Economist Magazine says housing market near collapse

[PeaceForever]

"House prices look seriously overvalued in Australia, Ireland, the Netherlands, Spain, Britain and the US and will fall by at least 20 per cent in many economies over the next four years," Woodall told a conference organised by Investment Property Databank.

The shocking part of this story is that IF the fall of housing prices were ONLY 1 (ONE) per cent, then, at least in the US, over 23 per cent of the publically backed (i.e. Fanny & Freddy loans) mortgages are 'underwater'. That is, the refi booms of the last two years have kept over 23% of the mortgages at less than 1 per cent 'equity'. This of course means that as soon as prices drop 1 per cent, the mortgages are in excess of what the house could be sold for at that point. It is really worse than this as to the drop in prices must be added the costs of sales (to get out from under the now 'bad' mortgage loan), and at this point then those 23 per cent of mortgage holders are at an average of 5 per cent underwater. Not a good sign. At a 20 per cent drop in housing prices, nearly 68% of all mortgages in the US are underwater as slightly under 32 % have a nominal equity of 20% of the potential sales price of their house. Typically, it takes between 13 and 21 years for housing markets to recover from an 11 per cent level price drop.

. . .

"The US has very little fiscal or monetary ammunition left to support its economy if house prices collapse," said Woodall. "If the US falls it would be the first global property bust in history."

http://www.nzherald.co.nz/business/businessstorydisplay.cfm?storyID=3555570&thesection=business&thesubsection=economy&thesecondsubsection=world

[arcos]

1. Is that the reason for the annoying Fannie Mae ads in CNN?

Oh god, I hate them!

[Kimber Scott]

2. One thing about land...

they ain't makin' anymore of it.

[NoMoreRedInk]

14. Land will never be scarce.....

other resource shortfalls will kill off humans first.

A developer I know gave me this statistic:

If you take every human on Earth and group them into families of four -- they could all live in Texas.

[gasperc]

18. on flat dry land with no water

I get his point in terms of square footage that we need and use. However, the places where people ant to live are becoming over populated and the places we are trying to preserve are getting over run

[alfredo]

34. Humans have a bad habit of settling on the best land, then paving it.

Only a small part of the earth's surface is suitable for farming. through misuse, the productive land is becoming played out.

We have seen from past civilizations, many collapsed because they used up the resources in the area. They were not defeated by neighbors, they just moved away because the ground was no good for growing crops, the water dried up or dangerously polluted. We are running out of places to move.

[yardwork]

28. Maybe all the freepers could go live there, for starters.

[SOS]

36. That would be a crowded Texas...

Putting all the people on earth into Texas would be 24,000 people per square mile.
Same population density as New York City.
You would have to build 800 New York Cities covering every square inch of Texas.

[Jacobin]

15. All the realtors say that right before a housing bust

I've watched lots of booms and busts in housing over the decades. Careful about buying into that too deeply.

Real estate prices can, do, and will go up....and down. Sometimes waaaaaaaaay down....for years, before going back up.

[Kimber Scott]

21. I'm not worried.

There are bigger things to worry about - like suitcase nukes and winds of black death. No need to add another horror to the portfolio - brokeness. I can live through that.

[leesa]

39. Why on earth are you worried about suitcase nukes? What

a waste of energy. Stop being so irrationally afraid America!

[Kimber Scott]

44. Oh. Ok!

nt

[Must_B_Free]

3. Is the sky falling too?

realestate is jacked now because it is a more tangible investment than the whole sketchy wall street scene. The low mortgage rates add to that effect. And isn't population increasing, not decreasing?

[PeaceForever]

5. The population is increasing, but . . .

it's increasing much faster than the number of jobs.

[newyawker99]

38. Hi PeaceForever!!

Welcome to DU!! :toast:

[papau]

I love the Economist Magazine - but a May 03 prediction of crash in 1 yr

is not that credible 10 months later when little that was predicted has happened.

http://www.economist.com/surveys/showsurvey.cfm?issue=20030531&CFID=24380110&CFTOKEN=4c655d9-4f7a61f5-9fe8-4abc-bf08-cc87fab6be05

House of cards

May 29th 2003

[PeaceForever]

6. It's tough to predict WHEN stuff will happen

Interestingly, though, the Economist correctly predicted the NASDAQ collapse a few years ago.

Also, I know this is anecdotal, but last week I was in Florida. I talked with friends who are buying their third house, none of which are rented right now. They honestly believe that the prices will continue to rise for years, and that rental income isn't important right now.

THAT is one sign of a bubble that will end badly.

[Vitruvius]

9. Exactly. It's easy to spot a bubble, but hard to predict when

it will collapse. Bubbles can be AMAZINGLY durable for years -- because people WANT to believe. And they loudly disparage all evidence that contradicts what they WANT to believe. But at some level, they know -- and they're uneasy. And scared.

When their fears surface, the zeitgeist changes and the bubble collapses -- and everybody wonders why they believed and most people deny they ever believed.

People are herd animals -- and one never knows ahead of time what trigger will finally spook the herd.

The 1920s stock market was a bubble; the present housing market is a bubble, and the Bu$h administration is a bubble. All were inflated by the same mixture of hot air and will-to-believe.

I don't know whether the housing bubble or the Bu$h administration bubble will collapse first. But they both will -- and in the same sudden way. And the Republican rank-and-file are scared -- hence vicious.

[girl gone mad]

10. It reminds me of the internet stocks bubble.

People were predicting in in 1996. The stocks kept soaring. Eventually the predictions came true.

[Woodstock]

16. give it time, 10 months is short

All the signs are there.

[PeaceForever]

4. My assessment of the situation

People are losing their jobs, incomes are dropping, etc.

Lenders are loaning insane amounts of money to questionable borrowers, etc.

It's not sustainable. Too many borrowers are on the edge, tapped out on credit, paying too much per monet in minimum payments, etc. For example, eLoan (and others) will allow someone with a $3000/month (pre tax) income to hang a $1700/month payment around their necks.

When interest rates rise, and adjustable rate mortgages begin to ratchet upwards, many of those borrowers will lose their houses due to the rising payments.

Consider this:
- The average # of weeks on unemployment has reached a new high every week since 2001.
- 150,000 new (job seeking) immigrants pour into the US each month, yet only 21,000 jobs were created last month.
- Over 40% of new mortgages are now written using an adjustable rate product.

It's the economy, stupid.

[LoZoccolo]

8. For me, who should be buying a house...

...it's the thought that I might not have a job for long, and that now I have to compete against Indian workers, exerting a downward pressure on my income. I was planning on buying a place in August, but now I'm on a survival trip and would rather have a year's income sitting in the bank than on a house that I'd get stuck paying for. At least when I'm renting I could move to a cheaper place pretty easily.

[Woodstock]

19. A Chicago Sun Times article along those lines

http://www.suntimes.com/output/otherviews/cst-edt-ref131.html

...The whole thing raised some red flags. Of most concern is this sea of cheap money sloshing around loan institutions. It is luring a generation of young people into what some consider to be an overheated housing market. When I mentioned this to Dave, he seemed totally unconcerned. ''Everyone's doing it,'' was his nonchalant reply. ''We encourage it. If you can afford rent, why not buy?''

''But doesn't a meager 5 percent down payment make the bank somewhat uneasy?'' I asked. ''Not at all,'' he replied. ''In fact, most of our clients cash out the residual equity with a quick home loan soon after title clears. In some cases, we'll even grant a line of credit that's more than the remaining equity. I've had instances where a home buyer or refinancer walks away with 110 to 115 percent of their property's appraised value.''...

Leaving the bank, I thought about how these last few years of rock-bottom interest rates have created a financial time bomb, a weapon of mass debt that dangles over our economy, tethered to an increasingly taut and fragile string. And we're not only talking about homes. Fueled by cheap credit deals, consumers are also snapping up big-ticket items like cars in record numbers. Adding a volatile one-two punch to the mix is the record credit-card debt Americans are carrying, coupled with recent data indicating that the number of people late on their payments just hit an all-time high.

Now, if you buy into government statistics that point toward increasing manufacturing activity and decreasing levels of unemployment, there's really not a lot to worry about. But I don't buy into it. What I do buy into is that worker productivity is on the rise, which squeezes more out of existing employees, but does little to generate new jobs. In fact, it has the reverse effect...

[Xithras]

7. Man, I do NOT need to hear that right now

I just closed on my new $240,000 4/2 last week. A 20% market drop puts me almost $50k upside-down in my mortgage...I'd just walk away from it at that point and buy something cheaper :(

[yardwork]

29. If you are going to live in the house, and you can afford the mortgage

you can afford to ride out a bust.

If there is a bust, the people who will be hurt most are those with unmanageable mortgage payments and people who have loaded up on rental properties.

[Woodstock]

30. also ARM's are going to smack people in the faces

I know a couple who got an overpriced $600K house (these are the ones that will drop in price first), and an adjustable rate mortgage. I was disppointed when I saw it, it was nice, but nothing fancy by way of appointments, and not very big. They put down the minimum down payment, and spent the money gained from selling their previous house on new cars, snowblowers, big TV's, and other extravagances. When interest rates rise (and property taxes will also rise), I wouldn't want to be in their shoes. I wish they had talked to someone besides people with a vested interest in getting them hooked first. I was hesitant, since she's already into it, but mentioned something about what was going on, and she said, but the appraisers wouldn't appraise over value, and the banks wouldn't give loans out that they didn't think would be good. I was going to tell her about the record number of foreclosures and the dubious goings on of Fannie Mae/Freddie Mac, but just said, things aren't always what they seem...

[kysrsoze]

41. Why on earth didn't you go for a fixed mortgage? Suffer now rather than

later. I locked in at 5 1/8 and close this Friday. Rates this low are ridiculous. NOBODY should be buying into ARMS b/c rates can't go any lower, but they can go much higher. My original mortgage 4 years ago was at 8 1/4%.

Do NOT go ARM.

[NewJeffCT]

42. well, we're building now... so, I hope the boom last 90 days longer

And, expect to put our house on the market in April... Luckily, we can easily afford the payments on the new house and it will shorten my wife's commute from 130 miles a day to about 70.

I'm just amazed that a house I bought myself 6 1/2 years ago for $120K is probably going for $220-230K right now where I live. Granted, I put in $25K in improvements/upgrades... but, still it is a 50% increase.

[sweetheart]

11. that housing market tells an interesting story

Assume for a second, that you "could" buy a house and live in any
country on earth, and that all the other people on earth (who can
afford a house) can as well.

Likely you will buy in the place where your prospects for long term
survival and well being are the highest. Radically destabliizing
economic factors and police state measures make the US less appealing
in this regard. I have a feeling that supply and demand is pushing
the housing market up unreasonably by this exogenous demand,
especially in liberal western europe given the american disaster.

The march 27 "the economist" puts forward the comparative rental
prices for office space around the world. London is twice over the
most expensive, meaning that global businesses believe by a factor
of at least 2:1 (over all cities but tokyo and paris) Indicating
that london/UK is a more secure place to do business from. Tokyo
is also 2:1 over new york.

Here is the stat: (read from a graph, so the numbers are +/- .05)

1.60 London
1.27 Tokyo
1.03 Paris
0.70 Moscow
0.65 Zurich
0.63 Frankfurt
0.58 Stockholm
0.57 New York
0.56 Seoul
0.55 Madrid
0.53 Sydney
0.46 Warsaw
0.46 Hong Kong
0.45 Toronto
0.40 Taipei
0.38 Delhi
0.37 Meixico city
0.36 Prague
0.34 Beijing
0.31 Singapore
0.26 saopaulo
0.25 buenos Aires
0.24 Istanbul
0.15 Bangkok
0.15 Jakarta
0.15 Johannesburn

I've been watching these stats over the years and london has
held poll position for some time now, given the transit and the
quality of the office space, it is seriously overpriced by the
real estate... New York has fallen drastically, i'm sure by the
dollar collapse, and as well, its indesirabiliy for doing business
unless a company is focused on the US market.

[mtnester]

12. Not to mention

Those pesky attacks


<heavy sarcasm>

[Woodstock]

13. Agree

This article goes into the big picture:

...Mortgage rates, which have reached a 37-year low, have almost nowhere to go but up. For the past two decades, declining mortgages have made housing more affordable. When rates reverse course, they will push monthly payments higher and crush the buying power that has sustained prices to this point.

Rather than let their equity build as home values rise, Americans are refinancing their debt and draining their equity to sustain lavish lifestyles. Equity as a percentage of home value hit a post World War II low around 2000, declining to 55 percent, down from 70 percent as recently as the mid-1980s. When prices do decline, as they inevitably will, homeowners will have less equity than at any point in history to cushion them.

In a related phenomenon, Rubino notes, consumers are gorged on debt. Homeowners have been piling on new mortgage debt at an unprecedented rate -- $820 billion in 2002 alone. That wouldn't be so bad if they'd used that debt to restructure their household balance sheets, but they haven't. Credit card liabilities are soaring too. Total consumer debt as a percentage of disposal income reached 14 percent in 2002, higher than at any time but a brief spike around 1988.

Consumer debt happens to coincide with record U.S. debt of all kinds, including business and government. The federal government is running up half-trillion dollar annual deficits again. Add it all up, says Rubino, and debt amounts to an astronomical $34 trillion -- that's trillion with a t, folks -- or about $450,000 for a family of four...

http://www.baconsrebellion.com/Issues03/11-17/Housing_bubble.htm

[gasperc]

17. economist was right on with the internet bubble

not but 8 months after their article did it pop!

[WoodrowFan]

20. damn that's scary.

Fortunately we have a LOT of equity, our house has almost doubled in value in 10 years (DC housing prices are OBSCENE0 but I can't imagine what would happen to people who bought AFTER housing prices jumped!

[sendero]

22. If this doesn't scare you...

>>That is, the refi booms of the last two years have kept over 23% of the mortgages at less than 1 per cent 'equity'. This of course means that as soon as prices drop 1 per cent, the mortgages are in excess of what the house could be sold for at that point.

... you're too dumb to be scared. This single statistic is all you need to know. Much less what the percentage would be in the event of a 5% drop.

Folks, when this crash occurs, and it almost certainly will, it will be catastrophic well beyond simple housing prices. Wait and see.

[shanti]

24. this is what's keeping me from

refinancing my house and also from buying a new(er) car (which i really need). my mortgage is a little under 700 a month. i bought in 1996 and my house has more than doubled in value since then. i'm just feeling very uneasy about acquiring new debt. thanks for letting me know that i'm not just pissing in the wind!

[muriel_volestrangler]

25. How many mortgages are already above the house value?

I doubt that 23% are in a narrow 1% band - house prices can move up 1% in a month, and I doubt that 23% have managed to remortgage to exactly their current house price.

Does anyone have a link to the original Economist article (without a subscription)?

[sendero]

26. I don't doubt it at all..

... see - I agree with you that prices fluctuate within a couple percent on a short term basis.

But there is a bigger message to this number and whether or not it is absolutely accurate I'm pretty sure it is accurate "in spirit".

The extension of credit to people who really are very poor risks as exercised by the credit card companies for a long time has now extenended itself to home buying and equity cash-out loans.

I hear the ads on radio daily, and I have no doubt whatsoever that people are buying houses in such a manner than they have negative equity on the day they close.

This is bad for everyone, because a lot of these folks will ultimately not be able to pay for their house. When there is no equity and they are foreclosed, it shocks the entire system. This money comes out of everyone's pocket (in the form of mortgage insurance) and the surplus of houses depresses the prices for everyone.

I really feel like, in order to move houses, the lenders have relaxed standards way past the point of reason. I would really NOT buy a house during the next couple years, there may be some real bargains afterward.

[Woodstock]

27. foreclosures are at record levels

and the Republicans just put out a new way for people who who can't afford down payments to buy houses...

[Insider]

23. our new real estate

but energy is fine. we own afghanistan & iraq.
war is booming. terror will never end.

[Walt Starr]

31. This is the Republican plan

When the crash happens, the rich guys move in and pick up all of that real estate at bottom prices. After things settle down for a few years, they sell and make a bundle.

It's yet another scam for the rich to make money off everybody else.

[yardwork]

32. A related issue is that many new houses are UGLY!

In our area there are a lot of new developments with huge houses, and it is disappointing to see how unattractive and unimaginative most of them are when complete. If I were going to spend $650,000 or one million on a house I would expect something beautiful and interesting for my money. These houses are just like regular neo-colonials on steroids.

I think that eventually there will be a shift in home designs and a lot of these oversized overpriced monstrosities will be dinosaurs while they are still relatively new.

[sendero]

33. Yeah...

... we call them "tract mansions", and it is most definitely a pejorative term :)

[Walt Starr]

35. We call 'em McMansions

My wife an I always wonder if they got fries with that.

[ProfessorGAC]

37. Dreadful Analysis

Doom & gloom for the sake of having an article published. If prices drop 1%, blah blah blah. Not one whit of information as to how likely this is to occur nor just how it would happen. No causative links, no leverage analysis, just blather.

It also completely ignores the fact that the national delinquency rate on mortgage loans in <0.2%. So, the effect would, by definition, be 1 500th of what is described. It only applies to those homes in full default. Since only about 8% of all BKO's involve homeowners wherein the house would not be protected, the default rate on mortgages is incredibly low, as well.

This is not a well thought out article. Lots of nice facts and figures but not much critical thought. This article would never pass peer review if The Economist were an academic or trade journal. Of course there could be a correction in housing, but this type of chicken-little reporting gets headlines more prominent than the writing deserves.
The Professor

[JCMach1]

40. Precisely, don't look for capital to run away from real estate

until there is a reason to... There are a couple of things that would cause this:

1. Rising interest/mortgate rates.
2. Significant cash moving back into equity markets and out of real estate.

[qb]

43. Someone help me out - does this sound like a load of crap?

We are looking into a home equity loan to consolidate an auto & home improvement loan at a lower interest rate. The loan officer recommended the ARM, because "if interest rates go up, you can always refinance."

Now this is a trusted credit union, so I wouldn't expect them to intentionally feed me a line of bullshit, but isn't something wrong with this picture? If I wait for interest rates to go up and then refinance with a fixed rate, it will just be that much higher, right? Is there any scenario where an ARM at this point is a good idea?