richardsfault
07-25-2004, 01:10 PM
We continue to borrow, borrow, borrow to make the good times last a
little longer. The latest way to keep the party going are borrowing
against equity in precariously over-valued homes.
I see trouble ahead:
http://www.nytimes.com/2004/07/25/business/yourmoney/25watch.html?adxnnl=1&adxnnlx=1090783024-lgBoZCOx3HfkQ2he93lE2Q
Housing Bust: It Won't Be Pretty
Published: July 25, 2004
ET the stock market slide. Let the bond market sink. As long as home
prices keep rocking, it's easy for Americans to feel fat and happy.
But what happens when the run-up in housing prices loses steam, or
worse? The implications are sobering, not only for homeowners but also
for the economy as a whole.
With the growth rate for home prices starting to slow, now may be the
time to ponder what a bear market in real estate may bring. A recent
study by two economists at Goldman Sachs provides some answers.
For now, prices are still climbing over all. The average home price in
the nation rose 7.71 percent in the 12 months ended in March.
But the first three months of this year showed far slower growth than
previous periods. Prices rose only 0.96 percent, according to the
Office of Federal Housing Enterprise Oversight, which keeps an eye on
Fannie Mae and Freddie Mac. The last time housing prices grew by less
than 1 percent in a quarter was in the spring of 1998.
More ominous, six states showed declines in housing prices in the
first quarter: Vermont, Alaska, North Dakota, South Dakota, Iowa and
Nebraska. No state had price declines in the previous quarter.
To be sure, home values are still hot in many spots. In the most
recent 12 months, prices have jumped by more than 15 percent in Hawaii
and Nevada, by 14 percent in California, 11 percent in New Jersey and
10 percent in New York.
In nominal terms, United States home prices are up 60 percent since
1995; in real terms, adjusted for inflation, they are up 37 percent.
Viewed historically, home prices are up twice as much now as they were
in the bullish real estate markets of both the mid-1970's and the
1980's.
As a percentage of disposable income, home prices are more than 18
percent above the long-term average. Prices exceeded that average by
only 4 percent in the 1970's and 8.5 percent in the 1980's boom.
Michael Buchanan, a senior global economist at Goldman Sachs, and
Themistoklis Fiotakis, a research assistant there, reckon that at
current interest rates, home prices are now overvalued by 10 percent,
on average. Because this figure spans the entire nation, the hottest
markets - California and New York - are obviously more overpriced.
The economists compute fair value in home prices by using a variety of
measures, including interest rates, population and demographic data,
and the overall health of the economy. If interest rates increased by
one percentage point, the economists said, home prices in the United
States would be overvalued by 15 percent.
None of this would be worrisome if homeowners had not turned the paper
profits in their properties into cold, spendable cash. But withdrawals
from home equities have recently totaled 6.3 percent of household
disposable income, according to the Goldman study. In the late 1980's,
equity withdrawals reached only 2.5 percent of disposable income.
Federal Reserve studies indicate that as much as half of the equity
withdrawals went into personal consumption and home improvements. As a
result, the Goldman economists estimate that equity cash-outs added
1.75 percent to the growth in the gross domestic product in 2003. That
is a significant increase from the 1.25 percent kick that equity
withdrawals added in 2002.
Consumption would slip 1 percent, Goldman estimated, if housing prices
fell by 10 percent, to the fair value level. But if prices decline to
well below that, as often happens when overheated markets go cold,
consumption may fall by 2.4 percent, Goldman reckoned.
Such a housing crash took place in Britain in the early 1990's. At the
market's low, home prices had fallen by 27 percent, 5 percent below
Goldman's estimate of fair value at the time.
Such a decline is not expected here, said Dominic Wilson, a senior
global economist at Goldman. That's because home prices in Britain had
escalated much more than they have in this country, even now. And
interest rates had soared into the high teens, which is unlikely here.
But even small declines in home prices could hurt the economy. "The
precise degree of the vulnerability isn't going to be clear until we
see house prices slow," Mr. Wilson said. "You've never seen consumers
this stretched, operating at levels of leverage we've never
experienced before. House prices are starting at a level that is
pretty high relative to what we think fair value is going to be, and
the economy as a whole has gotten a lot more sensitive" to
housing-related spending.
Indeed, Goldman estimates that home equity lines of credit and the
like have magnified the effect of housing wealth on consumption over
the past decade, taking it to 10 percent from 4 percent.
Although rising home prices have been stopped dead in the past by
sharply higher interest rates, the Goldman economists note that bear
markets don't necessarily need major triggers to get started.
Small events can change the market's psychology, and asset bubbles
sometimes just cave in on themselves.
One risk that looms large, however, is that United States policy
makers would have few tools to cushion the fall if a housing decline
gained real momentum. Interest rates are already so low and fiscal
policy so loose that little could be done to ease the pain.
"This is one of a series of risks and imbalances that suggest there
has been a price to the low-interest-rate policy that led the
recession to be much shallower than it might otherwise have been," Mr.
Wilson said. "Fiscal and monetary policy are both already fully
utilized. If things go wrong from here, the U.S. finds itself in a
more fragile position."
------------------------------------------------------------------------------
Some people claim that there's a woman to blame, but I think it's all...
Richard's fault!
Visit the Sounds of the cul-de-sac at www.richardsfault.com
little longer. The latest way to keep the party going are borrowing
against equity in precariously over-valued homes.
I see trouble ahead:
http://www.nytimes.com/2004/07/25/business/yourmoney/25watch.html?adxnnl=1&adxnnlx=1090783024-lgBoZCOx3HfkQ2he93lE2Q
Housing Bust: It Won't Be Pretty
Published: July 25, 2004
ET the stock market slide. Let the bond market sink. As long as home
prices keep rocking, it's easy for Americans to feel fat and happy.
But what happens when the run-up in housing prices loses steam, or
worse? The implications are sobering, not only for homeowners but also
for the economy as a whole.
With the growth rate for home prices starting to slow, now may be the
time to ponder what a bear market in real estate may bring. A recent
study by two economists at Goldman Sachs provides some answers.
For now, prices are still climbing over all. The average home price in
the nation rose 7.71 percent in the 12 months ended in March.
But the first three months of this year showed far slower growth than
previous periods. Prices rose only 0.96 percent, according to the
Office of Federal Housing Enterprise Oversight, which keeps an eye on
Fannie Mae and Freddie Mac. The last time housing prices grew by less
than 1 percent in a quarter was in the spring of 1998.
More ominous, six states showed declines in housing prices in the
first quarter: Vermont, Alaska, North Dakota, South Dakota, Iowa and
Nebraska. No state had price declines in the previous quarter.
To be sure, home values are still hot in many spots. In the most
recent 12 months, prices have jumped by more than 15 percent in Hawaii
and Nevada, by 14 percent in California, 11 percent in New Jersey and
10 percent in New York.
In nominal terms, United States home prices are up 60 percent since
1995; in real terms, adjusted for inflation, they are up 37 percent.
Viewed historically, home prices are up twice as much now as they were
in the bullish real estate markets of both the mid-1970's and the
1980's.
As a percentage of disposable income, home prices are more than 18
percent above the long-term average. Prices exceeded that average by
only 4 percent in the 1970's and 8.5 percent in the 1980's boom.
Michael Buchanan, a senior global economist at Goldman Sachs, and
Themistoklis Fiotakis, a research assistant there, reckon that at
current interest rates, home prices are now overvalued by 10 percent,
on average. Because this figure spans the entire nation, the hottest
markets - California and New York - are obviously more overpriced.
The economists compute fair value in home prices by using a variety of
measures, including interest rates, population and demographic data,
and the overall health of the economy. If interest rates increased by
one percentage point, the economists said, home prices in the United
States would be overvalued by 15 percent.
None of this would be worrisome if homeowners had not turned the paper
profits in their properties into cold, spendable cash. But withdrawals
from home equities have recently totaled 6.3 percent of household
disposable income, according to the Goldman study. In the late 1980's,
equity withdrawals reached only 2.5 percent of disposable income.
Federal Reserve studies indicate that as much as half of the equity
withdrawals went into personal consumption and home improvements. As a
result, the Goldman economists estimate that equity cash-outs added
1.75 percent to the growth in the gross domestic product in 2003. That
is a significant increase from the 1.25 percent kick that equity
withdrawals added in 2002.
Consumption would slip 1 percent, Goldman estimated, if housing prices
fell by 10 percent, to the fair value level. But if prices decline to
well below that, as often happens when overheated markets go cold,
consumption may fall by 2.4 percent, Goldman reckoned.
Such a housing crash took place in Britain in the early 1990's. At the
market's low, home prices had fallen by 27 percent, 5 percent below
Goldman's estimate of fair value at the time.
Such a decline is not expected here, said Dominic Wilson, a senior
global economist at Goldman. That's because home prices in Britain had
escalated much more than they have in this country, even now. And
interest rates had soared into the high teens, which is unlikely here.
But even small declines in home prices could hurt the economy. "The
precise degree of the vulnerability isn't going to be clear until we
see house prices slow," Mr. Wilson said. "You've never seen consumers
this stretched, operating at levels of leverage we've never
experienced before. House prices are starting at a level that is
pretty high relative to what we think fair value is going to be, and
the economy as a whole has gotten a lot more sensitive" to
housing-related spending.
Indeed, Goldman estimates that home equity lines of credit and the
like have magnified the effect of housing wealth on consumption over
the past decade, taking it to 10 percent from 4 percent.
Although rising home prices have been stopped dead in the past by
sharply higher interest rates, the Goldman economists note that bear
markets don't necessarily need major triggers to get started.
Small events can change the market's psychology, and asset bubbles
sometimes just cave in on themselves.
One risk that looms large, however, is that United States policy
makers would have few tools to cushion the fall if a housing decline
gained real momentum. Interest rates are already so low and fiscal
policy so loose that little could be done to ease the pain.
"This is one of a series of risks and imbalances that suggest there
has been a price to the low-interest-rate policy that led the
recession to be much shallower than it might otherwise have been," Mr.
Wilson said. "Fiscal and monetary policy are both already fully
utilized. If things go wrong from here, the U.S. finds itself in a
more fragile position."
------------------------------------------------------------------------------
Some people claim that there's a woman to blame, but I think it's all...
Richard's fault!
Visit the Sounds of the cul-de-sac at www.richardsfault.com
