July 31, 2006

The bills for the housing bubble and all the debt that's been run up in the last few years are coming due


As Fleckenstein says here, "exhaustion" finally has set in, and now the long way back down the ladder... time to take our medicine we should have taken in 2002.

"The 'use-your-house-as-an-ATM-to-live-beyond-your-means' stimulus is finished, thanks to the recent de-leveraging/crackup in the bond market. The refi game and the bull market in housing it created postponed the consequences of the largest stock market bubble in history. Though the Fed and the rest of the government succeeded in postponing the fallout from the massive misallocation of capital that took place in the mania, they have also succeeded in compounding and exacerbating those consequences. Even more leverage was created in the system, as we attempted to speculate our way to prosperity.

"In short, the excesses from the bubble have not been cleared away, but they will be, along with the recent excesses from the refi bubble … These developments will tend to be self-reinforcing, and especially damaging, if and when housing prices join the decline."

Exhaustion: built into a bubbleThe Federal Reserve precipitated, aided, abetted and cheered the largest (by dollar volume) stock mania in the history of the world. That mania exhausted itself in 2000. The exhaustion was not caused by the Fed tightening, contrary to what many folks believe, any more than the 1929 market break (and ensuing Great Depression) was caused by Fed tightening.

Manias end in exhaustion, though there are always coincident events surrounding the end of the move that get blamed for the decline. In both 2000 and 1929, higher interest rates were present, but they were not the cause. The preceding bubble was the cause of both the subsequent exhaustion and the ensuing bust.

29 comments:

pmd said...

Good Lord, Keith, you are feeling prolific these days... I, though a bubblehead, am feeling a little exhausted (not debt, must be the pace)... but please, don't change a thing...

keith said...

when the bubble popped, it became impossible to keep up with all the news... so I just pick the most relevant or interesting (or funny)

nice thing about being in the UK though is I can post in the AM here and all you Americans can wake up to a fresh new rag

Anonymous said...

Keith, What's your perception of things in the UK?

I was there last week and everyone I spoke with assured me of 50% PA returns going forward - the crowd got ugly and pugalistic when I begged to differ so I had to slink out of the pub via the lavatory window.

People were seriously touting Estonia as the next great RE investment frontier. Perhaps because its fine weather it's set to become the new Monaco?

And the Daily Express frontpage proudly asserted houses would double in the next 10 years (thereby allowing every Brit to purchase a castle in Estonia).

Seriously though, I suspect a lot of UK housing equity has flowed into Spain, Chiantishire, Burgundyshire and Cyprus.

There seems to be no common perception or understanding in the UK that it's been a great run but it may just be over? Even when talking to otherwise intelligent people - very strange.

Cheers, Haggis

Anonymous said...

aren't rents quite high in the UK, and don't they match up to the cost of buying better than in the US?

keith said...

I think the bubble is worse in europe than it is in the US. How is that possible?

They're addicted to the ponzi scheme here ("the housing ladder")

I know a girl who sells investment property in slovakia, and she says there's an endless supply of unsophisticated brit "investors" (i.e. "dentists") who want to buy in eastern europe sight unseen, regardless of cash flow or PE, and they're buying and selling to each other (other flippers)

Same thing happened in the UK, and things are out of control

London is overpriced, even though rents are high. For instance, my flat rents for $4000 a month, and would sell for around $1 million. Still doesn't cover the payment, taxes and costs if you bought it (around $8,000 a month). Problem with London is there are so many rich people getting richer (saudis, russians, brit bankers) that they bid up properties regardless of fundamentals

It will all come crashing down and crashing down hard though, and it'll probably take the US bust to bust the bubble here. It'll bust once the ponzi part stops - when people aren't confident that if they buy today it'll be worth more tomorrow.

Plus BOE is about to start raising rates here, even though they're much more motivated than the Fed to keep housing prices high, and under extreme pressure to not raise rates, as the loans in the UK are all adjustable rate loans (oh, man, can you smell a disaster in the making)

Anonymous said...

We put our London rental house up for sale end of last month.

We'd decided to sell earlier this year when rental yields dropped to 3% but we had to wait for the tenancy to expire. That's the problem with 'income' properties - there isn't much income these days and you can't move quickly on a sale with sitting tenants.

We've been told by everyone (even strangers passing us in the street) that we'll 'rue the day' we sold our London property. Oh well, I guess we'll just have to take that chance!

Maybe I'll take the proceeds and head to Slovakia - sounds like the hot new place to be...

Cheers, Haggis

keith said...

congrats haggis on selling at the peak. I hope you find a sucker (oops, I mean buyer)

if you would, do the math for a new buyer for us here

monthly payment (100% financing)
monthly costs and fees
total closing and eventual selling costs (divide by 60 months for a monthly figure over 5 years)
taxes and insurance per month
equals = total monthly

vs.

expected rental income per month (assume 10 months per year the unit will be rented, get the total, then divide by 12)

less any tax benefit

I'd like to know your PE ratio

David said...

The cat isn't even bouncing. :-) Damn it must be really dead.

Love your pictures Keith!

David
Bubble Meter Blog

Anonymous said...

Keith,

Income Property

House value 480K (all prices in GBP)

INCOME / EXPENSES
Rent PA 16,800. (1,400. PM x 12 mo)
Letting Agent -1,400.
Management -1,200. (100 PM x 12 mo)
Repairs / Insur. -2,000. (Average over 12 years)
NET INCOME 12,200.

The real net yield on this property per current house prices is 2.54%. The RE folks will tell you the yield is 3.5% based upon the gross rents but in reality you have turnover, management fees and on old houses like London, a fair amount of repairs & maintenance.

For us selling, the agency fee is 1.35%, conveyancing is 475. (didn't use a solicitor), and stamp duty was 3% (I think).

I'm not sure what the purchaser would pay on a new mortgage but if rates are around 5.5% an I/O at 100% would run you 2200. per month. So your cash flow burn rate would be about 1,000. per month on a buy to let basis.

We'd owned it from 1994, and maintained it very well but it is old and will soon need a major refit in the order of 20 - 30,000. I should note that it was mortgage free and even in that context we weren't comfortable continuing to hold this rental gem!

So it's cheaper to rent and BTL makes no financial sense whatsoever. Unless like a lot of people you're a rabid disciple of anti-investment (haemorraging cash and destroying wealth).

Cheers, Haggis

The only good cat is a ... said...

I hope that is a dead cat in the picture. Doesn't look to elastic. bet it doesn't bounce very well.

Good little dead kitty said...

David beat me to the dead cat idea. I didn't read the comments before I posted.

concerned said...

The Brits are stuffed imho....some even went and bought some 'disputed' property in Northern Cyprus, that legally belongs to the Greeks in the south. There is a case now where a British couple have been taken to court for building their 'retirement' home on his property in the disputed north. If the Greek wins his claim, then he is elligable to the British couple's house in England.......some people just neve learn.

Europe generally has gone through the roof, with rents lagging way behind. I think that it is probably worse here as interest rates were/are lower than the States. Every dog and their owners have a housing loan.

It is going to get ugly....very ugly....and rightly so. I live in a country where property ownership is in peoples blood, which makes it worse. Everybody still think that housing never fall in price.....but they also think that interest rates will never reach the 20% levels of the early 90's.......

Things are going to get ugly...very ugly. But I really do believe that this is a good thing (firstly because I am ready to pounce when the chance comes to buy)....secondly because it will make people more MODEST !!! I have had enough of 21 year old little shits driving around in BMW's, because daddy owns a flat that went up 50,000 euros the passed year .....

I walked into a ice-cream parlour/cafe (in the rich side of town mind you), over the passed weekend, and could absolutley swear that there was over 100,000 euro's worth of ROLEX's, CARTIER etc watches on people wrists.

Don't get me wrong, I wasn't born in the gutter.....but I just can't relate anymore.....How can a 25 y.o afford to wear a 6000 euro watch ? Where is all this money coming from ??

speedingpullet said...

No, I'm pretty sure the kitten is sleeping.

Both my cats have been sleeping on thier backs during this heatwave.

Re:UK housing....I'm in the process of selling my Mum's flat in Putney a.t.m, and am agog at the kind of prices people are bidding on it.
But then , I remember the late 80's, when prices suddenly dropped 30% nationwide...
I reckon prices in London are higher than here in LaLaLand presently.

Anonymous said...

>>> Problem with London is there are so many rich people getting richer (saudis, russians, brit bankers) that they bid up properties regardless of fundamentals

-- I don't know if anyone has said this before, but London is the "Manhattan" of Europe. Certain area's will have very high prices for this reason. Does not mean they are immune from market changes (just look at NY Co-ops over a 20 year period), but it can keep things relatively pricey for regular people.

Anonymous said...

>>> I walked into a ice-cream parlour/cafe (in the rich side of town mind you), over the passed weekend, and could absolutley swear that there was over 100,000 euro's worth of ROLEX's, CARTIER etc watches on people wrists.


-- I used to break watches every year, really tough on them. Back in 1996 I bought a Rolex Submariner for $5800, and have worn it everyday since. It still looks new. It will likely last another 20-30 years. So sometime you can "invest" in a good watch if that is important to you, and its yearly cost is more reasonable. Of course, you don't spend your last $5800 on a watch.. (or car, or anything like that)

And I am not some "dandy" and have not worn a suit for 13 years. I wear jeans and a polo shirt (usually with my works logo), and boat shoes.

I did notice a lot of fakes going around that look really close to the real thing unless you get really, really close and know what to look for. I have seen illegal mexican women who can't speak any english with "rolex's" on their wrists. Maybe then, they made an investment since they can't trust the banks...

Anonymous said...

>>> 21 year olds in beemer's

Yeah, I don't like it either. I live in a rich area, and there are so many one local kid decided to have his "stolen" and burnt for the insurance money so he can have the downpayment on a Bentley. I kid you not. Mommy gave him the car but it was to "common" for him at his high school. (I am sure daddy's divorced from mommy and she got the car as a settlement for the kid. Lots of rich divorces here since the local company where people make their money is well known for long hours, though its getting better...)

borkafatty said...

Keith did you see the piece over at the housing bubble 2 about the ARMS that are going to reset..man there is going to be a world of hurting in 07, and late 06.

Anonymous said...

I buy a Schmo-lex for $6.99 at Walmart and I have been asked if it is a Rolex.. LOL. I throw it away and buy another every 6 months.
Just like renting!

Anonymous said...

JEEZ!!! DOES EVERYBODY HAVE TO CUT, COPY AND PASTE EVERYBODY ELSE'S COMMENTS? NOTHIN LIKE READING EVERYTHING OVER AND OVER AGAIN. JUST ADD YOUR COMMENT AND MOVE ON!

devestment said...

Do you mean to say that there is a price to pay for all this manufactured prosperity that I have enjoyed! I will not tolerate it.

devestment said...

JEEZ!!! DOES EVERYBODY HAVE TO CUT, COPY AND PASTE EVERYBODY ELSE'S COMMENTS? NOTHIN LIKE READING EVERYTHING OVER AND OVER AGAIN. JUST ADD YOUR COMMENT AND MOVE ON!

OK

keith said...

great info haggis

if I read correctly, I'd lose 12,000 pounds a year of cash (around $22,000 US) by owning vs.renting

so basically you bet on appreciation. if it stays flat or depreciates, you're screwed

and if interest rates go up, you're screwed

autofx in Phx said...

The dollar is dropping, metals are rising, the stock market looks sick.

You can't sell your house unless you discount it deeply.

GET A CLUE.

cabbiesouth said...

JEEZ!!! DOES EVERYBODY HAVE TO CUT, COPY AND PASTE EVERYBODY ELSE'S COMMENTS? NOTHIN LIKE READING EVERYTHING OVER AND OVER AGAIN. JUST ADD YOUR COMMENT AND MOVE ON!


Will do

Anonymous said...

A, that was already done cabbiesouth.

Anonymous said...

Keith,

Absolutely correct - you'd lose 12,000 pounds a year. And with the older houses you can count on surprises like the boiler failing, new roofs, wiring problems, etc. which'll dump an unexpected 10K invoice on you when you least expect it.

Seriously, when we purchased, the rental yield was just under 10% gross (and we expected mild appreciation). And owning was about the same cost as renting.

This set of circumstances will come about again. Right now the average UK house is hovering at 6.5X the average salary - historically it's been about 3.25X.

There's no such thing as being 'priced out of the market' permanently. Housing is a commodity which in the long term is priced relative to the purchasing power of the average Joe.

Cheers, Haggis

PS - I came to Hong Kong in '96 and rented for 7 years whilst the property market peaked and then it dropped 65%!! We bought in 2003 when renting was 25% more expensive than owning. And when everyone hated property.

If you listen, the market & your own common sense tell you what to do!!

Meg Taylor said...

I was searching blogs,and I found yours.Please,
accept my congratulations for your excellent work!
If you have a moment, please visit my used dealers ford car site.
Have a good day!

Bill Harrison said...

Hi Friend! You have a great blog over here!
Please accept my compliments and wishes for your happiness and success!
If you have a moment, please take a look at my car sales uk site.
Have a great day!

Jane Carpenter said...

Hi Friend! You have a great blog over here!
Please accept my compliments and wishes for your happiness and success!
If you have a moment, please take a look at my bmw auto parts site.
Have a great day!