Every once in awhile I like to re-read the classic bubble exposes. "In Come the Waves" is still #1 by me. But this Barron's story is also top-shelf.
IT WOULD SEEM TO HAVE IT ALL: four bedrooms, a guest house, a pool and a rock waterfall. But the vacation home in Naples, Fla., hasn't been drawing much interest from buyers, so the seller recently threw in that most modern of amenities: the $1 million price cut. That's brought the asking price down a full 25%. "If you want to sell, you've got to go back to '04 prices," says Chip Harris of Coldwell Banker Previews International, which is handling the property.
The market for second homes could use a second wind. After a long string of double-digit annual price increases, a number of second-home meccas across the country are suddenly suffering from plunging sales volume and burgeoning inventories of unsold homes. Result: Naples-style discounting is starting to spread.
[much more - read the full story...]
August 12, 2006
HousingPanic Classic: Re-read Barron's "The Big Glut"
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Gary Busse book the 2nd Great Depression is my fav.
UPDATED BOOK’S NUMBERS:
1) The PERSONAL SAVINGS RATE has been zero or negative for 15 months in a row and was minus 1.5% in May.
2) The homeowners’ HOUSEHOLD FINANCIAL OBLIGATIONS RATIO hit 17.6% for the first quarter of 2006, the highest level in the Federal Reserve Board’s 25 years of published data.
3) HOUSEHOLD DEBT AS A PERCENT OF DISPOSABLE INCOME hit 127% at the end of 2005, consistent with the book’s prediction and more than 50% higher than in 1990. No new data is available.
4) The FED”S OVERNIGHT FUNDS RATE, which affects credit card and home equity loan rates, was raised to 5.25% in June, 2006. This is even higher than the 4% predicted in the book.
5) The 1-YEAR CONSTANT MATURITY TREASURY INDEX (CMT), which is the basis for most adjustable rate mortgages, is now at 5.17%. This is even higher than the 4% that the book predicted. This bodes poorly for those facing an adjustment in their adjustable rate mortgage payments.
6) The GDP grew at a 5.6% annual rate in the first quarter of 2006. This was higher than the book’s prediction of a leveling off of the GDP in 2006. However, in the second quarter, the GDP growth was only 2.5% as the rate of consumer spending slowed and home building went into the dumper.
MY OUTLOOK ON THE ECONOMY:
Consumers are hanging in there, but just barely. For four straight months, inflation-adjusted spending rose by 0.2% or less. Consumer spending is being enabled by borrowing and dipping into savings. In fact, in June there was a negative flow of money into mutual funds, probably indicative of the consumer’s withdrawing of funds to make debt payments and to continue their lifestyle.
Housing continues to look like the trigger that will cause the whole house of cards to fall. Spending on home building dropped 6.3% in the second quarter, the largest drop in almost 6 years. New home sales in June were down by 3% versus May, and the median price of a new home has dropped almost 6% in the last 3 months.
In addition to the above, those with adjustable rate mortgages (10 million households) are facing huge increases in their payments over the next year or two. This year, $330 billion of ARMS will adjust upward. Many homeowners won’t be able to make their payments, forcing even more homes onto the market. Then housing prices will really dive as the market gets saturated.
Because of their debts, consumers in general are going to be forced to reduce their spending, slowing the economy. This scenario will take time to unfold, so 2007 still looks like the year when the depression will start!
READERS’ ISSUE OF THE MONTH
“As the economy slows, why won’t the Fed just lower interest rates and get the whole party going again?”
Author's reply:
Core prices, which exclude food and energy, rose at a 2.9% annual rate in the second quarter. This was the highest rate in almost 12 years and far exceeded the Fed’s comfort zone. Since fear of inflation was what caused the Fed to start raising rates in the first place, they are going to be very hesitant to reverse direction and start chasing a slowing economy, thereby throwing inflation concerns to the wind. They may stop raising the rates, but it will take a very severe downturn to cause the Fed to reverse interest rate direction. And there is a real question whether inflation or a slowing economy is reversible no matter WHAT the Fed does.
Even if the Fed were to dramatically lower interest rates, its effect would probably be minimal. Most of those who wanted to enter the real estate market have already done so, enticed by all the creative financing schemes at the early stages of the housing bubble. Now, with higher interest rates, knowing the risks of ARMs, and an awareness that housing prices do not always go up, the attractiveness of getting into real estate has greatly diminished. Credit card payments will go down little with the new rules on minimum payment requirements, and consumer total debt won't be affected at all.
Note: Intelligent people can disagree with the above. This information should not be the sole criteria for an investment or any other decision.
Sorry, it's Warren Brussee
The Economist often
is brilliant. June 16, 2005 has to be just about the exact top.
There's 20 times more news in there than any other newspaper or magazine, and it's not written assuming you are a moron or to pamper your widdle prejudices.
They were right about the Nasdaq bubble, and they told Greenspan to pop it in 1998 or 1999. I was mad at them because I was long stocks then but I recognized they might have a point.
Sometimes they are of course very very wrong.
Remember the infamous "Drowning in Oil" cover from 1998 or so? Crude was at $10 and they predicted $5 or less for a decade.
And then, on the eve of Iraq: "We vote for war". At least they aren't still delusional about the situation like our ruling triumvirate.
I'm waiting for their first real Peak Oil issue. That will be the mainstream.
Plenty of houses. No gas to get to them.
Just reread the Penniless Billionaire, a book I bought in 1980. Talks about the Romans, French, German's and the US and their bouts with hyperinflation. The interesting thing about the US portion was that you can see everything repeated from the 60s and 70s in the 90s and 2000s. The one thing for sure, real estate cycles or not, it is prices continue to rise due to inflation. The book felt the inflation of the 70s couldn't last! Of course by 1980 the government made an attempt to reign in inflation with 18% interet rates but it wasn't so much an attempt to roll back prices as much as to tame their march forward. I laughed when I read about the unsustainable rise in home prices in relation to earnings when the average household income was $17,000 and home prices $67,000. What is so different from today? Prices haven't gone down. It mentioned that there was a period in US history, before fiat money, when an old man paid the same price for a loaf of bread as he did as a young man. Not any more. Inflation is real and our currency has continued to be debased.
The book basically showed how the upper 1% has always used inflation to get richer and how they manipulate the inflation game to their advantage to absorb ever more of a nations wealth. They also showed how in Germany the government, with a nod from the USA felt that inflation was better than mass unemployment and the chace for a bolshevik revolution. Of course they hyperinflation made many very rich in Germany at the expense of the working class and then gave rise to facism. I doubt that our government will honestly tame inflation if it means revolution.
The book is definitely worth reading as it reminds us that we all are pawns of the rich.
Proverbs 22:7 teaches us that "The borrower is servant to the lender." Many people find themselves slaves to debt, struggling to make ends meet each month.
Luke 8:14 describes this condition as being "choked by the cares and riches and pleasures of this life."
If you have any debt at the start of 2007 you could be on the downward ride of a lifetime. The 2nd Great Depression starts soon. Prepare yourselves. No debt, no where.
I'm glad congress made new BK law. Initially I was pissed about it, but now I see how many people will become ensnared and how I will profit from my fellow american's misery.
Fitzgerald, how will you profit? With the new BK laws only the banks, the rich will profit as they have throughout history. The rich manipulate the markets, inflate money supplies to their ends so they can acquire large assets and pay for them with fiat money they create. They lend to the poor to keep them enslaved to the land, factories, dead end jobs knowing they can never really be free. What is the difference between the worker and a serf?
My wife said to me when they passed that law that the lenders recognized they had lent themselves into a pickle with their excessive loans for credit and homes and cars and toys and they were determined that they wouldn't be left holding the bag like in the past. Plus they wouldn't have to act responsibly in lending to those who can't afford to borrow because they will not be able to wipe away their debts in BK.
Do you think if a massive economic meltdown occurs that the American citizens will sit idly by and not react to the burden of debt, no jobs, and a legal system that doesn't give them an opportunity to start over? Even the Bible had a year of Jubiliee freeing debtors from their debts.
I think inflation will set people free from those debts but if it doesn't and there is another Great Depression as a result of the financial collapse of the American economy I do believe a revolution will occur. Most likely we'll become a facist state as I don't think the rich will tolerate 250,000,000 poor indebted American's from ruining their party.
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