August 31, 2006

Forbes columnist: "20% decline in median single-family house prices nationwide, and that number may be way understated"

20%? Pretty bold.

We're talking a devastating crash if that comes to pass. What do HP'ers think the peak to trough number will be?

Man, I wish I could fast forward a few years to see how this all turned out. I feel like I should be shorting every stock I can find that touches the consumer.

The housing bubble is deflating rapidly. I expect at least a 20% decline in median single-family house prices nationwide, and that number may be way understated.

A bursting of the bubble would force many homeowners to curb their outlays in order to close the gaps between their income and spending growth. That would surely precipitate a major recession that would become global, given the dependence of most foreign countries on U.S. consumers to buy the excess goods and services for which they have no other markets.

With soaring stock portfolios now ancient history and leaping house prices about to be, no other sources, such as inheritance or pension fund withdrawals, are likely to fill the gap between robust consumer spending and weak income growth. Consumer retrenchment and the saving spree I’ve been expecting may finally be about to commence. And the effects on consumer behavior, especially on borrowing and discretionary spending, will be broad and deep.

26 comments:

Anonymous said...

I don't understand this part of the article:
Furthermore, the value of all previous inheritances as reported in the 2004 survey was $49,902 on average, with $70,317 for pre-boomers, $48,768 for boomers and $24,348 for post-boomers. Clearly, these are not numbers that provide for comfortable retirements and, therefore, allow people to continue to spend like drunken sailors.

If one is not going to get much from his or her parents' estates, wouldn't one be saving more money rather than spending it? My (divorced) parents both died and, being poor or having surviving spouses, didn't leave me much, and thus I've resentfully been socking my money away or paying cash for things, watching other people spend, not aware the happy consumers were borrowing against themselves to do it.

David said...

"The national median existing single-family home price was $227,500 in the second quarter, up 3.7 percent from a year earlier when the median price was $219,400 (NAR)"

A 20% nominal price decline would bring price the single familiy home down to 181K. The real dollar decline would obviously be greater.

This seems too much for even a bubblehead like myself.

David
Bubble Meter Blog

Anonymous said...

well if there is a silver lining on this, joe consumer won't be buying as much "stuff" and since a lot of "stuff" is made of or made with or made of and made with oil, the price of gas might not cost so much going down the road a year or two from now.

Anonymous said...

if home prices stayed flat for 5 years that'd be a 20% decline from today's levels when inflation adjusted

Roccman said...

I have a bet with a co-worker that by October 2007 a 50% drop in the Phoenix area.

I think I am gonna win this one

Metroplexual said...

I'm with you Richard. Although favored quarters such as Paradise Valley may be spared so steep a haircut.

Anonymous said...

"Americans extracted 719 billion in cash from their houses last year after a 633 billin withdrawal in 2004"

Didn't equity extraction accelerate even more in the first half of this year?

What happens now that appreciation has stopped? Doesn't that strangle the equity extraction inflow?

Moreover, how much equity extraction has been financed by adjustable rate schemes? What happens to that debt service graph when rates adjust?

Roccman said...

Source: http://counterpunch .org/whitney0830 2006.html
>
> August 30, 2006
> Pop Goes the Bubble!
> The Great Housing Crash of '07
>
> By MIKE WHITNEY
>
> This month's figures prove that the so-called "housing bubble" is
> not only real, but that its cratering faster than anyone had
> realized. As the UK Guardian reported just yesterday, "the orderly
> housing slowdown predicted by the Federal Reserve will (soon)
> become a full-blown crash".
>
> All the indicators are now pointing in the wrong direction.
> Consumer confidence is down, inventory is at a 10 year high, and
> the number of homes sold in July was 22% lower than last year. As
> Paul Ashworth, chief economist at Capital Economics said, "Things
> seem to be getting worse very quickly. Freefall is a strong word,
> but I think it's the right one to use here." (UK Guardian)
>
> The housing bubble is a $10 trillion equity balloon that will
> explode sometime in 2007 when more than $1 trillion in no-interest,
> no down payment, adjustable-rate mortgages (ARMs) reset; setting
> the stage for massive home devaluation, foreclosures and
> unemployment. ("By some estimates housing activity has accounted
> for 40% of all the jobs created since 2001". Times Online) July's
> plunging sales are just the first sign of a major slowdown. The
> worst is yet to come.

Bill said...

Savings rate may be difficult to save



You decide – is this good news or bad news?

This morning's report on July personal spending is expected to reveal the biggest surge in spending since January and to come in at twice June's anemic 0.4 percent growth rate. The same report should also show that the growth in personal income declined ever so slightly, to 0.5 percent from 0.6 percent in June.

Doesn't sound so bad, does it?

But doing the math behind the report – if that's the way the numbers fall – should result in a savings rate that dipped further into the red, to negative 1.7 percent from June's negative 1.5 percent.

Now you may be leaning more toward the bad news camp.

If so, that puts you in the minority on Wall Street.

The savings rate will keep deteriorating if households continue to spend more than they earn, which is and has been what's kept the economy and financial markets humming.

But these "good times" must come to an end.

Some analysts predict that falling home prices will result in a higher savings rate. The theory, which has held in past cycles, is that as net worth declines, households will be more inclined to hold the line by saving more.

What if?

But what if economists are operating on a false premise? What if increasing savings is not an option?

For many high-income earners, a declining value of their real estate holdings will indeed lead to a higher savings rate. But that's not saying much, because this segment is already saving a good slug of its earnings and will simply add more to the savings line to offset what's being lost to the real estate entry.

Those who are better off than most can, and therefore will, preserve their net worth. Indeed, the wealthiest continue to garner a growing share of the income pie. At 50.4 percent, the share of national income going to the top one-fifth of households is at a record high.

Shakier foundation

But for the remainder of U.S. households, a decline in net worth – which is what an unrealized declining home value amounts to – will not necessarily compel them to save more.

The bottom line is that the current recovery is built upon a much shakier foundation than those of its predecessors. And the stakes attached to declining home prices are much higher than they used to be.

Drill all the way down and you find that the source of the problem is the questionable appraisals that have supported mortgages and refinancing loans that become increasingly less collateralized as time goes by.

With little in the way of home equity to fall back on and no savings to speak of, many households will resort to plowing further into debt just to get by. For some, doing their part to increase the savings rate may prove to be a luxury they can't afford.

Anonymous said...

How interesting.. Gary Shilling... related to Robert Shiller? LOL!

On a serious note, 20% nationwide median decline is not only possible, but probable.

Take one more look at Robert Shiller's chart and you will be reminded why.

Anonymous said...

20% from where? today? summer of 2005? summer of 2004?

my guess is based off my experience and the hockey stick graph posted earlier. so i say 60%.

how do i come up with that? well, if the recession of 2001 is the bottom, just after 9/11, prices will correct to that. i bought a new home in jan of 2002 at $230,000. at that time, papers started to run articles on the "shortage of land" and the great demand for housing. come summer of 2005 the same home i bought for $230 was selling for $550 (new construction).

i believe prices will return to 2001 figures. 60%.

good luck.

Anonymous said...

“The average life of a loan is less than five years, so why get a 30-year fixed-rate loan which locks you into higher payments?” says Teresa O'Dette, owner of O'Dette Mortgage Group in Tahoe City, Calif. “People are not buying homes to stay in them forever.”

O’Dette could afford a 30-year fixed mortgage on a home in the upscale Lake Tahoe area she lives in but instead chose a negative amortization loan with fixed monthly payments but an adjustable rate, currently at 7 percent. “So far, I’ve added $12,000 to my $900,000 loan, but the value on my home has gone up $300,000 since I took on the loan. If someone offered me $1.5 million on my house, that $12,000 extra is not much of an issue.”

AMAZING STUPIDITY. This ho deserves to lose her house..which she will.

Anonymous said...

'If someone offered me $1.5 million.... Hey STUPID. No one is going to. You are screwed!!!!

The 'claimed' value may have gone up 300000 but too bad there won't be anyone to pay you that becasue EVERYONE with a brain will offer you far less when you are filling your pants on your upside down mtg.

Stupid ho.

Anonymous said...

Borkfatty gets the STAR today!. . .very interesting comments on savings rate - I agree, that higher income earners will save more, and low income will just borrow more (or get a THIRD) job to support Citibank Mastercard. . . this reminds me of education - every time a report comes out that scools are "failing". . . upper middle class parents redouble their efforts to help their children - give more money to schools, send them to a learning-center, get a touter, etc. . . but that only makes the gap between rich and poor students worse. . .probably poor parents can't afford the newspaper to read about how bad their schools are.

Bill said...

Ok I am sitting here, in my home Just arrived from work you know the kind of work that is not keeping up with inflation. My Salary for one..

Thinking of what is going on lately and the wealth factor involved in the Bush Tax cuts for the rich.

I feel there was a reason behind those tax cuts..and the reason is??

To keep the dollars flowing in the states. The top 1% gets a nice tax cut..more investment, more paper money fly's. With more I.O.U'S.

Then pump up housing let the lowlife Middleclass have Their Piece..inflate.. top 1% get a tax cut.

Prices No matter what they say on the goverment end, Are out of control..sure thank you for the Dime Cheaper Labor Day gas cut..Should have bee a buck.10 billion in profits..Ill take 1/3 of that and get out economy flowing agin... You want a bubble...here you go SAGFLATION.

Ahh yes the 70's women, no care in the world, WEED!, and if lucky a 'Job'. If you owned a house rates were 18%.

Good to be back there again...soon...if only I knew then what i Knew now, top 1% dont look to bad right about now.

Anonymous said...

Borakafatty said:

"Some analysts predict that falling home prices will result to higher savings rate."

"For many high income earners, a declining value in their real estate holdings will indeed lead to a higher savings rate."

I'm losing you buddy. First, if the homeowners have no equity, which majority are, as their property is overvalued, they can't save, because they still have to service their debts otherwise they will face foreclosure.

Some of the high income earners have also high debts. Their income is proportionate to their debts, so that they don't have any flexiblity of saving. I guess the popular quote; it's not how much you earn, but how much you save is very true. People who have high incomes, have high debts. It goes back to our culture of being impatient. There's a big difference in saving money in order to buy the stuff that you want versus buying that stuff through credit and then paying it. The former shows discipline and control, while the latter doesn't. The objective remains the same, but how it was acquired is what it matters. That's what separate the boys from the men.

Anonymous said...

Borkafatty,

Sorry for the spelling.

Anonymous said...

Anon posted
“The average life of a loan is less than five years, so why get a 30-year fixed-rate loan which locks you into higher payments?” says Teresa O'Dette, owner of O'Dette Mortgage Group in Tahoe City, Calif. “People are not buying homes to stay in them forever.”
This my friends is the problem that lead to all the symptoms.Teresa is a poster child for the charity case,special ed,preschool,undeveloped,easy marks,and shark food that inhabits the US.These people never did one hours worth of due diligence.Granted experience is the best teacher,but jump into a leveraged futures contract on real estate without preparation,and some small trades with losses and wins,then you are asking to be bluggened.Her statements are pure assumptions stemming from her emotional high to be rich.Why would anyone want a short term loan at 5.6% when they could have had a 30year at the same.The chance to lock in some of the best rates ever was turned down by even those that qualified.Why is it that Tereasa didn't know the basics of buy low sell high,or sell high buy low?She obviously has never examined a chart.If,one gos to the top of heavenly ski resort and looked down into the Carson Valley below,an amazing postulate forms in ones skull,There sure is a whole lotta open land over there.Tereasa-You don't get out much do you?

Anonymous said...

A 20% would do absolutely nothing to solve the affordability crisis.

It better drop a LOT more than that.

With the rise in interest rates, prices would have to drop 20% this instant just to get back to the "affordability" (cough, cough) we were at a couple years ago.

20% is way off as a "trough" number.

Anonymous said...

Think when the Fed talks about Americans saving again they are thinking long-term.

As in, people work their way out of debt and, finally, when they are free, are sufficiently traumatized by the credit debacle that their habits change - ie. saving becomes as attractive to them as living high on the hog on borrowed money used to be.

It's a long process but it's gotta happen.

The gov. wants people to become fiscally responsible again so that it doesn't have to pay for everyone's retirement/medical care,etc.

Anonymous said...

Keep in mind that a 20% drop in the median national price would mean 50% in some bubble markets, while areas that did not see a run-up would decrease 10%...

20 national is a pretty bold claim...

Anonymous said...

Anon 12:47;59:

I'd like to add to your comments about Teresa O'Dette: More often than not, you hear this a lot from loan brokers. I think their trying to sell these poor guys who listen to their sales pitch, an expensive loan. First, short term variable rates may be lower initially, but are bound to rise. If the homeowner finds a hard time keeping with the payments, they're going to sell them again (refi) and the process goes on. Everytime you refi, it cost money that goes in their (brokers) pockets.

In addition, no loan broker would like to see homeowners live in their houses permanently. They want them to move every 5 or 7 years so that there's always business available. It doesn't take much to figure it out. Loan brokers are salepeople and they will you exactly what you want to hear.

Anonymous said...

20% on 100% leveraged funding = world of hurt

Anonymous said...

seems pretty clear that oil is looking toppy here. We are clearly killing demand, and we have too much of it right now in the spot market. Just wait until all the new commodity fund money wants to pull out. It's funny, because most of the bitter angry Dems on this blog seem to be really bullish oil and afraid of everything in the world. I'm just afraid of Hillary and Al Gore, and Keith's p&l on his trades.

The New Banker/Repub/Commod Trader.

Anonymous said...

"seems pretty clear that oil is looking toppy here"

that is the true from a charting perspective.

however, the charts do not take into account mr. madman over there in the middle east. which is exactly why i've allocated some funds to energy and hedged it equity indexes. it was a good time to get in, when it dipped under $70 for a bit.

Anonymous said...

however, the charts do not take into account mr. madman over there in the middle east. which is exactly why i've allocated some funds to energy and hedged it equity indexes. it was a good time to get in, when it dipped under $70 for a bit.


better yet: replace "there in the middle east" with "here in the US"