bad real estate market for sellers may mean a very good market for buyers and for property investors."

"The people who are in the most trouble are flippers"

"In the coming months, I predict we'll see an increase in people dumping real estate they can't afford. They'll be forced to sell because they'll be eaten alive by a phenomenon known as negative cash flow."

"Some people say we're now entering a bad real estate market. I disagree. I think we're entering a great market. A bad one is when amateur investors become real estate experts and they bid up prices. They make housing expensive for homeowners, often adding little to no value to the property."

"Yet it's the amateurs who come late to the party -- and who eventually donate their money back to the professionals."

Less liquidity to starve housing bubble

2006-06-07T23:24:00.000-07:00

Central Banks' Tight Fit

"Rather than letting the irresponsible fiscal policies of governments from Beijing to Washington damage national economies, the central banks decided to use their control of the money supply to postpone the consequences of fiscal folly."

"Now the bill is coming due, and although the central banks still think they can put off paying the bill for past behavior, investors are less and less certain. Some days, in fact, they get positively panicky."

"The Fed decided to fight the effects of the stock market bubble burst of 2000 by taking interest rates down to 1%. That created a real estate boom, which drove up housing prices, making us feel better in the U.S. about all the money we'd lost in the stock market crash."

"Interest rates of 1% also created a mortgage refinancing and home-equity lending boom as homeowners rushed to take some of that new equity out of their houses and spend it on a second home, a new car, a vacation, whatever. The resulting surge in consumer buying prevented the stock market crash from sending the general economy into the tank and gradually revived economic growth."

"At some point, the Fed knew well, all that extra cash has to come back out of the economy."
"Taking excess liquidity out of an economy is never simple. And circumstances have combined to make it especially tricky for the Federal Reserve right now."

The tide has well and truly turned. The cycle of excess liquidity and easy money is coming to an end, this means that most assets will be revalued as money becomes more expensive and harder to get hold of.

Liquidity was the single most important factor supporting house prices in recent years - low interest rates, creative financing and lax lending standards have allowed just about anything with a pulse to finance real estate purchases.

But this is all changing. Central banks around the world have been progressively raising interest rates and clearly signalling that this trend will continue. The housing bubble is doomed.

Global House Prices
http://globalhouseprices.blogspot.com/

X and Y - The Angry Generations

2006-06-01T18:23:00.000-07:00

Why America's 20- and 30-somethings can't get ahead

"America is touted as the land of the limitless possibilities, but for one group of people, often deemed Generation X and Y, it seems that America's young adults are a generation whose income in being swallowed up in paying off debt."

"Today, 20-somethings are graduating college with five- or six-figure student loan bills, credit card bills with balances of more than $10,000 and are facing potential entry-level jobs often paying wages too low for the indebted, or even necessary unpaid internships."

"But the situation gets trickier: The 21st century has ushered in skyrocketing housing prices, stagnant income levels and increasing payments on student loans. Also, Generation X and Y seem to have a lack of financial knowledge in relation to personal finance issues and savings tips due to the lack of education on the topic during their youth. For young people, debt is the norm and they are of the mindset, "I'll deal with it later"."

"While the median home price has risen by 26 percent across the nation within the last five years, young adults' incomes have gone up less than 10 percent. In an expensive housing market like San Diego, often times buying a home isn't even an option. Those that are able to buy a home are usually "house poor" and cannot afford to pay off their staggering debt and mounting pile of bills."

This article touches on some sensitive issues and identifies why todays young adults are disadvantaged relative to previous generations. Massive debt levels are reluctantly being accepted as an inevitable part of life by Gen X and Y.

The housing bubble has also exacerbated the situation by making a major life-goal unreachable, especially when combined with the burden of existing large debts by this demographic.

Are we crafting an entire generation (or two) of indebted serfs? Will this result in a society that is angry and disenfranchised due to circumstances beyond their control?

Who/what is to blame? Clever marketers? The instant gratification mindset? Irresponsible Central Bankers? Predatory lending practices? Greedy Baby Boomers? You decide.

Global House Prices
http://globalhouseprices.blogspot.com/

Interview with a Housing Bear

2006-05-24T22:27:00.000-07:00

Here is an interesting BusinessWeek interview with John Talbott:

The Growl of a Housing Bear
Author and real estate maven John Talbott says the bubble has stretched about as far as it possibly can

"We are in for a fairly rough ride in the housing market for the next five to seven years."

"What do you think is happening to the housing market right now?
The smart money is getting out. The inventory of homes for sale is increasing dramatically across the country. That's typically what happens before you see price declines...."

"How much do you think prices will decline, and how long do you think it will take?
I think that it's a worldwide phenomenon, and in the 25 cities that have had price run-ups, which make up 40% of the market, we'll see corrections of 40% to 50% in real terms over the next six years. It has already started, and you'll see it happening in more cities in the May-June time frame."

"What happens to the U.S. economy if the downturn you predict really happens?
I think it will be a disaster. Not only will people in fields like banking be unemployed but consumers themselves will spend less. They're spending a lot now because they think their house is worth a million. If they find out it's only worth $400,000, they'll spend less. As foreclosures increase, the banks will get hurt and pull back on lending. That can drive the country into a recession."

Fed raises rates yet again

2006-05-10T16:55:00.000-07:00

In its 16th straight increase, the Federal Reserve raised interest rates to 5 percent on Wednesday. It also left the door open to further rate rises to ensure inflation is kept under control. Some economists are predicting rates to reach 5.5 percent by the end of the year.

Fed raises rates, opens door to possible pause

"Summing up the Fed statement, he said: "Translation: We were hoping to pause in June but now we're not so sure. It will depend on the economic news between now and then." "

ARMs are one big ugly mess

2006-05-09T20:13:00.000-07:00

ARMs are like a ticking timebomb...

Mortgage Mess

"With interest rates pushing up monthly bills and housing prices cooling, some worried homeowners are barely hanging on"

"For homeowners struggling to handle those payments while shouldering rising costs for health care, gas and education (not to mention higher rates on their credit-card debt), trouble is almost inevitable."

"Home foreclosures in the first quarter of 2006 were up 72% over a year earlier, according to a study by RealtyTrak Inc. of Irvine, Calif."

"But there's no substitute for common sense: never take more mortgage than you can afford."

European Central Bank signals rate rise

2006-05-04T20:07:00.000-07:00

The days of easy credit appear to be well and truly behind us, with more and more Central Banks continuing to steadily increase interest rates. The ECB look like they will continue this trend with a clear signal that they may act next month.

ECB's Trichet Says Bank to Be `Vigilant', Signals Rate Increase

"European Central Bank President Jean- Claude Trichet said the bank needs to show 'vigilance' on inflation, preparing the ground for an interest-rate increase as soon as next month."

"The governing council will exercise strong vigilance in order to ensure that risks to price stability over the medium term don't materialize,'' said Trichet at a press conference in Frankfurt today after the ECB left its benchmark lending rate at 2.5 percent."

Australian Reserve Bank raises rates

2006-05-02T19:52:00.000-07:00

The Reserve Bank of Australia raised official interest rates today to 5.75 per cent from 5.50 per cent, taking rates to their highest level in five years. This makes interest rates in Australia amongst the highest in the developed world.

Interest rate blow for homeowners

"But in other parts of the country, particularly in New South Wales, where the consumer has been what I would call fragile and the housing market has started to show a little bit of a recovery, I think will have quite a negative impact."

"Particularly with the threat of another rate hike hanging over the consumer now."

With inflation at the top of the Central Banks comfort zone, growing mortgage and consumer debt and continuing real estate speculation, the RBA had little choice but to raise rates to keep inflationary pressures under control.

The question is how will this affect consumers? Higher rates coupled with higher oil prices must be placing additional stresses on an already overleveraged consumer.

http://globalhouseprices.blogspot.com/

Housing Bubble Facts and Figures

2006-04-30T09:53:00.000-07:00

Housing Bubble Facts and Figures:
http://globalhouseprices.blogspot.com/

What is a housing bubble?
A housing or real estate bubble occurs when (mal)investment in housing causes prices to increase rapidly to a level that is unsustainable. Bubbles are usually characterised by prices that rise so high they are no longer a reflection of true underlying asset value, rather a reflection of expected gains based on recent history. The process is concluded with a correction which results in prices eventually falling to reflect their underlying value or a reversion to their mean.

Is there a currently a housing bubble?
Consider this chart of U.S. home prices, population, building costs, and bond yields (Irrational Exuberance, Robert Shiller). Shiller shows that inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004. In recent years, however, house prices have accelerated upwards away from the other elements.

What causes a housing bubble?
In the case of the current housing bubble, it is driven by a number of factors including:
-Low interest rates along with loose lending standards and creative financing - these factors have conspired to embolden an entire generation of home-buyers who would have otherwise not qualified or even considered buying homes.
-Herd mentality and speculative investment - as the bubble gathers steam and draws in more participants, a self-reinforcing cycle of speculation and investment, coupled with the laws of supply and demand, precipitates more price rises, which in turn encourages further herd investment and speculation.
-Expectation of further gains - in bubble markets, prices become detached from reality and soon become irrelevant, the expectation of further price rises is all that matters when participants become caught up in the mania.
-Enthusiasm for home ownership and investment in property as an asset class - many people, particularly those that are less sophisticated and knowledgeable financially, prefer residential real estate for reasons such as it's tangibility, familiarity and simplicity. There is also a common misconception that 'house prices never go down'.

How do you quantify housing affordability and values?
A method of quantifying housing value is the Price/Earnings (P/E) ratio as commonly used in valuing shares. A housing P/E ratio is calculated by dividing the house price by the net income or rent less expenses.
Using this method would yield negative results with the overwhelming majority of properties in the current market due to the fact that rents generally do not exceed expenses or carrying costs.

Traditional methods of valuing housing affordability include the price to income ratio - this is the ratio of the median house price to the median income for a particular area.

Ratio of house prices relative to average wages in Sydney, Australia. (Datastream, AMP Capital Investors)

The following table lists the 20 most unaffordable housing markets in the world. The median multiple figure is derived from median house prices vs median incomes in each particular city. For example in Los Angeles it takes 11.2 times the median annual income to purchase a house valued at the LA median price.

From the 2nd Annual Demographia International Housing Affordability Survey (2006)

What happens when a bubble bursts?
History is the best guide in this case - a textbook example is the Japanese housing bubble which occured in the 1980s, we can study the period following the bursting of this bubble to get an idea of what might happen again.

The following chart shows Japanese house prices (1980–2005) inflation-adjusted, compared to house prices in the United States, Britain, and Australia (1995–2005).

At the peak of the bubble the Imperial Palace in Tokyo was worth more than the entire state of California.

The time after the bubble's collapse is known as the 'lost decade'.

http://globalhouseprices.blogspot.com/

Time is running out on the Investment Clock for real estate

2006-04-26T16:41:00.000-07:00

The Investment Clock (or Economic Clock) was first published in the Evening Standard in London in 1937. It is based on the well-known phenomenon that major business cycles occur roughly every decade and it broadly depicts the movement of markets within this longer-term cycle. It assists with timing major market moves and shows the cyclical relationship between the share, property and fixed interest markets and the order in which they occur.

We can see from the investment clock that the progression of the economic cycle is represented by the passage of 'time' from 12 o'clock (which represents the top of the boom) down to 6 o'clock (which represents the depth of the recession) and back up to midnight again.

The investment clock shows that real estate is always the last asset class to move. When the cycle enters credit-squeeze mode, real estate is the hardest investment to sell and hence the most dangerous.

By my reckoning, we are currently at about 1 o'clock on the investment clock. This would mean that the top of the boom has already passed and we are heading into tougher times. We are already beginning to see evidence of rising inflation, higher interest rates and tighter money, however these will all become more evident as we progress through this cycle.

So how can we relate the investment clock to the current real estate market? Tell us what you think, what 'time' is it at the present moment and what are the implications for housing?

Global House Prices
http://globalhouseprices.blogspot.com/

Bubble to burst soon?

2006-04-23T02:19:00.000-07:00

Speculation that the Fed has finished raising interest rates seems to be a little premature according to some.

Why Housing Looks Rickety
Real estate bulls shouldn't count on the Fed abandoning further hikes. Here's why the squeeze could well grow worse

"The Fed may not stop after just one more rate hike in May, despite the hints in the March meeting minutes. And even if the Federal Reserve does pause in raising the short-term rates that it controls, long-term rates may well keep rising anyway."

"Stepping back, it's hard to see why interest rates would stop rising now. Not only have oil prices soared, but gold is booming, the world economy is strong, unemployment is low, corporate profits are rising at a healthy clip, and, most important of all, inflation over the past year has been above the Federal Reserve's target range."

I agree with the opinion that interest rates will continue to rise, at the very least long term rates must rise to complete the normalization process of the yield curve. We must also consider oil prices as well as keep an eye on the bond markets.

Oil prices over $75 per barrel and the yield on ten year notes over 5% have to start causing pain soon...

These soft landing theories sound like wishful thinking from the vested interests associated with the real estate machine. These cheerleaders are about to get a dose of reality very soon.

Global House Prices http://globalhouseprices.blogspot.com/

7 in 10 Consumers Expect Housing Bubble to Burst

2006-04-19T22:28:00.000-07:00

Results from a recent Gallup poll:
Seven in 10 Consumers Expect Housing Bubble to Burst
Still, only about 4 in 10 expect housing prices in their areas to remain the same or decline

At first glance these two statements seem contradictory, but they simply reflects human nature. People like to think that this kind of stuff always happens to someone else.

"Increasing mortgage rates and a growing inventory of unsold homes likely has many U.S. consumers wondering about whether the sharp increase in housing prices over recent years -- the "housing bubble" -- will burst at some point during the coming year. Seventy-one percent of consumers believe it is very likely (24%) or somewhat likely (47%) that housing prices will collapse in housing markets across the nation as a whole within the next year, according to the April Experian/Gallup Personal Credit Index survey."

"Consumers are far less pessimistic when it comes to their local housing markets. Only 32% of consumers think it is very likely (7%) or somewhat likely (25%) that their local areas will experience a housing bubble in the next year. For that matter, 28% of consumers say such an eventuality is not at all likely."

So what can we deduce from these figures? Are people in a state of denial? It seems that they acknowlege the existence of the bubble but think (hope?) that it will not affect them or their neighborhood. Time will tell.

http://globalhouseprices.blogspot.com/

Australian housing market sets an example

2006-04-19T03:15:00.000-07:00

Australian housing market sets an example

"Australia has been held up as an example of how to pull off a "soft landing" in the housing market, and as a guide for America as its overheated market teeters on the edge."

"In its annual review of global financial stability, released last night in London, the International Monetary Fund expressed concern about instability in the US housing market and identified Australia and Britain as exemplars of the soft landing."

"These markets had successfully negotiated a slowing in price growth, from 20 per cent a year to zero per cent in a short period of two years, the report said."

The author makes a rather perilous assumption - that the process of the so-called soft landing has run it's course and is now finished. The last downturn in the real estate cycle lasted between 5 and 7 years.
Is it not a little premature to declare a 2 year stagnation in prices a soft landing? Did it not occur to them that perhaps the correction has only just begun to get underway and has quite a way to go based on historical precedent?

These conclusions reek of naivete, even bordering on arrogance, the same as that displayed by meddling central bankers and economic policymakers alike who think that they can influence the outcomes of massive global markets.

http://globalhouseprices.blogspot.com/

The European Property Bust

2006-04-17T18:46:00.000-07:00

Some interesting points in this Newsweek piece: The European Property Bust

The challenges associated with the demographics of an ageing population are not unique to Europe. Retiring baby boomers will have a profound effect housing markets, they have the potential to alter consumption rates and demand, not to mention change the labor force all whilst placing a heavy burden on those left to pick up the slack.

Just imagine the prospects for housing market when millions of boomers begin unloading their real estate holdings to sustain their life(styles) through retirement... health care can be very expensive.

"Germany is a sobering harbinger for Europe; with the labor force peaking, vacancy rates are high, and demand for office space is slack."

"No one worries about Europe's dismal demographic prospects, which will sharply reduce real-estate demand."

"In many ways, the prospects for real-estate investment in Continental Europe vs. the United States are similar to the outlook in Pittsburgh vs. Los Angeles or Detroit vs. Orlando. There's no question about it: demographic expansion fuels appreciation. Without growth, caution is in order."

What happens next?

2006-04-16T00:01:00.000-07:00

Houses: What happens next?

This report on the real estate market in Ireland begins by posing the following question:

"Is the property market heading for a soft landing? The forecasts are conflicting."

"Just look at the headlines over the past month, and the lack of consensus is clear."
...
"This estimate was seriously out of tune with that of Davy Stockbrokers, which recently warned that the cost of servicing a mortgage on a typical starter home in Dublin now exceeded the potential rental yield on the same property."

You call that a housing bubble? Rental yields on properties in many other parts of the world don't even come close to servicing their equivalent mortgages!

The author then attempts to present a balanced argument but uses some telling language...

"There is a whole industry devoted to talking up property prices in Ireland including estate agents, financial institutions and newspapers that depend on the first two groups for lucrative advertising."

"Others, in contrast, have been talking down the market since the late 1990s. Irish property buyers have received umpteen warnings from independent observers such as the Central Bank, the Paris think-tank Organisation for Economic Cooperation and Development (OECD) and the Economist magazine, all of which believe the residential property market is overvalued."

"The Economist predicted a housing crash in Ireland with house prices falling by as much as 20 per cent, but the projected drop in prices has failed to materialise."

"Pessimists caution about the effect of the credit explosion. The total value of private debt now stands €268 billion, with households accounting for nearly half of that. This means there is an average of €120,000 owed by every household in the country - most of it in mortgages."

It's interesting to note that the author talks about vested interests and "a whole industry devoted to talking up property prices", yet refers to housing market forecasts in terms of positive and negative and uses the term "pessimists" when referring to cautionary advice. One has to wonder why this type of subjective language is used so consistently in reports like this.. draw your own conclusions.

Bond yields top 5%

2006-04-14T00:09:00.000-07:00

Is the yield curve finally beginning to normalize?
Yields on ten year notes have risen above 5 per cent for the first time in four years. Speculation that the Fed has not finished raising rates will ensure that yields continue to rise making borrowing costs and home ownership more expensive.

Bond market sell-off fuels fears of US interest rate rise

"In developments that will fuel anxieties over an extended bond market sell-off that would drive up US market interest rates and threaten to puncture America’s faltering housing boom, prices for benchmark 10-year US Treasury notes tumbled after the latest buoyant economic news."

U.S. 10-Year Note's Yield Rises to 5%, Highest Since June 2002

"U.S. 10-year Treasury note yields rose to 5 percent for the first time since June 2002, a harbinger of higher borrowing costs for everything from home loans to corporate bonds."

The Housing Economy

2006-04-09T20:36:00.000-07:00

Ever wondered why the terms "higher interest rates" evoke so much terror in average homeowners and policymakers alike? Why our super low interest rates cannot be raised to traditionally average levels without affecting house prices and causing wider economic damage? Why central banks around the globe are trying to engineer so-called soft landings by reversing the tidal wave of easy credit that has fuelled these bubbles?

Today's economy revolves around housing

"By almost any measure, the U.S. economy is built on housing more than in the past. In 2005, investment in housing constituted a higher proportion of the goods and services the nation produced than it has since 1950, when the nation was experiencing a massive postwar housing boom. The proportion of jobs in real-estate-related fields is the highest it has been since at least 1970."

"Some economists argue that housing prices have so outstripped those supported by economic fundamentals, such as income levels, that they are due for a painful and rapid correction that could cause a recession. But most mainstream economists believe the unwinding of the housing market's outsize role in the economy will be gradual and come just as other industries take over as economic drivers."

THIS WEEKEND CAN MAKE YOU A MILLIONAIRE

2006-04-09T20:00:00.000-07:00

Hoards of wannabes eager to get a piece of the action - yet another example of the masses caught up in a speculative mania. Could this type of expo generate so much interest in a normal market? Imagine the attendance figures if the expo was held in the mid-late '90s when house prices were appreciating in line with inflation figures.

The Donald, 'Rich Dad' and you? Wannabe real-estate moguls pay to hear how to follow in footsteps

"Tens of thousands of hopeful real-estate moguls entered the Convention Center on Saturday with money on their minds."

"They were drawn to the two-day Real Estate Wealth Expo by iconic investors like Rob "Rich Dad" Kiyosaki, Donald Trump and Magic Johnson."

"Many wanted to know how to make their first million, and the program covers assured them, in block red letters, "THIS WEEKEND CAN MAKE YOU A MILLIONAIRE!" "

""You do not have to have money. You don't have to have good credit. You don't have to have a job. All you need is the knowledge to put a deal together," Reggie Brooks told students in a session he taught on investing in abandoned properties."

Where Will Housing Prices Go?

2006-04-09T19:38:00.000-07:00

Some good perspective on human behavior, psychology and herd mentality, how it affects house prices and how not to get caught up in the mania:

Where Will Housing Prices Go? Buyer (And Seller) Beware

"So much of what drives the housing market is human interpersonal dynamics," says Yale University economist Robert J. Shiller."

"A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place. The expectation of rising prices became a self-fulfilling prophecy as office mates and in-laws tried to leapfrog each other. The prevailing mindset: "You see people who aren't particularly talented, who aren't hard-working, who buy a house with nothing down, and they've been getting rich doing it. If they're getting richer, then you're falling behind," says Robert H. Frank, a Cornell University economist and author of Luxury Fever. Another attraction of herd behavior is safety in numbers. Millions of buyers can't all be wrong, can they?"

"A foible that helps account for America's obsession with real estate is what you might call the tangibility fallacy. It's the all-too-human tendency to regard tangible things like houses as more stable and trustworthy than intangible ones like stocks and bonds. It's true that a house provides more comfort than a book entry in a stockbroking account. But that doesn't mean it's a better investment."

Should the Fed burst the bubble?

2006-04-06T18:09:00.000-07:00

From the Center for Economic and Policy Research - The Menace of an Unchecked Housing Bubble

Examines the real estate bubble and concludes that there are no fundamental reasons for it. Proposes that intentionally bursting the bubble sooner will be better than allowing it to grow even larger when the consequences of an inevitable burst will be more severe.

"An unprecedented run-up in the stock market propelled the U.S. economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery. Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, will likely face serious hardships."

"The best evidence that fundamentals are not the cause of the run-up in housing prices is the fact that there has been no comparable increase in rental prices."

"Breaking The Bubble Sooner Is Better Than Later"

"The economy, and tens of millions of homeowners, will certainly be better off if the fall occurs sooner rather than later. The longer the bubble persists, the more overbuilding takes place, and the more resources will eventually have to be diverted from homebuilding to some other sector of the economy. Similarly, the amount of bubble-induced debt, and subsequent defaults, will also grow larger as long as the bubble persists. The recession following a housing collapse will likely be more severe the longer the bubble persists."

six months to housing hell

2006-04-06T18:01:00.000-07:00

This article Existential equity extraction and six months to housing hell estimates that we are about 6 months away from a housing crash, it lists "some of the reasons why many property owners are about to descend into “Housing Hell” " ie. triggers that will likely burst the bubble.

"So, welcome to Housing Hell. Now that buyers are willing to wait one or more years before buying, there are more sellers than buyers. Interest rates, in the meantime, continue going up. Let’s also not forget the Existential Equity Extraction. With $700 billion of sub-prime mortgages written (of which 10 percent could default), $2 Trillion of ARMs set to reset, and mortgage delinquencies near 5 percent, equity to extract is vanishing."

"Over the past 30 years, the United States has seen a Housing Hell scenario a number of times. In 1980-82, property values declined significantly each year. In ‘90, prices fell painfully again for five straight years in a row. There was a slight recovery in ’95, but prices fell again in ’96. When you look back, you will realize that the housing markets that suffered the most (particularly the Northeast and California), took almost 10 years to recover from the downturn. You may also remember when homeowners lost money every month and were forced to rent out their properties at a loss because they couldn’t sell them. Perhaps you know one of these homeowners."

"Based on the logic of history, those who rent for a few years, rather than buy, will be rewarded the most (even though rents should increase with general inflation). Yes, the day will come again when it will, indeed, cost less to buy than it does to rent. When that day comes, it will signify the return, once again, of Housing Heaven."

Kiyosaki on the Housing Bubble

2006-04-04T17:55:00.000-07:00

A couple of articles from Robert Kiyosaki - for someone who makes a living spruiking real estate, it's refreshing to see such blunt honesty.

Booms, Busts, and Where Opportunities Occur

" "Is there a real estate bubble?" That's the question I'm asked repeatedly. When I reply honestly -- "I hope so" -- my questioners' fear occasionally turns into anger."

Kiyosaki proceeds to describe seven stages of a financial bubble as was written in 1982 by Nobel Laureate Hyman Minsky.

"So instead of asking, "Is it a bubble?" it's more financially intelligent to ask, "What stage of the bubble are we in?" Then, decide if you should be fearful, greedy, or hibernating."

Smart Investing Amidst Real Estate Mania

Here Kiyosaki describes the inverse logic amateur investors use when buying real estate.

"Personally, I would say, "The dumbest reason to buy anything is because the price is going up." Yet that's what people do when they invest. They generally don't buy high-priced things when they shop."

"For example, if Safeway had a sale -- 25% off everything in the store -- the supermarket would be swamped. Yet, when the stock market or real estate market has big discounts (often called a crash or a burst bubble), that same shopper runs away from an asset sale. Instead, they wait until prices are high and other fools are bidding them up further to finally buy."

"We all know a real estate crash is coming. The problem is we don't know when."

"A final word from Warren Buffett: "It's only when the tide goes out that you learn who's been swimming naked." In my opinion, there are many naked swimmers, especially in the real estate market."

http://globalhouseprices.blogspot.com/

Housing Bubble Trouble

2006-04-03T17:26:00.000-07:00

Some very compelling arguments in this article on Housing Bubble Trouble:

"Unfortunately, the weight of the evidence strongly suggests a bubble. The price of the median home is up an inflation-adjusted 50 percent during the last five years, an unprecedented national increase. It is true, as Alan Greenspan and others have observed, that real estate is regional, and much of the country has not experienced significant price gains. However, prices are overextended in enough areas that a real estate correction would have national fallout. The mortgage insurance company PMI estimates that regions accounting for more than 40 percent of the nation's housing stock are overvalued by more than 15 percent. Other estimates of overvaluation are much higher."

"Consider the price-to-income ratio, an obvious measure of affordability. This ratio has reached an unprecedented level in the bubble markets. While this ratio hovered around its average of 4-to-1 for the past 30 years, it has zoomed to nearly 8-to-1. The current figure is 3.6 standard deviations from its average level, which, if the data have a normal bell-shaped distribution, means the odds of the price-to-income ratio reaching this level would be less than 1 in 300. In other words, it is off the charts."

"An even better indicator of how divorced home prices are from their underlying economic value is the price-to-rent ratio (see chart, top of next column). In the Washington, D.C., metro area, which had remained relatively constant for several decades, this ratio has soared since 2000. Yet home prices and rents should remain closely linked. Why would one buy a house, condo, or vacation home if it was significantly cheaper to rent it? Or why would an investor buy a property that rents for far less than his mortgage and other costs? Rent is a reality check because it reflects the actual earnings power of the asset."

"Not only are house prices at extreme levels by traditional measures, but the manner in which home purchases have been financed in recent years is also disconcerting. Consider the growth of interest-only and "pay-option" adjustable rate mortgages — loans that initially don't require borrowers to repay principal. With the latter, also known as an option-ARM, the outstanding balance owed can actually get bigger every month. A few years ago, these loans barely existed. Last year they accounted for more than a third of new loans. What's worse, the vast majority of these loans were extended based on "stated income," which means the bank didn't verify the income of the borrower. Of course, consumers usually have to pay more if they don't provide tax and payroll records to the bank to verify their income. Common sense suggests many are fibbing about their income to qualify for a larger loan."

Keeping up with adjustable rates

2006-04-03T17:23:00.000-07:00

Some homeowners struggle to keep up with adjustable rates

"The number of borrowers in trouble will rise this year and peak in 2007 and 2008 as the largest number of mortgages reset to higher rates, according to First American Real Estate Solutions, a real estate data provider."

"Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won't be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan's research."

Will the fallout from adjustable rate mortgages resetting en masse become the trigger for a long overdue correction in house prices? It seems the most vulnerable of borrowers have resorted to taking out ARMs as their only means of affording an overpriced home without considering the consequences. Given this demographic is probably least capable of exercising some financial discipline, how will these already stretched borrowers continue servicing their debts when their repayments increase by several orders of magnitude?

http://globalhouseprices.blogspot.com/

Housing bubble quotes from the gurus

2006-04-02T22:14:00.000-07:00

So what are the experts saying, here are some (in)famous quotes:

Warren Buffett and Charles Munger warn of real estate bubble
"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."

Sir John Templeton: Keep a cautious watch
"Prices of houses in all nations for centuries have fluctuated above and below cost of reproduction. In the United States now, in most major cities, homes can be sold for far higher prices than reproduction costs. Several times in my lifetime, house prices have been far below reproduction costs, and such cycles are likely to continue."

Soros: Billionaire investor says Fed may raise rates too high
"Soros said he believed the U.S. housing bubble had reached its peak and was in the process of being deflated."

ALL BOOMS BUST! Words of Caution from Robert Kiyosaki
"Lately, I have been asked if we are in a real estate bubble. My answer is, "Duh!" In my opinion, this is the biggest real estate bubble I have ever lived through. Next, I am asked, "Will the bubble burst?" Again, my answer is, "Duh!" "

I wont even bother with Greenspan's mention of 'froth'!

http://globalhouseprices.blogspot.com/

Bubble madness

2006-03-30T18:58:00.000-08:00

If this is not evidence of the mania phase of the bubble, I'm not sure what is - a crackhouse that was bought for $235,000 last October is now for sale for $1M. Is there a greater fool willing to part with a lazy million?

Real Estate Bubble Reaches $1m Crackhouse Phase

"How can anyone look at evidence like this and NOT conclude that a full fledged real estate mania is currently in swing and approaching its peak? How can anyone expect to buy this place, put in $1m worth of renovation, and make a profit? How can someone sell this building at this price with anything approaching a straight face?"

Curbed Fixer-Upper #2: Well Cured in Billyburg

Would you shell out 1M smackers for this sad shack?

Global housing affordability

2006-03-30T18:48:00.000-08:00

Mixed news from around the world, but the bottom line is that housing is still facing an affordability crisis in the major cities. Speculation is still rampant in some areas, whilst others are calling a recovery in prices a 'soft landing'.

To housing speculators, LA is so yesterday
"Too much speculative activity from investors hoping to turn a quick profit is perhaps the biggest sign that a market -- whether real estate or stocks or any other asset -- is in an overpriced "bubble" condition, economists say. Too many speculators drive prices too high, and when they sense that the market is topping, they tend to sell all at once, sending prices into a free fall."

Canadian Houses more expensive than ever
"The price for a residential home in Canada rocketed to $268,215 in February, the highest national average level on record, the Canadian Real Estate Association said Thursday."

In the UK: Property soars in spring boom
..."the market's strength was unlikely to be maintained as would-be homebuyers become increasingly financially stretched."

In Australia: Marginal recovery in new home sales
"However, he said there were not any signs of a sustained recovery for new housing, with the Sydney market still very weak. "Sydney continues to buckle under excessive housing affordability constraints," he said."

http://globalhouseprices.blogspot.com/

Housing is still affordable in the right spots

2006-03-29T18:36:00.000-08:00

"Housing is still affordable in the right spots" proclaims this article - just as long as those spots aren't in or near a city, populated area, or on either coast or practically any other desirable area.

One has to wonder about the motivation and logic behind this article, the author does, however, go on to say:
"Overall, housing affordability nationwide is at its lowest point in 15 years, according to the NAR. In December, the percentage of households in California able to afford a median-priced home stood at 14 percent, according to the California Association of Realtors. New York City, Boston, Washington, D.C., and increasingly, South Florida, according to Yun, are also progressively unaffordable. The most affordable markets, by contrast, tend to be in the Midwest."

Then there's this pearl of wisdom:
"If you're living in one of the places on the most-expensive list, take heart. There are plenty of places in the United States where homes are still quite affordable."

Yeah, of course, take heart - for the miniscule fraction of the populace that is able to uproot their lives and move away from work/family/friends/etc. you can always move to a place where there are no jobs, infrastructure, services, attractions, sub-standard schools where you have a daily encounter with the friendly neighborhood muggers and crack dealers.

"Sometimes real estate is cheap for a reason. That's particularly true in cities with high crime rates, a shrinking job market or underperforming public schools."

http://globalhouseprices.blogspot.com/

Fed raises interest rates

2006-03-28T17:42:00.000-08:00

Fed Raises Rate to 4.75%, Holds Out Prospect of More Increases

The Federal Reserve has just increased the fed funds rate by a quarter-point to 4.75 percent, this is the 15th consecutive increase bringing key interest rate to a five year high.

With interest rates moving out of the 'accommodative' zone and potentially more raises to come, will this stem the tide of easy credit that has helped perpetuate the long boom in real estate prices? How will this latest increase affect the many millions who have relied on creative financing to purchase homes recently and does it spell the end for interest only and adjustable rate mortgages.

Also worth noting, in a departure from the practices of obfuscation under Greenspan, the Fed statement contained some clear, unambiguous language:
"The committee judges that some further policy firming may be needed"

http://globalhouseprices.blogspot.com/

Housing haves and have-nots

2006-03-28T17:06:00.000-08:00

Some quotes from one of my favourite articles from the Sydney Morning Herald:

"There has been so much talk of Sydney's deification of property that the phrase "real estate obsession" has become a cliche. Even the Lonely Planet travel guide describes Sydney as a "big joke" because of the "locals known for their real estate obsession, mobile phone toting and slavish devotion to the latest fads". "

"We sit at dinner parties and bars, glassy-eyed at the mania for renovations, the vehement debate about when and where to buy, slightly sickened by the materialism and greed, increasingly uneasy that we're being left behind."

"Relatives that once only hassled you to get married, push you to enter the housing market before you miss out. While it was Smug Marrieds that gave Bridget Jones grief, it's the Smug Mortgageds and their furniture porn that renting Sydneysiders have to worry about. All we hear is: you have to get into the market. It's the only way to make money. Get ahead. Save, save, save. If you reach 35 and are not propertied, you never will be. Rent money is dead money."

So who really benefits from the housing boom, is it a good thing? Depends on who you ask... whilst the haves are smiling, the have-nots are becoming more and more alienated and facing the prospect of being left out entirely.
If we view houses as we do any other commodity, we would be horrified if their cost kept increasing at such rates, for example how many people would be pleased to be paying 20% more for new cars every year?

http://globalhouseprices.blogspot.com/

Dangerous ARMs

2006-03-27T17:40:00.000-08:00

Housing Woes: Interest Rate Increases and Foreclosures

"Adjustable-Rate Mortgages and Rising Interest Rates Leave Many Americans Staring at Foreclosure"

The statistics are frightening, it seems the majority of new homeowners have probably taken on loans they can not afford - what happens when all these ARMs readjust?

In February, 51.9% of all California home buyers used an adjustable-rate mortgage, compared with 63.7% in January and 68.7% in December, according to DataQuick Information Services, a La Jolla-based real estate research firm.

Supply and demand

2006-03-26T21:14:00.000-08:00

Are the days of the real estate boom behind us?
Recent figures paint a clear picture of a housing market that is beginning to turn from boom to bust. The supply of homes for sale is up sharply hitting a record high, median prices declined for the fourth month in a row and sales volume is rapidly falling.

"Sales of new U.S. homes plunged 10.5 percent in February, the biggest drop in nearly nine years"

Sales down, prices down, supply up

"Sales in February drop more than expected, as median price falls and supply grows. Is the real estate bubble bursting?"

International Housing Affordability

2006-03-23T19:10:00.000-08:00

Demographia

"Housing affordability continues in crisis intensity in many markets. The most pervasive national crisis is in Australia, while the crisis is nearly as serious in Ireland, New Zealand and the UK. There are regional pockets of severe unaffordability in the United States and Canada, especially in California, the Northeast and the Northwest. Still, strong affordability continues in many markets, such as Atlanta, Dallas-Fort Worth, Houston, Winnipeg, Quebec, Edmonton, Indianapolis Cincinnati and Kansas City."

Demographia presents some amazing survey results by nation/region including findings that identify 11 seriously unaffordable and 42 severely unaffordable major urban property markets out of 100.

Interestingly, there are no affordable major urban property markets in the United Kingdom, Ireland, Australia and New Zealand.

New way to bet on real estate

2006-03-23T19:03:00.000-08:00

Housing futures to hedge aganst potential downturn.

"New financial instruments are being launched to let you wager on the direction of home prices in major cities."

Japan property 14 years on...

2006-03-23T18:07:00.000-08:00

Real estate prices in Japan are less than half their 1992 prices!

"That is still less than half its yen currency value of 1992"

History never repeats, but it rhymes... anybody care to guess where house prices will be in 2010, 2016?

Housing Bubble Facts and Figures

2006-03-20T17:50:00.000-08:00

This post has been updated and moved to:

http://globalhouseprices.blogspot.com/2006/04/housing-bubble-facts-and-figures.html

Biggest bubble in history

2006-02-07T17:56:00.000-08:00

Food for thought from the Economist:

"The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops."

http://globalhouseprices.blogspot.com/

Welcome!

2006-01-22T23:22:00.000-08:00

I intend to explore the prices (vs values) of houses and present arguments for and against current valuations.

I will examine experiences during previous cycles and try and relate them to current behaviour.
I hope for this to be an open and lively forum hearing arguments from all sides and encourage all to share their experiences.

http://globalhouseprices.blogspot.com/

First Post

2006-01-22T22:05:00.000-08:00

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Extraordinary Popular Delusions and the Madness of Crowds
by Charles Mackay