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2006-06-06 Home Front Economy
Forbes on homes: Implosion by A. Gary Shilling
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Posted by 3dc 2006-06-06 13:33|| || Front Page|| [11131 views since 2007-05-07]  Top

#1 I should think that less new homes would have a positive effect on the price of existing homes. Thus the bubble is not popped, it just changes forms.

Needless to say around my neck of San Diego there are two massive developments of new homes (thousands of homes each) so I find it hard to buy this story at all.
Posted by rjschwarz 2006-06-06 14:18||   2006-06-06 14:18|| Front Page Top

#2 rjschwarz note he is talking about an implosion of the expensive homes with strange mortages and such. "mansions" "vacation rentals" etc..

again: These investors and vacation-home buyers accounted for 40% of house sales last year, up from 36% in 2004. A lot of these investors rent out the properties. Despite low-payment interest-only mortgages, they cannot cover their cash outlays with rents, which are depressed by the proliferation of spec houses.
Posted by 3dc 2006-06-06 14:38||   2006-06-06 14:38|| Front Page Top

#3 A few points. (I have completed the corse work required to be a real estate agent in my state. I am wonder if this expert has.)

Doom and gloom. Problem is we are not making less people. Those people need places to live. Yes prices are often inflated. Housing is a cyclical market. It always has been. If you ask any honest realtor or realty agent they will tell you the "average price" for existing housing is some where near the lower end of the middle range. Most of the houses sold are at the bottom and middle not at the top. Speculators are greedy and stupid. So what if they lose their rear end they are the ones that drove prices up. They did it with tulips too. You still have a place to live in which is the reason you bought a house. If the market turns down you still have a house. You only need one house, not 10 unless you are a full time landlord.

Seems to be just one more person wanting a recession or depression. I can never figure these types out. What is bad is letting them get into a position of influnce or power. We have to suffer from these fools unfortunately. Looks like we may have one at the helm of the Fed. Fire him before he drives us off a cliff.

People use interest only mortgages to get into houses they other wise can't afford and refinance at the earliest chance. There is a reason these loans exist. Regardless of the type of loan people default on them. This is nothing new. The lender takes risk with any and all loans. It sucks when lots of loans go south for the lender. But people need houses. At some point the lender can if they are diligent about it recoupe the money they put at risk by selling the property that has defaulted for it's actual value. Usually they give it away at an auction after letting it run down however that is the lenders fault. It's your problem only if you want to borrow money during a down turn or live next to a defaulted property.

This guy can't remember 15%+ interest rates on first mortages apperently. Plenty of people were still qualifying for them and buying houses at 15%+.

The glut of housing is not caused by demand it's cause by greed. Don't worry if Mega building Corp loses it's butt and goes out of business. You don't want the house they built any how. You want a house built by a smaller contractor who is actually putting his name on his work so the quality is actually there.

Enough of my misspellings and bad grammar.
Posted by Sock Puppet of Doom 2006-06-06 14:44||   2006-06-06 14:44|| Front Page Top

#4 I see these sorts of homes going up 2 to 3 blocks from my house. (see home divison here) The lots are the same size as mine but cost more then my complete home.

I was talking with one of the construction managers working at (Airhart custom homes) and he told me they didn't have buyers for most of the mansions and were offering steep discounts. Average idle time before a sale for these new mansions was 7-months and growing.
Posted by 3dc 2006-06-06 14:46||   2006-06-06 14:46|| Front Page Top

#5 Not your problem 3dc. If they are fools building on spec let them feel the pain. A prudent builder only builds homes after a sale have been made beside a few demos.
Posted by Sock Puppet of Doom 2006-06-06 14:51||   2006-06-06 14:51|| Front Page Top

#6 rjschwartz, yes, there may be a ton of homes in those developments, but....are they selling? And at what price?

I doubt they are getting full price. Forget about a premium like they were a while back. Developers all over the country are cutting prices and giving some nice incentives to sop up the inventory, and construction sites are quieter than they were last year. They're not asking for as many permits to start new construction, either.

Look, last year, I wouldn't have been able to sign a contract on a home without having at least a prequalifying letter from a lender. We didn't get that until after we signed. I sure wouldn't be able to ask for all the contingencies we negotiated with the seller, not to mention the discounted price. They had already lowered it once before we even saw the place.

Once all the interest-only loans start raising their rates or become due, it's really going to get ugly.
Posted by Desert Blondie 2006-06-06 15:03|| http://azjetsetchick.blogspot.com]">[http://azjetsetchick.blogspot.com]  2006-06-06 15:03|| Front Page Top

#7 --This is the first nationwide housing bubble since the 1920s---

Uhhh, no. Look at the cities being cited, they're on the coasts or popular locations like Vegas.

So builders get stuck w/mini-mansions ++++.
Like the guy across the street from me might. My hubby and I were laughing that we might be able to pick 1 house up for a song - the drawback is we really like our back yard. Otherwise it might have been a possibility.

--On average, those with mortgages have 37% equity in their abodes.--- That's heartening.

We're in the process of redoing our kitchen, my hubby's having an attack as to the cost. Can't understand how cost has tripled in 10 years. Partially found out why, seems wood has tripled in about 6 years.

Parts of CA will once again dive off the cliff a la 1993. When will they learn?????
Posted by anonymous2u 2006-06-06 16:11||   2006-06-06 16:11|| Front Page Top

#8 --The resulting unemployment will kill many subprime borrowers' ability to make payments.--

Might it also send a lot of illegals home?

Idiot forgot parts of FLA/AL/GA/MS/LA are still being rebuilt.

And hurricane season is once again upon us.
Posted by anonymous2u 2006-06-06 16:16||   2006-06-06 16:16|| Front Page Top

#9 3dc - I think we're kind of neighbors, I live in DP county.
Posted by anonymous2u 2006-06-06 16:17||   2006-06-06 16:17|| Front Page Top

#10 This is the first nationwide housing bubble since the 1920s, and it's driven by three nationwide forces: low interest rates, loose lending practices and the desperate search for a stock substitute after the 2000--02 debacle.

The 1980's Savings and Loan collapse all over again. The banks have been playing 'monopoly' with the real economy. When it starts to go sour and the notes are called, you're going to see a lot of them in trouble. They'll expect the Federal government to bail them out, which means you and I and every taxpayer will be hammered for generations. The S&L debacle cost us 500 billion in debt. And that was to literally pay banks to take the assets of the busted S&Ls which they held until the market finally took off again [as it always does] several years later.

Next time around, the government should recharter the Bank of the United States and just absorb the failed banks into a tool that the Fed Reserve can use to leverage the other major institutions to play straight.
Posted by Hupaper Unolusing9804 2006-06-06 16:47||   2006-06-06 16:47|| Front Page Top

#11 Desert Blondie, there is no t in my last name.
Posted by rjschwarz 2006-06-06 17:27||   2006-06-06 17:27|| Front Page Top

#12 Well, if the new housing market is going to collapse we aren't going to need all those illegals the dems are always talking about to keep up our labor force.
Posted by bigjim-ky 2006-06-06 17:32||   2006-06-06 17:32|| Front Page Top

#13 3DC

Say thanks to MBK and Ozzy...
Posted by Bright Pebbles 2006-06-06 18:52||   2006-06-06 18:52|| Front Page Top

#14 I am look ing a buying the building I live in; a 2 apartment building in downtown chicago. My landlord intimated that he might want to sell, my guess is an impending divorce. Confidentially, the rents are approximately 1500/month per apartment, making possible rent obtained 3000/month. That supports a loan of only 425k. He asked 600k, and seems to genuinely believe that he'll get it. Lunacy.
Posted by Mark E. 2006-06-06 19:16||   2006-06-06 19:16|| Front Page Top

#15 Bright Pebbles - OK but I don't have their e-mails to thank them nor Hawkeyes to spot them.

anonymous2u - I am just a couple of blocks from that spot. Incidently it borders the Prairie Trail which I bike every other day for fun.
Posted by 3dc 2006-06-06 20:07||   2006-06-06 20:07|| Front Page Top

#16 The problem isn't the housing market, although if it collapses alot of people will get burned. It's the flow on to the rest of the economy and the prospect of a decade or more of Japanese style deflation.

Will it happen? Depends a lot on what happens in China. If China goes into a recession, the global economy will tank.
Posted by phil_b">phil_b  2006-06-06 20:34|| http://autonomousoperation.blogspot.com/]">[http://autonomousoperation.blogspot.com/]  2006-06-06 20:34|| Front Page Top

#17 BJK: Well, if the new housing market is going to collapse we aren't going to need all those illegals the dems are always talking about to keep up our labor force.

Well, if a few million leave, that's really going to increase the supply of rental apartments. Which is going to further crater housing prices. For people who own houses, it's going to be a downer see their equity go up in smoke. For people looking to buy, it's going to be tempting, except house prices may go down for a while.

Just look at equities - roughly six years from its peak in September 2000, the S&P 500 is down 17% from its high. Note that equities weren't even very highly-leveraged, since you can only borrow $1 for every $1 of stock you own.

House prices can go down for a long time - the Japanese real estate market went down 15 years in a row during a time of declining, almost zero interest rates. And land in Japan is in short supply and the carrying costs are negligible, since property taxes are tiny there (like most of the rest of the world), unlike in the US.

It's not clear what a real estate bust will do to the US economy, but it really wrecked the Japanese economy. The Japanese stock index went from a high of 38,957 in December 1989 to 15,384 yesterday, a decline of 60% over 16+ years. The basic problem for Japan is that domestic consumption took a huge dive as house prices cratered, and over-leveraged Japanese households haven't yet recovered - it's Chinese demand that is getting the Japanese economy back into shape*. The same could happen stateside. This is why my view is cautious.

* Why Chinese? What about American demand? Well, American demand is far higher than Chinese demand for Japanese goods. But something needed to make up for the big hole in Japanese domestic demand - that's where China came in. The stability of American demand has been the bright spot for Japan over its extended recession. But this demand may be about to crater, thanks to the bursting of the US real estate bubble. Which means that Japan may be about to encounter phase 2 of its recession.
Posted by Zhang Fei 2006-06-06 20:36|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-06-06 20:36|| Front Page Top

#18 If China goes into a recession, the global economy will tank.

If the American consumers stop buying from the rest of the world, that would cause the world economy to tank. But China buys little from anyone for consumption. Most of what it buys from abroad is re-exported. So it isn't a demand engine yet.
Posted by Nimble Spemble 2006-06-06 20:39||   2006-06-06 20:39|| Front Page Top

#19  If China goes into a recession, the global economy will tank.

Further, the Chinese won't be able to sustain buying oil at $70+USD for oil either, thus a major drop in demand and a dramatic drop in prices. It'll probably collapse OPEC types, but it'll fire up the American economy. Nimble merchants will be shifting production from the mainland to elsewhere as the 'Central Committee' will be living in the classical 'interesting times' trying to deal with their first [and probably last] major recession.
Posted by Sloluting Tholung7699 2006-06-06 20:50||   2006-06-06 20:50|| Front Page Top

#20 China is the world's 3rd largest impoerter of goods - $716billion/annum.

However the real problem is that huge amounts of investment have been made based on the assumption that will increase at 10% pa indefinitely. A collapse in that demand will cause cascading bankruptcies, liquidity will dry up, etc.

And to follow on Zhang's point. Japan ameliorated its deflationary 15 years by exporting its excess capacity. If most of the world goes into deflationary recession that won't be an option.
Posted by phil_b">phil_b  2006-06-06 20:51|| http://autonomousoperation.blogspot.com/]">[http://autonomousoperation.blogspot.com/]  2006-06-06 20:51|| Front Page Top

#21 ST7699: Further, the Chinese won't be able to sustain buying oil at $70+USD for oil either, thus a major drop in demand and a dramatic drop in prices.

China's GDP per capita is growing in the high single digits annually, with salaries following in lockstep. This means that the ability of the Chinese consumer to buy more gas (than the limited amount he is using today) is increasing in the high single digits. This is why demand from China for various commodities is likely to increase for decades, because it is starting from extremely low bases, and growing its output per capita very rapidly.
Posted by Zhang Fei 2006-06-06 21:18|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-06-06 21:18|| Front Page Top

#22 ST7699: Further, the Chinese won't be able to sustain buying oil at $70+USD for oil either, thus a major drop in demand and a dramatic drop in prices.

Another important point is that the average Chinese consumer only recently graduated from the bicycle just over a decade ago - to the motorcycle. Even motorists live no more than 2 or 3 miles away from work. Chinese industry is extremely decentralized, meaning that people generally live not far from where they work. Bottom line, the average Chinese doesn't have a 2-hour commute to work, and he certainly doesn't drive an SUV. The average motorcyclist might spend 5% ($12.50) of his $250 monthly (two-income) household salary on gas*. If oil goes to $150 per barrel, that means he'll spend 10% of his salary on gas. That'll hurt, but it won't be crippling.

* How does he cart his only child around? China has no child restraint laws. The husband drives the motorcycle while child is squeezed between husband and wife.
Posted by Zhang Fei 2006-06-06 21:29|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-06-06 21:29|| Front Page Top

#23 ST7699: Nimble merchants will be shifting production from the mainland to elsewhere as the 'Central Committee' will be living in the classical 'interesting times' trying to deal with their first [and probably last] major recession.

The expression "may you live in interesting times" is not of Chinese origin. It may have originated either from Hollywood studios or from Western authors who wrote chinoiserie* in what they imagined was the Chinese style - probably cribbing from Western translations of Chinese classics.

* From Wikipedia: The term is also used in literary criticism to describe a mannered "Chinese-esque" style of writing, such as that employed by Ernest Bramah in his Kai Lung stories, Barry Hughart in his Master LI & Number 10 Ox novels and Stephen Marley in his Chia Black Dragon series (it should however be noted that Marley rejects the chinoiserie label in favour of his own term "Chinese Gothic").
Posted by Zhang Fei 2006-06-06 21:34|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-06-06 21:34|| Front Page Top

#24 ST7699: Further, the Chinese won't be able to sustain buying oil at $70+USD for oil either, thus a major drop in demand and a dramatic drop in prices.

This actually brings to mind a curious Chinese arrangement. There are Chinese who work far from their homes (say, an hour's drive each way). The Chinese solution involves some hardship, but is eminently practical - employee dormitories next to the workplace. In fact, employee dormitories are an almost universal Chinese institution - government departments, hotels, garment factories, heavy industry - all have them. The big negative is that couples where one spouse works far away may see each other only during the weekend.
Posted by Zhang Fei 2006-06-06 21:48|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-06-06 21:48|| Front Page Top

#25 I develop residential and commercial real estate for a living. There is a bubble. But it's not likely to be as painful as others. In San Diego for example, during the late 80's early 90's bubble there were thousands of unoccupied units available for sale. Today most everything is occupied. The new units coming to market may have some trouble. Homes are staying on the market longer now. That always happens first. People try to hang on to get their asking price before they reluctantly lower it. Prices are starting to come down. San Diego condos in particular. Very high end real estate isn't as interest rate sensitive. San Diego neighborhoods like Rancho Santa Fe and La Jolla haven't experienced much of a drop. These buyers finance very little of their purchase since only 1 million of interest is deductible. Nevertheless, I definitely think prices will cool off maybe 20%-30% in the next couple of years. I will be a buyer again at that point.
Posted by Intrinsicpilot 2006-06-06 22:30||   2006-06-06 22:30|| Front Page Top

#26 SD eh? Santee here....

the La Jolla of East County LOL
Posted by Frank G">Frank G  2006-06-06 22:58||   2006-06-06 22:58|| Front Page Top

#27 IP: These buyers finance very little of their purchase since only 1 million of interest is deductible.

Most people finance their purchases not because they want to be able to deduct the interest, but because they have to - otherwise they can't afford the place - at least in competition with other bidders. Many people buy at the limit of their affordability. Interest rates weren't a big factor in Japan's real estate collapse. Japan's central bank had the short term rate at zero for many years, and kept on lowering rates even as real estate continued to crater. The key factor is affordability. I think real estate will fall much further than the 20-30% it has fallen in previous crashes because it has risen so much further, due to loosened credit standards and innovative financing packages that have greatly increased leverage in the sector. Excessive leverage means you overshoot on the upside *and* the downside.
Posted by Zhang Fei 2006-06-06 23:02|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-06-06 23:02|| Front Page Top

#28 Ernest Bramah in his Kai Lung stories = hmm.. haven't read those since college. I think I still have some in the basement stacks.
Posted by 3dc 2006-06-06 23:11||   2006-06-06 23:11|| Front Page Top

#29 Ok, rjschwarz, duly noted. Now please calm down about it, 'mkay?
Posted by Desert Blondie 2006-06-06 23:48|| http://azjetsetchick.blogspot.com]">[http://azjetsetchick.blogspot.com]  2006-06-06 23:48|| Front Page Top

23:54 Desert Blondie
23:48 Desert Blondie
23:45 Anonymoose
23:43 Shieldwolf
23:38 ed
23:34 3dc
23:34 ed
23:34 Ricky bin Ricardo (Abu Babaloo)
23:31 Rafael
23:29 trailing wife
23:29 3dc
23:28 3dc
23:26 Ricky bin Ricardo (Abu Babaloo)
23:25 3dc
23:21 RD
23:17 JosephMendiola
23:17 Shieldwolf
23:16 Frank G
23:16 trailing wife
23:14 Rafael
23:11 3dc
23:08 Manolo
23:08 trailing wife
23:08 Alaska Paul









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