Wednesday, August 31, 2005

Calling the Top

A couple of astute market observers are suggesting that the top may, in fact, be in for the housing market. This from Bill Fleckenstein:

"Last Tuesday saw the release of July existing-home sales that were slightly below expectations. For the housing market, one piece of data in the National Association of Realtors report portends the end of ever-higher prices: The supply of homes on the market now stands at 2.75 million -- the highest since May 1988.

. . .

Given all the multiple-property buying that's occurred, the accounts in the media . . . and what readers of this column have observed with their own eyes, this news is somewhat surprising. However, it was inevitable that inventory would start piling up at some point. The time, as it turns out, is now.

That excess inventory, together with the further supply now in various stages of coming on stream, makes me feel more strongly than ever that this summer will be seen, with benefit of hindsight, to have been the top. In essence, Time Magazine's cover early last June -- "Home $weet Home: Why We're Going Gaga Over Real Estate" -- will more or less have marked the peak."


It's RIP for the Housing Boom

And this (admittedly more hysterical take) from Theodore Mantle of The Wall Street Examiner:

"The biggest financial disaster in history is unfolding in real time right before our eyes. Due to the lingering effects of mass hysteria, denial remains widespread. But the numbers don't lie.

The U.S. Commerce Department announced Wednesday that sales of homes increased 6.5 percent in the last month, while median prices fell 7.2 percent, down three months in a row and falling below year-ago levels.

Increased volume selling into a falling market looks to me like the beginning of a good old-fashioned collapse.

The current inventory of houses waiting for buyers is 460,000 -- an all-time record."


Panic Selling as Home Bubble Bursts

Greenspan Warns About Dangers of Overheated Housing Market

"Easy Al" Greenspan made another warning abut the state of the housing market. This was made in couched terms, as usual, but the fact that he feels the need to keep making pronouncements on the matter should be telling. This one was made last Friday at an economic conference,

"Federal Reserve Chairman Alan Greenspan on Friday cautioned Americans against thinking the value of their homes and other investments will only go higher, saying 'history has not dealt kindly' with such optimism.

. . . .

Rising house and stock prices have made many people feel more wealthy and have helped to support consumer spending, a key ingredient of the economy's good health.

Greenspan, however, said people shouldn't count on that paper wealth, which can evaporate if economic conditions deteriorate rapidly.

'What they perceive as newly abundant liquidity can readily disappear,' he said. 'Any onset of increased investor caution' could cause home and stock prices to drop, he said.

A long spell of low interest rates and low risks for investors has especially encouraged investment in homes. Greenspan worried about what would happen if that climate were to change.

'History has not dealt kindly with the aftermath of protracted periods of low-risk premiums,' he said."

Greenspan Sends Up a "Yellow Flag"

Are Increasing Rents a Sign of a Housing Slowdown?

This New York Times piece from last week saw evidence of a slowdown in the housing market in rising rental prices:

"Rents are rising again across the country, squeezing tenants who are already coping with high gasoline prices and improving returns to landlords after a deep five-year slump.

The turnaround appears to be another sign that the boom in house prices and sales is finally slowing, as homes have become so expensive in many metropolitan areas that some people have decided to rent instead."


Rent Heads Up as Home Prices Put Off Buyers

In fairness to housing bulls, one of the arguments in favor of a bubble is that home prices are completely out-of-whack with rental prices for equivalent properties on a historical basis. Those that argue we are in a bubble say that this disconnect cannot continue and that housing prices need to fall in relation to rents. The other way that this imbalance can get corrected, of course, is for rents to rise. Thus, rising rental prices could be seen as justification for today's extravagant sales prices. That being said, the fledgling price increases reported by the Times does not come close to bringing buy-to-rent ratios back to historical averages.

Monday, August 22, 2005

Warnings from Robert Schiller (aka Mr. Bubble)

The Sunday Business Section of the New York Times had an interview with Robert Schiller, who had warned about the irrationality of the stock market in the mid '90's jus before Alan Greenspan came out with his famous "irrational exuberance" pronouncement. Schiller's subsequent book on market behavior took that phrase for its title. In his second edition he focuses on the likelihood of a bubble in housing.

In the interview, Schiller states that real estate could adjust downward by as much as 40% in real terms over the next decade. However, he also notes that prices could continue to increase for a few more years and then slowly adjust downward with prices languishing for years: "'There will be many people thinking it was a soft landing even though prices may have gone down in real terms by 40 percent.'"


Mr. Bubble's Worried Again

Betting On Your House Or The Market

This New York Times article from last week relays that despite real estate's outperformance over the past five years, the better long-term investment has been the stock market by a wide margin.

"In fact, by a wide margin over time, stock prices have risen more quickly than home values, even on the East and West Coasts, where home values have appreciated most. . . . Since 1980, for example, money invested in the Standard & Poor's 500 has delivered a return of 10 percent a year on average. Including dividends, the return on the S.& P. 500 rises to 12 percent a year. Even in New York and San Francisco, homes have risen in value only about 7 percent a year over the same span."


Sleep at Home and Invest in the Stock Market

Thursday, August 18, 2005

Another Compelling Case for Existence of a Housing Bubble

Excerpted from Alan Abelson's Barron's column:

By far, the most persuasive brief we've yet seen assembled in support of the case for a housing bubble is that dawn up by David Rosenberg, Merrill Lynch's man about economics. We don't know David personally, but we devour his stuff and, despite a peculiar ocular deficiency that prevents him from recognizing inflation when he sees it, his commentary is consistently first-rate. In any case, last week he offered a kind of roundup of the evidence of a housing bubble and its enormous influence on the economy as a whole. We'd like to share as much of David's review as we can and replicate the staccato format he used to such good effect.

Under the bold-face heading "Housing is Dominating Economic Activity," he offers these facts and figures, each set preceded by a proper bullet-point:

• Real estate has accounted for 70% of the rise in household net worth since 2001.

• Over 40% of private-sector jobs created since 2001 have been housing-related.

• Excluding housing, real final sales slowed sharply in the first quarter of 2005 to a 2.4% annual rate, from 3.2% in the fourth quarter and 4.9% in the third quarter, of 2004.
Under the heading "Over-leveraged," he points out:

• Subprime market has accounted for a 28% share of new mortgage funding in the past six months (vs. 5% five years ago).

• The Fed's loan-officer survey shows that mortgage standards have eased a massive 13 percentage points in the past three years.

• An estimated 42% of first-time buyers made no down payment on their home purchases last year.

• In the hottest price areas, adjustable-rate mortgages (ARMs) now account for over 50% of new mortgage originations.

• Over 60% of new mortgage loans in -- where else? -- California this year have been in interest-only loans or option ARMs.
Under the heading "Affordability Stretched," David notes:

• According to the FDIC, 38 of 50 states in the past year have seen home- price appreciation far outpace personal incomes -- and nationwide, home prices grew 6.7 percentage points faster than incomes.

• From 1955 to 1995, home prices rose with inflation, or basically 0% in real terms. Since 1996, home values have risen 45% in real terms. End result: a $5 trillion increase in housing-bubble wealth.

• Over a third of homeowners are devoting over a third of their income to monthly mortgage payments; 12% are devoting over half their income.

• Homeowner affordability is now at a 13-year low and total household debt-service ratio in the first quarter hit a peak 13.40%.

• Oversupply may be a looming risk to prices -- housing starts at two million units per year are now outpacing new household formations of 1.6 million. Could the excess supply, David muses, reflect speculative buying?

• And, finally, under the heading "Speculation Rampant," he ticks off the following:

• National Association of Realtors data show 23% of home sales in the past year were "investor" (read: speculative) based; another 13 were second property.

• A proxy for speculative buying, he reports, namely units sold but not yet started, are up 47%, year over year, a record high. Nearly one in four Americans polled in the University of Michigan Consumer Confidence survey believe that now is a good time to buy a home because it's a good investment and/or prices will continue to appreciate. That represents a 25-year high in bullishness.

• His research shows that 60% of the country is currently in a housing bubble (where the ratio of house price to income is greater than one standard deviation from the historical mean). And that includes the Northeast, the Pacific Coast and any number of pockets in between.

• He calculates that a decline from double-digit growth in home prices to no growth would trim at least 1% from GDP next year (which, he reports, is the current experience in the U.K.). Of course, if we might put our two cents in here (that's all we have on us on us at the moment), such a drastic change in the trend of housing prices would reverberate through the length and breadth of the economy, and its real effects would be as profound as they are unfathomable.
But, there's no housing bubble. We know that because that's what our friendly real-estate broker and every home builder and would-be home seller we talk to tells us. So it must be true.


Housing is Dominating Economic Activity

Friday, August 12, 2005

The Grunt on the "Housing Bomb"

The Property Grunt has become increasingly alarmist on the state of the housing bubble, which he now calls a bomb:

"The chaotic nature of the real estate market and factors associated with it gravely concern the Grunt. I could give you a laundry list of factors ranging from suicidal mortgages being taken by buyers infected with irrational exuberance to a housing market that has been carpet bombed senseless with overpriced homes and a lack of inventory. However there are two factors that I would like to address that I feel that are transforming this bubble into a bomb."

The two factor the grunt details are the continual upward pressure by the Fed on interest rates and the complete disorder at Fannie Mae.

The Grunt's bottom-line advice:

"Whether you are buying, selling or sitting this one out please watch your backs and do not ignore the red flags that have popped up. This is not the time to gamble with your finances with risky mortgages or overpriced property. Whatever deals you make, do the math and make sure it makes sense. And when in doubt, dont."

From Housing Bubble to Housing Bomb

Rent-to-Buy Ratio Out-of-Whack

A reader at in repsonse to Paul Krugman's op-ed piece from last week's New York Time's, as well as the recent Center for Economic Policy and Research rent v. buy calculator had this to say about Manhattan rents:

"As a Manhattan resident, my wife and I just went through the "should we rent-should we buy" exercise (we decided to rent with the expectation that the market will correct in a year or two). I should point out that, while Manhattan rents are much cheaper relative to purchase prices, there has been upward pressure on rents as potential purchasers, like us, have been completely priced out of buying a decent apartment in which we could raise a family, and are instead renting. Thus, a two-bedroom we were interested in renting exactly one year ago for $3,300/month, is now renting for $4,400/month.

Granted, that equivalent two-bedroom in today's market would likely sell for approximately $1 million to $1.3 million. Which brings me to the next point. Historically, the sale price-to-rent ratio in New York City (the sale price of an apartment vs. the yearly cost to rent that identical apartment) has been approximately 10-1 to 12-1. Today, that ratio stands at about 20-1 to 25-1. Thus, it would appear that the CEPR's calculator is pretty accurate. Your friend's parents could probably rent the apartment they just purchased (from the purchase price I deduce it is a 2-bedroom) for about $4,200 - $4,400/month in today's rental market, based on the current sale price-to-rent ratio. However, in "normal" times, the the fair market value of the apartment they just purchased is likely 1/2 to 1/3 its current purchase price."

Another reader added:

"The situation for much of Manhattan and New York City is even worse than it looks based on purchase prices. Those million-dollar apartments (if they're co-ops) typically come with a grand or two (or more) a month in maintenance fees. Some of that is just real estate taxes and other expenses you'd be paying anyway, but a substantial part may also be the underlying mortgage on the building, which is in effect tacked onto the purchase price. (And some of those underlying mortgages are balloons that make the consumer-grade versions seem positively friendly.)"

Full link:

TPM Cafe Comments

Also, here is the CEPR rent-buy calculator:

CEPR Rent or Buy Calculator

The Housing Bubble Economy (More from Krugman)

Paul Krugman has more to say in today's New York Times about how housing mania is fueling our economy (leaving us on potentially very shaky grounds when things inevitably cool off):

"I used to live next door to a Russian émigré. One day he asked me to explain something that puzzled him about his new country. 'This place seems very rich,' he said, 'but I never see anyone making anything. How does the country earn its money?'

The answer, these days, is that we make a living by selling each other houses. . . .

The housing boom has created jobs in two ways. Many jobs have been created, directly and indirectly, by a surge in housing construction. And rising home values have fueled a simultaneous surge in consumer spending.
. . .
Then there's the jump in house prices. Over the past five years housing prices have grown much faster than the overall cost of living, adding about $5 trillion to the public's wealth.
. . .
Beyond that, there's the disturbing point that we're paying for the housing boom (and the military buildup and tax cuts) with money borrowed from foreigners. . . . In other words, a fuller answer to my former neighbor would be that these days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn't seem like a sustainable lifestyle."

Full op-ed piece:

Safe As Houses

Monday, August 08, 2005

Running Out of Gas on Long Island

Is the housing bubble on Long Island starting to leak. From this past weekend's real estate section of the New York Times:

"The number of homes for sale on Long Island and in Queens in June was 22 percent higher this year compared with the same time last year, signaling, some say, that prices have been raised too high for many buyers.
. . .
With more people putting homes on the market at ever higher prices, the supply is starting to outpace demand.

Real estate brokers have encountered both edgy sellers and savvier buyers, saying that news reports on the real estate market have added to the uncertainty and anxiety on both sides."


Number of Unsold Houses Grows

Krugman on the Housing Bubble

Today's NYT has Paul Krugman once again addressing the housing bubble:

"[T]he news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.
. . .
[I]n the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.
. . .
In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

Nobody would pay San Diego prices without believing that prices will continue to rise. . . .So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That's pretty much the definition of a bubble."

Link below:

That Hissing Sound

Thursday, August 04, 2005

Another NYT Cover Story on the Housing Bubble, er. . . Boom

Outer borough people should not feel left out. The housing bubble is not limited to Manhatan but is spreading like kudzo to the boroughs as well. This NYT cover story from today focuses on the boom in construction across New York:

"From Bensonhurst to Morrisania to Flushing, new homes are going up faster now than they have in more than 30 years. In 2004, the city approved the construction of 25,208 housing units, more than in any year since 1972, and that number is expected to be surpassed this year. Already, officials have authorized 15,870 permits.

Looked at another way, the city has 38 percent of the region's population but accounts for half of its new housing starts. Much of that development is being fueled by private money, a phenomenon not seen since the 1970's.

. . .

In many cases, complaints about a lack of housing have been replaced with fears of overdevelopment. Neighbors from Bay Ridge to Throgs Neck have flooded the Bloomberg administration with requests to limit the number of apartment buildings being built in their midst, saying that they intrude on the indigenous look of blocks, create overcrowded schools and subway stations and even lower water pressure."

We'll have to see if there is sustained demand for all of this new supply.


Housing Boom Echoes in All Corners of the City

Wednesday, August 03, 2005

A Nice Rebuttal of the Anti-Bubble Case

Mike Shedlock defends the supposed Housing Bubble "myths" that, according to housing industry flacks, are being perpetrated on the poor American public by blogs like this one. Shedlock gives a nice pooint-by-point rebuttal to the argument in the online Wall Street Journal editorial pages that there is no housing bubble. Note the outrageous conflict of interest (and hypocrisy) of the original editorial writer (who attacks the notion of a bubble) at the end of the piece:

What Housing Bubble?

Tuesday, August 02, 2005

More Anecdotal Evidence of a Slowdown

The following item is a reader's e-mail to Bill Fleckenstein at his excellent site Fleckenstein Capital.

The reader writes:

"here's a little housing anecdote that i came across this weekend:

a friend of mine who lives in westchester county (an expensive suburb just north of nyc) recently sold their house in february of this year for $1.6 mil after having lowered it from $1.975 during the 8 months that it was on the market. this friend recently ran into their (well-known and successful) broker who told them that they were lucky to have sold their house when they did, because while the number of listings have skyrocketed, the number of buyers has dropped dramatically and there is 'little to no traffic. no one is looking.'"

Of course, this tidbit is merely anecdotal, and moreover, anonymously posted and unconfirmed. Still, I thought I would post it here for what it is worth. If readers of this blog have similar stories to relate please post them in the comments.

By the way, for those of you who don't know him, Bill Fleckenstein is a fund manager on the short side and has been writing about the housing bubble for quite some time now. For those of you who don't want to pay the subsription for his daily market insights, his Friday market rap appears free courtesy of as the Contrarian Chronicles. For those interested in his daily musings, you can subscribe at: Fleckenstein Capital