Why Housing Is About to Go "Pop!"

[A. Fig Lee]

Ето не квестион что харддрайв будет фeйл.
Вопрос - когда?

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Americans' incomes fell for two years
Report: IRS data shows first-ever consecutive-year drop; loss of jobs blamed.
July 29, 2004: 11:04 AM EDT

http://money.cnn.com/2004/07/29/news/ec ... tm?cnn=yes

NEW YORK (CNN/Money) - Americans' overall income shrank for two consecutive years after stocks plunged in 2000, the first time that has effectively happened since the current tax system was put in place during World War II, according to a published report Thursday.

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... и сразу-же вторая новость.

American wages, benefits rise moderately
Labor Department reports 0.9 percent rise in second quarter
The Associated Press
Updated: 9:34 a.m. ET July 29, 2004

http://www.msnbc.msn.com/id/5547626/

WASHINGTON - Wages and benefits for U.S. workers rose a moderate 0.9 percent in the April-June quarter this year, down slightly from the previous quarter’s increase, as price pressures for benefits like health insurance eased significantly.

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New-home sales edge lower
June data follow record pace in May
The Associated Press
Updated: 10:59 a.m. ET July 27, 2004

http://www.msnbc.msn.com/id/5527309/

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Freddie Mac: No Housing Bubble

By Salim Haji
July 30, 2004

http://www.fool.com/news/commentary/200 ... 073003.htm

As sales of existing homes hit an all-time high in June, concern is increasing among investors that the U.S. real estate market may be teetering on the edge of a cliff.

On the front page of last Sunday's New York Times business section was a column entitled "Housing Bust: It Won't Be Pretty," citing a Goldman Sachs (NYSE: GS) study that indicates that U.S. home prices are significantly overvalued. As I first wrote back in April, I believe the evidence is strong that a bubble is building in residential real estate, and that like all bubbles, it will eventually burst.

Not everyone agrees with this view. In a presentation at UCLA a few weeks ago and in a subsequent telephone conversation with me, Amy Crews Cutts, the deputy chief economist at Freddie Mac (NYSE: FRE), argued that there is no housing bubble in the U.S. today.

According to Cutts, the term "bubble" is a situation in which the price of an asset or an asset class is not driven by fundamentals. The Internet Bubble of the late 1990s is a classic example. The prices of stocks were driven by speculators who bought stocks based primarily on the expectation of being able to resell them at a higher price. As Fed Chairman Alan Greenspan famously said, the market was driven by "irrational exuberance."

Bubbles are based on a herd mentality -- as long as the herd believes that prices will continue to rise, bubbles survive. Bursting is difficult to predict, because identifying what makes the herd all of a sudden change its view about future prices is nearly impossible. (Greenspan was about three years early with his comments on the dot-com bubble in 1996.)

According to Freddie Mac, the housing market remains rational. While Cutts cautioned that rational markets can fall based on underlying economic conditions, they don't exhibit the boom and bust characteristics of bubbles. She offered six reasons why Freddie Mac doesn't believe that a housing bubble exists:

1. Supply of housing for sale is low. The current inventory of new and existing homes for sale is lower today than it has been in the last 20 years. For new homes, as the homebuilding industry has consolidated, such homebuilders as KB Homes (NYSE: KBH), D.R. Horton (NYSE: DHI), Lennar (NYSE: LEN), or Centex (NYSE: CTX) have increased their share of the market over small, local players. These larger, more sophisticated homebuilders use options and other tools to minimize the capital they put at risk in particular housing markets. As a result, Cutts argues, the supply side of the housing market can adjust to changes in demand much more quickly than it could in the past. If demand drops off, supply can be quickly cut back, which basic microeconomics tells us will mitigate any steep drop-off in price.

2. Housing doesn't resemble the typical bubble asset. According to Freddie Mac, the purpose of a typical bubble asset is investment, not consumption. In addition, typical bubble assets have low transaction costs and are held for short periods of time -- speculators can buy and resell the asset rapidly to make a quick profit. Housing is different. The transaction costs are high, holding time is typically quite long, and most people buy homes primarily for consumption, not investment.

3. Mortgage rates are low. Freddie Mac argues that even with the recent increase in mortgage rates, we are still very far away from the 30-year mortgage rates above 10% that existed in the early 1990s. Even if rates were to rise 100 basis points, rates would still be below the 1971-2004 average of 8.5%. With sustained lower mortgage rates, people can -- and will continue to be able to -- buy more expensive homes.

4. User costs are negative. Related to the previous point, as long as mortgages are low and home prices continue to rise, net user costs are negative. Freddie Mac argues that interest (after tax), maintenance, and taxes approximate 6.5% of the price of a house. If the home price rises at 6.5% per year, the owner gets to live in the house "for free."

5. Household incomes and house prices in balance in the long term. Freddie Mac's presentation includes data that illustrates that between 1991 and 2001 the growth in home prices and average household income has been about the same. Cutts does concede that if these data were extended to 2004, a gap would exist. (According to The Economist, the ratio of home prices to average household income is now at a record high: 14% above its long-run average.) But she argues that the ratio needs to be compared to similar points in the business cycle -- she now expects wage growth to accelerate as the economy recovers and "catch up" with home prices.

6. Rent vs. price growth is aligned. The equivalent of the P/E ratio in the real estate market is the ratio of home prices to rents. In the U.S., again according to The Economist, that ratio is now at a 20-year high and more than 15% above its average value between 1975 and 2000. Freddie Mac argues that this data is misleading, because it does not take quality of housing into account. Cutts claims that quality in rental housing has not kept up with the increasing quality of homes that are owned. As a result, the widening ratio is explained not a by a bubble in home prices, but rather by a widening spread in the quality of homes for rent vs. those for sale.

My opinion
While I believe that many of the points that Freddie Mac raises do make the real estate markets less susceptible to bubbles than markets where the asset traded is more speculative (such as Internet stocks), I don't agree that one can conclude that bubbles in real estate can never happen.

Data indicates that real estate bubbles, while less frequent than in other types of markets, such as equity markets, do indeed occur: A recent study by the International Monetary Fund looked at 14 countries between 1970 and 2002 and found 20 instances of real estate bubbles bursting (as well as 25 examples of equity prices crashes).


I also don't believe that the real estate market is fundamentally rational. Changes in underlying economic conditions simply cannot explain the fact that in the last year home prices soared 18% in Los Angeles or 14% in Miami. In my opinion, like all markets where a subjective view of the future plays a key part in what people are willing to pay for the asset being traded, the residential real estate market is driven in large part by group psychology.

In my mind, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett's famous allegory of the manic-depressive Mr. Market (first articulated by his mentor, Benjamin Graham, and recently explained in a commentary on value investing by Zeke Ashton) also holds true for the real estate market.

Perhaps Mr. Real Estate Market is a bit more emotionally stable than his brother Mr. Equity Market, but fundamentally the family's mental health is not terribly sound.

In the same way that adherents of the efficient market theory believe that stock prices accurately reflect everything that is known about a stock and its prospects, Freddie Mac believes that current prices in the U.S. real estate market are rational and reflect underlying economic conditions. While prices may change as economic conditions change, investors should rest assured that there is no psychological bubble in the housing market that is going to burst anytime soon.

I respectfully disagree.

Fool contributor Salim Haji owns shares of Berkshire Hathaway, but no other stocks mentioned in this article. The Motley Fool is investors writing for investors..

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Housing Bust: It Won't Be Pretty

Source: The New York Times
URL Source: http://www.nytimes.com/2004/07/25/busin ... watch.html
Published: Jul 25, 2004
Author: GRETCHEN MORGENSON

LET the stock market slide. Let the bond market sink. As long as home prices keep rocking, it's easy for Americans to feel fat and happy.

But what happens when the run-up in housing prices loses steam, or worse? The implications are sobering, not only for homeowners but also for the economy as a whole.

With the growth rate for home prices starting to slow, now may be the time to ponder what a bear market in real estate may bring. A recent study by two economists at Goldman Sachs provides some answers.

For now, prices are still climbing over all. The average home price in the nation rose 7.71 percent in the 12 months ended in March.

But the first three months of this year showed far slower growth than previous periods. Prices rose only 0.96 percent, according to the Office of Federal Housing Enterprise Oversight, which keeps an eye on Fannie Mae and Freddie Mac. The last time housing prices grew by less than 1 percent in a quarter was in the spring of 1998.

More ominous, six states showed declines in housing prices in the first quarter: Vermont, Alaska, North Dakota, South Dakota, Iowa and Nebraska. No state had price declines in the previous quarter.

To be sure, home values are still hot in many spots. In the most recent 12 months, prices have jumped by more than 15 percent in Hawaii and Nevada, by 14 percent in California, 11 percent in New Jersey and 10 percent in New York.

In nominal terms, United States home prices are up 60 percent since 1995; in real terms, adjusted for inflation, they are up 37 percent. Viewed historically, home prices are up twice as much now as they were in the bullish real estate markets of both the mid-1970's and the 1980's.

As a percentage of disposable income, home prices are more than 18 percent above the long-term average. Prices exceeded that average by only 4 percent in the 1970's and 8.5 percent in the 1980's boom.

Michael Buchanan, a senior global economist at Goldman Sachs, and Themistoklis Fiotakis, a research assistant there, reckon that at current interest rates, home prices are now overvalued by 10 percent, on average. Because this figure spans the entire nation, the hottest markets - California and New York - are obviously more overpriced.

The economists compute fair value in home prices by using a variety of measures, including interest rates, population and demographic data, and the overall health of the economy. If interest rates increased by one percentage point, the economists said, home prices in the United States would be overvalued by 15 percent.

None of this would be worrisome if homeowners had not turned the paper profits in their properties into cold, spendable cash. But withdrawals from home equities have recently totaled 6.3 percent of household disposable income, according to the Goldman study. In the late 1980's, equity withdrawals reached only 2.5 percent of disposable income.

Federal Reserve studies indicate that as much as half of the equity withdrawals went into personal consumption and home improvements. As a result, the Goldman economists estimate that equity cash-outs added 1.75 percent to the growth in the gross domestic product in 2003. That is a significant increase from the 1.25 percent kick that equity withdrawals added in 2002.

Consumption would slip 1 percent, Goldman estimated, if housing prices fell by 10 percent, to the fair value level. But if prices decline to well below that, as often happens when overheated markets go cold, consumption may fall by 2.4 percent, Goldman reckoned.

Such a housing crash took place in Britain in the early 1990's. At the market's low, home prices had fallen by 27 percent, 5 percent below Goldman's estimate of fair value at the time.

Such a decline is not expected here, said Dominic Wilson, a senior global economist at Goldman. That's because home prices in Britain had escalated much more than they have in this country, even now. And interest rates had soared into the high teens, which is unlikely here.

But even small declines in home prices could hurt the economy. "The precise degree of the vulnerability isn't going to be clear until we see house prices slow," Mr. Wilson said. "You've never seen consumers this stretched, operating at levels of leverage we've never experienced before. House prices are starting at a level that is pretty high relative to what we think fair value is going to be, and the economy as a whole has gotten a lot more sensitive" to housing-related spending.

Indeed, Goldman estimates that home equity lines of credit and the like have magnified the effect of housing wealth on consumption over the past decade, taking it to 10 percent from 4 percent.

Although rising home prices have been stopped dead in the past by sharply higher interest rates, the Goldman economists note that bear markets don't necessarily need major triggers to get started.

Small events can change the market's psychology, and asset bubbles sometimes just cave in on themselves.

One risk that looms large, however, is that United States policy makers would have few tools to cushion the fall if a housing decline gained real momentum. Interest rates are already so low and fiscal policy so loose that little could be done to ease the pain.

"This is one of a series of risks and imbalances that suggest there has been a price to the low-interest-rate policy that led the recession to be much shallower than it might otherwise have been," Mr. Wilson said. "Fiscal and monetary policy are both already fully utilized. If things go wrong from here, the U.S. finds itself in a more fragile position." (1 image)

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Time Home Sales Before Housing Bubble Bursts
Economists Say Home Price Hikes Outpace Incomes, Signifying Bubble

POSTED: 3:41 pm EDT July 30, 2004

http://www.thewbalchannel.com/money/3598061/detail.html

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HOUSING BUBBLE GROWS

County real estate selling at higher prices than 2003

By LARRY PARSONS

Herald Staff Writer

Posted on Tue, Jul. 27, 2004

http://www.montereyherald.com/mld/monte ... 252913.htm

The home real estate market in Monterey County stayed hot during the first half of 2004, as more homes sold for higher prices than a year ago.

The median price of a county home sold through June 30 jumped from $410,500 in 2003 to $532,000 this year, an increase of almost 30 percent, according to the Monterey County Association of Realtors.

In June alone, the median sales price was $575,000, up 36.6 percent from June 2003, the state Association of Realtors reported Monday. That means half the homes sold for more, half for less.

The number of home sales was up 22 percent the first half of this year, and sales were occurring faster. The average number of days homes have stayed on the market dropped from 73 during the first half of last year to 59 days this year. "It's very indicative of interest rates staying low. It's just a kind of frenzy," said Sandy Haney, chief executive officer of the county Realtors association.

Though interest rates have risen slightly from the all-time lows of the past two years, increased borrowing costs apparently haven't deterred many buyers.

"There's a lot of pent-up demand and a lack of supply," Haney said. "Bidding wars are still going on."

Strong demand is reflected by the narrowing of the gap between asking and selling prices. On average, homes have sold for almost 97 percent of their listing price so far this year, up 1 percent from 2003, according to the county Realtors association.

In two areas -- Marina and North Salinas -- sales prices are matching or exceeding listed prices. Homes throughout Salinas are selling within a percentage point of listed prices.

Prices of high-end homes in Pebble Beach and Carmel have shown the largest year-to-year increase. The median Carmel home price rose by 35 percent to $1,250,000 through June. In Pebble Beach, the median price shot up to $1.3 million, a jump of 35.4 percent over the first half of 2003.

Marina and Seaside median prices also increased sharply. The median price for a Marina home was $510,000, up nearly 31 percent; the median price in Seaside was $490,000, up almost 34 percent.

Seaside has seen one of the highest median price increases over the past year, primarily due to sales in the upscale Seaside Highlands development.

"Obviously it's been good, especially for good price ranges," said Jeral Johnson, a Carmel Realtor.

Areas where first-half median home prices rose between 20 percent and 30 percent were: East Salinas, $382,500 (22 percent); North County, $570,000 (24 percent); North Salinas, $455,000 (28 percent); Pacific Grove, $735,001 (28 percent); South County, $340,000 (23 percent); and South Salinas, $441,500 (21 percent).

Median prices were up between 1 percent and 20 percent in Carmel Valley, $910,000 (1 percent); Del Rey Oaks, $600,000 (16 percent); Monterey, $699,000 (15 percent); and Monterey-Salinas Highway, $745,000 (5 percent).

The South Coast was the only section of the county where first-half median home prices dropped, declining by about 9 percent to $1.2 million from $1.32 million in 2003.

Home sales are typically slow during the second half of the year, Haney said. The November presidential election likely will affect the market, too.

"It's going to be a huge part of how the economy goes the rest of the year," Johnson said. "It's going to be an interesting end of the year."

Housing prices $532,000 Monterey County median home sale price in the first half of 2004 $575,000 Monterey County median home sale price in June $191,800 National median home sale price in June

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The Housing Bubble Builds

By Salim Haji
July 8, 2004

http://www.fool.com/News/mft/2004/mft04070844.htm

As interest rates have increased, mortgage refinancing has slowed down, hurting companies such as Washington Mutual (NYSE: WM), which recently warned that earnings would come in below expectations. But the bubble that I have argued exists in the U.S. real estate market shows no signs (yet) of bursting.

Home prices have continued to increase, and the rate of price increases also continues to accelerate. The Office of Federal Housing Oversight recently released its house price data for the first quarter of 2004. U.S. home prices rose 7.7% over the first quarter of 2003.

Further, the rate of price increases has been steadily increasing since 1990. The 7.7% yearly price increase in the latest quarter is greater than the 2000-2004 average of 7.3%. And the average yearly price increase since 2000 is higher than the average for the second half of the 1990s of 4.0%, which is in turn significantly higher than the average of 1.9% for the first half of the 1990s.

Activity and interest in real estate also appears to be heating up on Wall Street. In the last few months, both Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER) have announced plans to develop large real estate funds and high-profile hires to head the new funds. The activity on Wall Street in real estate is reminiscent of the atmosphere at the height of the Internet stock bubble, when every Wall Street firm had to have its own Internet fund and when high-tech analysts were treated as superstars. With Internet-like hyperbole, TheDeal.com recently reported that "Raising real estate funds is all the rage on Wall Street this summer."

Finally, housing stocks such as KB Homes (NYSE: KBH), D.R. Horton (NYSE: DHI), Lennar (NYSE: LEN), or Centex (NYSE: CTX) continue to remain strong. Over the last 12 months, despite the changing interest rate environment, all four stocks are up, and three of the four have outperformed the S&P 500.

All of this indicates to me that the real estate bubble is alive and well. Like all bubbles, it will eventually burst. The longer and bigger it grows, the more painful the bursting will be.

Fool contributor Salim Haji owns a home in Denver, Colo., but does not own any of the stocks mentioned in this article.

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Housing Market Set for a Leak, Not Bust
Reuters
Tuesday July 27, 9:12 pm ET
By Ilaina Jonas

http://biz.yahoo.com/rb/040727/construc ... ing_1.html

NEW YORK (Reuters) - For over a year, headlines warned of a U.S. housing bubble and the inevitable bust.

But home builders have kept setting records constructing new homes. And prices of new homes in some areas continued rising -- 20 percent higher in some areas than they were last year.

So where's the bust?

It's missing in much of the government's official housing data. On Tuesday, the U.S. Commerce Department said sales of new homes dipped to a seasonally adjusted annual rate of 1.326 million units in June -- down 0.8 percent from a record pace of 1.337 million units in May.

Once again, the housing sector defied economists' expectations for a drop-off. The new home sales figures came a day after the National Association of Realtors (News - Websites) reported that existing home sales jumped to a record high in June.

But the data hasn't changed housing analysts' minds.

Unlike the stock market, where the tech-loaded Nasdaq Composite Index (NasdaqSC:^IXIC - News) lost 37 percent in just three months in 2000, the housing market won't suddenly pop, experts said.

Instead, it will deflate as if it sprung a slow leak.

"The stock market focuses on bubbles because that's what happens in the stock market. It just collapses," said Natexis Bleichroeder analyst Barbara Allen. "That isn't what happens in the housing market. You get some markets where you will get price declines. That's happened in the past in California and in the Northeast, and I think we'll have it again, over a period of a couple of years, though."

Allen said there already are pinhole leaks.

FIRST-TIME BUYERS HURT

"The first signs that we've seen of it has been the Midwest and companies focused on first-time home buyers," she said, referring to Dominion Homes, Inc.(NasdaqNM:DHOM - News), whose sales volume dropped 44 percent in the second quarter.

"You're starting to see the impact of higher rates on the first-time home buyers," Allen said. "If you get rates that go up, it will be more difficult for them to qualify."

While still near the lowest levels in a generation, mortgage rates are a little more than half a point higher than their March nadir.

In June, U.S. sales of new homes fell 14.2 percent in the Northeast and 13.1 percent in the West, according to the Commerce Department statistics released on Tuesday.

HSBC economist Ian Morris said that with home sales setting record highs in May and June, the downside in the residential real estate market is about a year away.

"The timing of it is difficult," Morris said. "But by the middle of 2005, the party will be over."

Prices are 10 percent to 20 percent too high, he said.

THE FED GIVETH ... AND TAKETH

The Federal Reserve created the housing boom by driving U.S. interest rates to 46-year lows, and the Fed also will be the architect of the housing slowdown with its current policy of rising rates, Morris said.

The fallout from the stock market crash of 2000 and the subsequent three-year bear market will look tame compared with a decline or even a leveling off of housing prices, Morris warned, because more people have more of their wealth tied up in their homes than they did in the stock market.

"Some academic studies suggest that the negative housing wealth effect could be more than twice as powerful as an equity wealth effect because your average person owns a home, but doesn't necessarily own that much stock," he said.

Many experts said the areas at most risk are the hot spots of the New York, Boston and Chicago metropolitan areas, and above all, California, where the median cost of an existing home in June rose to a record $469,170 -- up $100,000 in a year. In May, when the median price was slightly lower, only 19 percent of households in the state could qualify to buy a median-priced home, Allen said.

But Morris said the risk is spread nearly nationwide.

"I get 20 states plus (Washington) D.C. looking pretty rich compared to their histories, and that accounts for half the population," he said. "It's a bit more than a few local bubbles here and there."

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Bubble Trouble

By Scott Patterson
July 29, 2004

http://www.smartmoney.com/theproshop/in ... y=20040729

IS THERE a housing bubble?

Wildly mocking forecasts by experts that the housing market simply can't keep rising, U.S. home buyers have displayed an endurance that six-time Tour de France champ Lance Armstrong would envy. In June, existing-home sales rose 2.1%, with the average house going for $191,800 — a record, according to the National Association of Realtors.

The question is whether the housing market is going to turn from blazing money-maker to a sad pile of smoldering ashes as the Federal Reserve squeezes credit by hiking interest rates.

Robert Shiller, a Yale economist and author of "Irrational Exuberance," thinks there's no question that the U.S. is in the midst of a dangerous property bubble fueled by years of easy access to cheap cash. Shiller, who famously called the dot-com bubble in the late 1990s, is planning to reissue his book in 2005 with a fresh chapter arguing that there's a property bubble not only in the U.S., but world-wide. When it pops, he says, a global recession may follow.

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Is Your House Really An Asset?

Guest Commentary, by Brian Ochsner
July 29, 2004

http://www.prudentbear.com/archive_comm ... _idx=34603

Everyone’s probably heard the phrase (usually in ads by realtors or mortgage brokers) that the house you live in is your greatest investment or asset. This is because it’s the largest dollar figure on the average American’s personal balance sheet, and most homeowners get a tax break from Uncle Sam on their mortgage interest.

But Americans should ask themselves the question: Is my house really an asset? The answer can be yes and no, depending on when and where you bought your house, and how long you held it before you sold it. But unless you rent out other rooms in your residence for more rent than your mortgage payment, it’s not an asset. And I’ll explain why if you keep reading.

With any investment, you obviously want to make a profit. If you bought a house in Denver in the early 90s, or California in the mid-to-late 90s (and held for several years before selling), prices in both areas skyrocketed, and you would have pocketed some great capital gains.

One of the biggest mistakes average investors have made throughout history, is to assume what’s happened in the past will continue to occur in the future. I know people who have bought houses in “up-and-coming” areas of Denver at prices I wouldn’t touch with a 10-foot pole. They’re betting - and I mean that literally - on future appreciation over the next few years, just like that of years past.

The problems with this theory are the assumptions behind it. The average American is assuming that mortgage rates will stay at 40-year lows, inflation won’t be a problem now nor in the future, and that wages won’t be negatively affected by outsourcing of blue and white-collar jobs to India and China. And that prices will keep on rising, just like they have through the 90s and early 2000s.

Besides location, condition, square footage and amenities, the two main factors that affect all home prices are interest rates and income. Right now, a homeowner can leverage his or her annual income up to 4 times for the price of a house. In other words, if someone makes $50,000/year and has good credit, they can buy a $200,000 house.

With any investment, you should know if you’re in a bull or bear-trending (up or down) market before you buy – and know if you’re in the early or later stages of that market. This will give you a decent idea of how much upside potential an investment may have. It won’t guarantee you that you’ll make money in the short-term, but should ensure longer-term profits.

The book “Financial Reckoning Day,” quotes a memorable phrase by the late-90s “tech-stock Messiah” George Gilder. He told investors that America was in a “new economy” and that you couldn’t afford to be out of the stock market – the same mantra preached by Wall Street. He also had this interesting statement about investments: “I don’t do price.”

OK…alrighty then. Looking at the 60% drop in the NASDAQ from March 2000 until present – not to mention the decrease in price of most stocks and mutual funds in this time frame - that statement doesn’t make any sense. An investor that doesn’t “do price” is like a radiator mechanic who doesn’t “do temperature” – eventually they’ll both get burned.

It doesn’t matter if the investment is stocks, bonds, real estate or Peruvian llamas. The fundamentals and principles of sound investing still apply, whether the year is 1904 or 2004. I’ll be the first to admit that investing isn’t an exact science, and even experienced investors can make mistakes that cost them money.

However, if you know the fundamental and technical factors (or trends) that affect any investment you make, the odds of being successful and profitable go way up. Today, It looks like the US is similar to where the UK was about 100 years ago. Britain had the largest empire in the world, and was the biggest economic powerhouse on the planet.

Then these upstart Americans started creating assembly line technology and an Industrial Revolution, which led to the biggest economic expansion the world had ever seen. These Yanks of the early 20th Century were industrious, ingenious, and had a strong entrepreneurial spirit.

Now we’re seeing these “upstarts” in China and India. Because of currency differences and the huge demand for jobs, they’re willing to be paid only 10-20% of what an American worker is paid to do the same job – sometimes even less than that.

When manufacturing jobs started leaving the US and going overseas, so-called experts said that we could make do by having a service economy, and manufacturing didn’t matter any more. Now that service jobs are also being outsourced, where does America go from here? Probably with more people being self-employed entrepreneurs out of necessity, but that’s another essay for another time.

Back to the main point – how will these trends will affect the value of US real estate? Again, the two main factors that affect the price of real estate are 1) mortgage interest rates, and 2) a homeowner’s income. Since most Americans depend on a job for their income, and salaries are under deflationary pressure from outsourcing and a sideways-trending - or “muddle-through” - economy, this doesn’t appear to be a bullish factor for real estate prices.

Looking at mortgage interest rates, they’re still at multi-decade lows. A 30-year fixed mortgage is around 6% as of this writing. How long these rates will stay this low is anyone’s guess. My advice would be to expect rates to significantly increase (at least 1-1.5%) in the next 12 to 18 months.

There are probably bond traders and technical analysts who could give a more accurate prediction of when this will happen. My focus is primarily on the fundamental trends, and staying ahead of them – even if I’m several months to years ahead of time. A wise man once said: “It’s better to be two years early than a day late.”

Today in America we’re a very short-term thinking society. Anything that occurred more than a year ago is considered ancient history. To have a good grasp of investments and trends, it’s very helpful to look back many decades – up to a century – to look at the big picture, and primary trends.

Being a successful investor is like being a successful quarterback in football. He throws the ball where the receiver will be, not where the receiver is when the ball leaves the quarterback’s hand.

An investor or businessman that can see what trends will occur in the future - and take action to profit from those trends – will be the ones that make the most (or lose the least) money. Generally, these successful businesspeople don’t do what the “thundering herd” does, relying on “conventional wisdom” – which is an oxymoron like postal service, or jumbo shrimp.

Whenever a large number of people (usually who don’t have a clue what they’re talking about) are in agreement that something is a safe bet, almost every time it’s not. Keep this in mind whenever you hear someone say, “You can’t lose by investing in _______.”

There are a few business-savvy people who might say this as well. However, they’re saying this because of what has worked for them in the past with their experience, and assuming it’ll continue to work in the future.

The biggest reason that a house isn’t an asset, is because of Robert Kiyosaki’s (best-selling author of the book “Rich Dad, Poor Dad”) definition of assets and liabilities. An asset is any investment that puts cash into your pocket, and a liability is anything that takes cash from your pocket.

Although most homeowners receive a tax break from the government on the mortgage interest deduction, the net effect is a homeowner paying a dollar in interest to the mortgage company, and receiving 30 cents back in cash benefit from Uncle Sam. Doesn’t look like a great ROI (Return on Investment) to me. If you don’t believe me, do the math with a competent CPA or tax attorney and find out for yourself.

Most successful real estate investors rely on cash flow and the cash-on-cash return as the measure of a good property investment. If someone’s made money by selling a house for more than they bought it for, obviously it was a good purchase and sale for a capital gain. However, if you look back throughout history, most real estate markets aren’t like the ones we’ve seen in the late 90s and early 2000s.

Rapidly appreciating prices (manias or bubbles, if you want to call them that) that boom in any market, always come back down to earth in a bust. Common sense tells me that interest rates can’t stay at these lows forever, and incomes still appear to be in a sideways to slightly-declining holding pattern, no matter what the government numbers say.

This is from talking with people here in the Denver area, asking how their job – or their neighbor’s job – is going. Also noticing that foreclosures in the Denver-metro area are still steadily increasing in 2004 compared to 2003.

And - I still see plenty of people with the disease known as “affluenza,” or keeping up with the Joneses. Lots of “new paint,” as my dad from Kansas would say, referring to farming and ranching neighbors of his that bought new machinery they really didn’t need - or really couldn’t afford. This is generating a “giant sucking sound” on their bank accounts, and hurting their personal financial statements.

In the short-term, anything can – and usually does – happen. Markets that should go up can go down, and vice versa. But fundamentals are still fundamental. They’re economic laws that people will pay the consequences for if they break them. Like the old commercial in the 70’s where the mechanic said: “You can pay me now, or pay me later.”

By confusing assets with liabilities, Americans could be paying both now and in the future for a very long time.

Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy

[ax3816]

довольно хорошая статья - ответ на вопрос риэлторов "А с чего это цены на недвижимость должны упасть? "

Money Created 'Out of Thin Air'
Guest Commentary, by Richard Benson
July 31, 2004

http://www.prudentbear.com/archive_comm ... _idx=34679

Richard Benson is president of Specialty Finance Group, LLC , offering diversified investment banking services.

We hope this brief essay stimulates your thoughts with respect to how money is created – a secret all investors should know.

Money is created in two ways: First, money creation comes from borrowing it and spending it. (Money is literally borrowed and spent into existence.) Second, it can simply be printed up “out of thin air” by a central bank. The U.S. economy and other modern economies have central banks and fiat currencies. Central banks have two major powers. They can 1) “peg” the nominal level of short-term interest rates, and 2) purchase assets such as government debt, with newly printed money. When the central bank pegs short-term interest rates at a low level, it greatly encourages corporate and individual borrowing and spending.

For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sector’s new borrowing will not create enough new money to keep servicing the already massive level of old debt. Central banks will need to step up their efforts to “print money out of thin air”. Central bank printing of new money is accomplished by purchasing government debt or other assets.

(continued)

Very soon it will be incumbent on our Federal Reserve to crank up the domestic U.S. printing press. It is one thing when your neighbor’s central bank floods their country with newly printed money buying U.S. Treasury debt. It is quite another when the Federal Reserve flood’s America with Helicopter Money by buying massive amounts of U.S. Treasuries.

As inflation comes, interest rates will be forced up. Rising interest rates certainly hurt the owners of old low-coupon bonds. Moreover, rising interest rates have never been the stock market’s friend. Rising interest rates are the declared enemy of housing prices. Indeed, rising inflation in the general price level is the enemy of all those wonderful bubble markets. Rising inflation and falling asset prices will turn the world of investing upside down!

Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

[ax3816]

Я так чувствую, в понедельник народу будет чем заняться на работе

[ax3816]

хорошая (эмоциональная ) статья

Why the California Real Estate Market is a Bubble
Guest Commentary, by Rob Boyle
June 2, 2004

http://www.prudentbear.com/archive_comm ... _idx=33023

Rob Boyle is a resident of Orange County, California.

Some friends of my brother just bought a cute little three-bedroom house in Santa Barbara for about ONE MILLION DOLLARS. Sure, it’s a nice house, well maintained and newly appointed. But it is OLD. Not classic, not antique, not special, just OLD. And here is what it doesn’t have: a view, a big lot, a pool, a spa, a prime location, and square footage. It is just your average little three-bedroom California bungalow. Utterly mundane and forgettable. And it’s a MILLION DOLLARS!

See, my wife and I would love to buy our first home. We are both professionals with graduate degrees. We both make enough money to afford a significant monthly payment. We don’t have a lot of debt other than easily manageable student loans.

But I’ve been a Southern California resident my entire life and let me tell you, the price of real estate here is INSANE right now.

We live in Orange County and right across the street from us, in a non-fancy area, with no clear extras, the price of a three-bedroom townhouse is $735,000. I’m not making this up, we went open house shopping last weekend. A townhouse/condo with no yard in a new but cramped and crowded development is going for $735K.

My wife and I laughed at the idea of putting down nearly $150,000 of our hard-earned saved-up money for a 20% DOWN PAYMENT on a piece of property that would have sold for less than $200,000 five or ten years ago.

HOW CAN THIS BE POSSIBLE?

My wife and I are savers. We don’t waste money, we pay our credit card bills in full every month. We don’t live an extravagant lifestyle. We have excellent jobs with good salaries. Yet we cannot afford to buy a house in California. What is wrong with this picture?


After laughing at the price of houses here in Orange County for awhile, I realized that people are actually paying these prices. And I don’t understand how. So I sat down and did exhaustive research on the real estate market in California. I read about the history of earlier California real estate crashes.

And I remembered my own experiences. After all, I worked at a Savings and Loan in college in the late 1980’s, and I remember a time when the banks had BOOKS full of foreclosed properties listed for sale. Ah yes, the California Savings and Loan scandals brought an end to the last California real estate boom. Remember when you could open a regular short-term CD account at your local bank for 8.5%? I do, because I was a bank teller selling those CDs back then. And the richest clients at the West Los Angeles Savings and Loan where I worked were mostly children of the Great Depression who were frugal and careful with their money. They taught me more about macroeconomics than my UCLA Econ professors.

So I finally figured it out. California real estate is overpriced for one of two reasons: 1) first time buyers are getting 1 to 3 year Adjustable Rate Mortgages at 4% or less; and/or 2) people are selling their homes to first time buyers and “trading up” to more expensive houses using BIG down payments from the inflated equity they squeezed out of their house.

I can cite references, but you know it’s true.

So I realized that my wife and I CAN afford an average, standard, forgettable single family residence in the middle of So. Cal. suburbia. All we have to do is get an ARM. Why, even the broker standing in the $775,000 single family home in Orange County last week told us the AVERAGE buyer she sees of these houses these days has “EIGHT TO EIGHTEEN THOUSAND DOLLARS IN [CONSUMER] DEBT.”

Are the lenders in this country on crack (or just repackaging their loans and passing them off to blind investors)?! This can only lead to heartbreak and pain.

See, anybody who has done their homework KNOWS the rates are going up.

In fact, I studied the LIBOR, the 11th District Cost of Funds, the US Treasury, and other such indexes and have come to the conclusion that for most of the past 40 years the indexes to which ARMs are currently tied have been at a substantially higher rate than current rates. Just from a statistical point of view, it is clear the rates are not staying this low, and when they do go up, they will likely stabilize at a significantly higher rate.

I believe the rates are likely to go back to a more "normal" range after 12-24 months. This is evident from the Fed’s own statements as well as the general consensus in the market. Both the market and Fed will push rates up in the next 24 months to avoid increasingly obvious inflation.

I know that if this happens, anybody who has a 1 or 3 (and probably 5) year ARM is going to get royally screwed once their fixed term is up. I firmly believe that when the initial fixed rate on 1 year ARMs is back up to 5.5 to 6% we are going to see a clear shift in the dynamics of the California real estate market. Why? Because this is when the monthly payment for the cheapest mortgage will not sustain the price of houses in California. The lowest income qualifiers will have to get cheaper prices to be able to buy. People won't be able to "trade-up" as readily because their down payments will be smaller. Equity will deflate. Prices will come down.

THE LAST TIME THE CHEAPEST MORTGAGES HAD 6% RATES, the price of real estate in California was 40-50% cheaper than it is now. And incomes have NOT risen appreciably since that time. I don’t know anybody whose wages have risen more than a few percentage points in the last several years. Think about that for a minute.

I'm sure you know that people who are stretching to get into a $650,000 house (that originally sold for less than $350,000 10-20 years ago) will be simply unable to afford the monthly payment if the rates go up 2-3 percent. And when that happens, they will want to sell. And when they can't get $650K for their house anymore, because NOBODY can afford the new monthly payment at the new rate, they will go into foreclosure. And the price of real estate in California will come down to a more "normal" level.

My guess is that the timeline for this is between 2006 to 2008, which is when the bulk of low interest 1 to 5 year ARMs will be turning variable and UNDOUBTEDLY the interest rates will be 1-3% higher or worse. And who will be able to refinance with higher rates and wiped out equity?

And some moron somewhere would have me believe that the price of housing in California is expensive just because of the high demand! Well, where are all the high income jobs? I don’t care how much demand there is. In fact, I DEMAND a house for a fair price! That doesn’t mean I can afford it.

To express it in near mathematical terms: my argument is that the price of real estate in California is inversely proportional (on a parabolic curve) to the interest rate on the cheapest mortgage product available to the least qualified borrower. In other words, as the monthly payment for the least qualified buyer goes up or down, the overall price of real estate goes up or down in some proportionate fashion. Only time will prove if my theory is correct.

The California real estate market is going to go down in flames. It isn’t going to happen overnight. People will fight long and hard to prevent foreclosure. But the equity bubble in California is going to disappear. How do I know this? Because I desperately want to buy my first house in California, a place I’ve lived my entire life. But with a rock-solid, high earning, excellent credit, two-income, no children, minimal expense, saver household, my wife and I cannot afford to buy a single family residence in our community for the price of the monthly payment on an 80% 30 year fixed rate loan.

Something is wrong in the world.

Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

[ShellBack]

А у меня сосед на прошлой неделе дом продал. Всего неделю табличка простояла. А вчера его риэлтор мне рекламку подкинул.

Дом продался в два раза дороже чем был куплен новым три года назад.

Помню, как в 2001, в разгар кризиса, меня отговаривали вкладывать деньги в "этот курятник", который "намного подешевеет, когда бубль вот-вот лопнет".

[ax3816]

Real Estate Riches, Ruins or Rewards

Guest Commentary, by Brian Ochsner
February 16, 2004

http://www.prudentbear.com/archive_comm ... _idx=30480

Brian Ochsner is a real estate investor and marketing consultant in Denver, Colorado.

I think it’s safe to say that real estate “refi madness” has been the true wealth effect that has helped keep the US economy afloat, amidst large numbers of blue and white-collar job layoffs over the past 2-3 years. I’ll take a look at the factors that drove prices up, and the factors that will probably drive prices down over the next few years.

First of all, what drove prices up was a flood of liquidity in the form of larger money supply and lower interest rates, along with “foreigners” invading Colorado and buying like crazy. Every real estate market is local, and the Denver market was affected by the influx of Californians, Texans and others who flocked to Colorado for the great weather and plentiful tech, telecom and other jobs.

The late to mid-80s were a rough time because of the oil bust – jobs dried up, and people moved out of state to get the jobs in the oil/gas field. With fewer buyers in the area, with fewer jobs to provide income, the housing market tanked. It wasn’t until the mid-90s or so when Californians with higher-priced housing noticed that they could get houses for much lower prices than they were paying in the Golden State.

Combining this influx with the surge in the stock market, the Internet/tech mania, people making money hand over fist on stocks they knew little to nothing about, made for a great economy and a great time here in Denver. Prices of everything were going up, and the living was easy.

The liquidity was great not only in the stock market, but in the real estate market. Coloradoans along the Front Range (Ft. Collins south through Colorado Springs) could purchase a house, have it increase in value 10-20%/year, then ‘trade up’ to a higher-priced house with little to no problem at all. It was like a game of musical chairs where everybody always got a seat when the music stopped – or when they wanted to trade up to a higher-value home.

However, those houses or “chairs” aren’t as easy to find today. Foreclosures are at their highest level since the oil bust days of 1988, about 9,500 in the Denver-metro area alone in 2003. As a part-time real estate investor, I saw the pace of foreclosures per week and month increase as 2003 went along. Homes are staying on the market for a longer period of time, and this fact is probably making people nervous about buying a new home, and having the possibility of making double payments for a few months or more.

Another factor that’s kept the real estate market going is the increase of ‘non-profit’ companies that provide down payment grants to low-income or first-time homebuyers. It appears that these programs may have had people buy houses that shouldn’t have bought them to begin with. Home ownership isn’t just a financial issue, but a very emotional one as well.

It’s a status symbol, part of the American Dream, and people have been almost conditioned through advertising not to “throw their money away on rent,” when they could be building up equity over time with their home or condo.

People in their 20s and 30s are looked upon as if there’s something wrong with them if they haven’t bought a house by the time they're 30. It’s part of the disease called “affluenza”, or “keeping up with the Joneses.” In 21st Century middle-to-upper class America, it’s the slogan that Andre Agassi said in the Canon commercials: Image is everything.

The only problem is that the Joneses are broke. Even though they look great on the surface, this abundance of flash has led to a lack of cash. Trying to keep up these appearances and lifestyle is the fastest way to financial self-destruction, and Americans are doing a great job of that in the 21st century.

Americans have assumed over the past two decades (and rightfully so) that the value of their homes will always keep going up. This is their “ace in the hole” if they need to take care of high-interest credit card and retail debt. With home prices stagnating here in Denver, and the average home price declining by $6,000 in October 2003, people are starting to realize this may not always be true.

With the Greenspan Fed trying to inflate their way out of the great American debt mess, this monetary inflation is showing up in the form of higher food and utility costs. Assuming incomes stay the same, and these expenses take up more of Joe and Jane Starbuck’s income, it’ll put a further squeeze on already tight finances for middle-class Americans.

While expenses are rising, a number of higher-paying, formerly “untouchable” white-collar jobs (mainly in IT) are leaving the US for India – and aren’t coming back. The majority of Americans still have to work to pay their bills. With companies’ hiring rates and wage increase rates stagnant to slightly declining, this is definitely a big strike against real estate values.

If – more like when - 30-year mortgage rates increase another percentage point or two, this will be a body blow to the real estate market. The average American could be in the uneasy situation of making a ‘margin call’ on their house (i.e., coming to closing with cash) because the house they paid $200,000 for a year or two ago, is now only worth $180-190K (or less).

Because of the lack of financial and economic literacy (and history) among most Americans, I’m not sure if they’ll understand that ever-increasing real estate prices are a myth, and the reality is that real estate prices can go down. By then, it’ll be too late if they and 10,000 or more of their closest friends are all trying to sell their homes at the same time.

I get the sense that people have a hunch that something is wrong in the economy, but don’t want to admit it. They just keep putting on good fronts by buying nice stuff with money they don’t have, spending more time with the electronic narcotic (television), hoping whatever it is that’s bugging them will go away.

If the real estate market does take a tall tumble down, and pulls the stock market with it, how does a prudent American consumer or investor be prepared? First of all, don’t buy a bigger, newer house if you don’t have to. Even if you’re a tenant and tired of paying rent to someone else, be patient. In Denver, the rental market has taken a beating. You can find some very good deals – and negotiate some great ones.

I know it’s not as glamorous as the prestige of home ownership. However, I see a LOT more downsize risk than I do upside potential in the real estate market. You’ll also be better off from a cash flow standpoint, as you won’t be paying property taxes, homeowners’ dues, and property insurance.

The more cash that you have available when real estate values come back down to earth, the better position you’ll be in to take advantage of some great bargains. Good investing requires planning, foresight, and using your head instead of your emotions to make sound decisions.

Warren Buffett says it another way: Be brave when others are fearful, and be fearful when others are brave. Right now, most Americans are pretty courageous in the stock and real estate markets. If you haven’t noticed before now, conventional wisdom – well, isn’t wise counsel. When everyone thinks something is a sure bet, eventually that’s a sign it’s not.

Knowing the fundamentals of investing, and what options to take will make all the difference whether you’ll be financially rewarded or ruined in the months and years to come. It may not be easy going against the grain of friends, neighbors and co-workers who blindly believe that real estate and stock prices are on the way back up again for a long time. At least not now.

If you can tolerate being a little unpopular today, you could be prepared to take advantage of tremendous opportunities tomorrow. Be patient.

The choice is yours. But as the wise sage in one of the Indiana Jones movies said: “Choose…..but choose wisely.”


Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

[ax3816]

Debt vs. Income: At the Point of No Return

Guest Commentary, by Richard Benson
February 22, 2004

http://www.prudentbear.com/archive_comm ... _idx=30391

Richard Benson is president of Specialty Finance Group, LLC , offering diversified investment banking services.

At the beginning of 2003, the level of debt that American’s owed as an absolute amount, and as a ratio of income, was already approaching levels never seen before. Debt can be handled in a number of ways: 1) earn enough money to pay it off; 2) default; 3) borrow even more; or, 4) pray for inflation so you can earn more dollars (but really pay back less). Where are we now?

Last year, personal income increased about 2%. Individual debt increased about 10%. Personal debt for autos, credit cards, etc., topped $2 Trillion - up about $120 Billion despite massive debt consolidation and mortgage refinancing. Mortgage debt rose about $800 Billion, and total individual debt rose over $925 Billion, while wages and salaries rose only $190 Billion. Retirees and savers saw their interest income shrink, as interest paid on savings dropped by $30 Billion. Indeed, given the Fed’s low interest rate policies, it doesn’t pay to save.

In December, the savings rate dropped to a new low of 1.5% and in the 3rd quarter of 2003, the only reason financial assets were acquired is because they were bought with borrowed money. The low savings rate is even more astounding when you consider the increase in Disposable Personal Income of around $200 Billion from the tax cut. The economy needs $500 Billion in government stimulus from tax cuts and increased spending just to keep employment from falling and to help consumers roll over their credit cards for another month.

The savings rate is actually materially overstated. Personal Income, according to the Bureau of Economic Analysis, includes a few hundred billion dollars in “imputed income” for owning your own home and receiving value for other “non-cash services”. Imputed income is significantly greater than the 1.5% savings rate! Unfortunately, debt can only be repaid with actual cash flow. In January, Personal Income rose at about a 2% annual rate and very few jobs were created. Consumers are spending every last penny to live, and many are “tapped out”.

What is perfectly clear from simple arithmetic is that without a sudden increase in the number of jobs and the wages they pay, individual debt can not be serviced by personal income. Worse yet, not only are people not saving, but their financial reserves are not in real cash. The only thing keeping the “national ponzi scheme” going is the illusion of wealth created by the Federal Reserve’s low interest rates and liquidity that has allowed stock market valuations and housing prices to artificially inflate.

The market value of homes in 2003 rose about $1 Trillion and stock market values rose about $1.5 Trillion. The rising asset prices look like they balance rising debt on household balance sheets. Tragically, the increase in asset prices will vanish the day that interest rates rise, but the debts will still remain. Indeed, not only will the debt remain, but the cost of servicing it will go up dramatically. As interest rates rise, wages and salaries must increase or massive debt defaults will follow.

Income and job growth are so low that we have certainly passed “The Point of No Return”. There cannot be an easy resolution to the debt bubble and resolution will only come when a crisis forces change. Perhaps, for this election year, crisis can be postponed by continuing to facilitate an increase in borrowing so that debts can be rolled over, but increased. By 2005, the ultimate outcome to resolve the debt problem looks like it will be a combination of inflation, rising interest rates and debt default.

The reason we do not believe that job and income growth will save the day for the American worker is we have never before seen in history such increases in government spending, tax cuts, federal budget deficits, consumer spending and borrowing, with so little job growth. The massive fiscal and monetary stimulus has mostly been spent. There will be some nice tax refunds this spring, and that’s it! The peak of mortgage refinancing is already past. Construction spending is at a peak and the percentage of people who own their homes is at a record 69%. Mortgage underwriting shows that 5% of homebuyers in 2003 really couldn’t afford to buy a home, and another 5% could lose their home if one spouse becomes unemployed.

While the industrial sector is recovering, employment in the manufacturing sector has not increased since the start of the recession - there has been job loss in manufacturing for the past 42 months in a row. The United States has been in an economic recovery for over a year and a half and continues to lose manufacturing jobs every month! This is unprecedented!

Capacity utilization in the US remains about 76%, while massive new investments in production capacity are being made in Asia. The drop in the dollar has primarily affected trade with Europe, and Europe isn’t stealing our jobs. As long as Asia buys our dollar debt and continues to hold their currencies down against the dollar, job growth will happen there, but not here. Even when China and the rest of Asia “finally float” their currencies, few jobs will come back to America. In the United States, we only produce 45% of the manufactured goods we consume and much of that production is in electricity, petroleum refining, chemicals etc., that are capital intensive, with few workers required. Critically, many of the workers listed as employed in manufacturing are not engaged in manufacturing at all but in design, marketing, and distribution. Even if the Chinese currency doubled in value, the labor cost for a worker in China would still only be a fraction of the cost for an American in America. The sad fact remains that Personal Income growth will not happen because of job growth. Personal Income remains under pressure as higher “valued added” manufacturing jobs are exchanged for lower paying part-time and service jobs. America is losing manufacturing jobs paying $45,000 - $60,000 a year so it needs three new service jobs paying $15,000 - $20,000 a year just to replace the one manufacturing job that was lost.

So, where are Americans and their mountain of debt headed? If the days of borrowing more - courtesy of both the Federal Reserve and Asia’s Central Banks - are winding down later this year when Asia revalues its currency, it looks like there will only be two ways out: increased inflation and debt default. Both are likely. When those Chinese goods at Wal-Mart go up 30% in price, Americans will see inflation. The Fed will accommodate most of the inflation, but there will be a rise in interest rates. Inflation, if allowed and encouraged, will save the wage earner so he can continue to service his consumer debts. Rising interest rates will smash into housing prices like a tornado in Kansas. Homeowners who have a 30-year fixed rate mortgage will come out in the end, if they don’t have to sell their home for at least 10 years. Anyone who wants to sell their home will see some “asset deflation”, and financial institutions will experience substantial “debt default”. The Federal Reserve will “print money like crazy” to fight asset deflation and encourage inflation. Sometime before or after the Presidential election, the financial markets will be interesting, but painful to many.
Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

[ax3816]

Is U.S. Housing Bubble Fact or Fiction?: John Wasik (Update1)
John Wasik
Last Updated: July 26, 2004 12:00 EDT

http://quote.bloomberg.com/apps/news?pi ... X8ADXYd6iE

There are two schools of thought on the subject. Either speculation is rampant due to low mortgage rates and home prices are poised for a decline, or demand is at an unprecedented level and prices will rise unabated by ``measured'' rate increases by the Federal Reserve and inflationary pressures.

In either case, it's wise to be more careful when buying residential real estate now as prices continue to climb in the largest markets.

Ian Morris, chief U.S. economist for HSBC Securities USA, whose parent company is HSBC Holdings Plc -- Europe's biggest bank by market value and the holder of more than $1 trillion in assets -- is one of those who say a bubble is looming in the U.S. residential market.

``The bubble psychology has manifested itself in very rich valuations,'' Morris says. ``House prices relative to income, rent, replacement-cost and home equity have set new highs. Twenty states that account for half of the population look shaky.''

Bullish on Bubble

Morris supported his argument in a recent HSBC study that examined valuations of home prices relative to rents, income and consumer debt.

His general conclusion was that U.S. housing prices were ``bubbly and 10 percent to 20 percent too high.''

Possibly exacerbating Morris's bubble scenario is the U.S. Federal Reserve Board's stated policy of ``measured'' increases in short-term interest rates. The Fed's move will probably ``cause a reassessment of likely future house-price risks and its associated debt, thereby triggering housing's fall,'' Morris says.

Particularly telling, in Morris's view, is the housing price- to-rent ratio (P/R), which he says is an indicator of home overpricing.

``The P/R ratios for New York, Los Angeles, San Francisco, Boston and Philadelphia have surpassed the peak of the late 1980s bubble, and suggest prices could be roughly 25 percent too high compared to current rents,'' Morris says, adding that Chicago and Detroit also look expensive to him, while Dallas and Houston look ``comfortably priced.''

Situation Normal

While Morris's observations concur with leading economists like Robert Shiller, the Yale University academic and author of ``Irrational Exuberance,'' real estate analysts and the Fed say he's off track. Fed Chairman Alan Greenspan, for one, has repeatedly discounted the existence of a housing bubble.

A report titled ``Are Home Prices the Next `Bubble'?'' by Jonathan McCarthy and Richard Peach of the Federal Reserve Bank of New York, disputes the pro-bubble camp.

The New York Fed's report finds ``little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.''

McCarthy says strong demand is driving prices on both U.S. coasts where there are building restrictions and a shortage of available land for building.

``Here in New York, there's not much land left and there are various regulations, so it's not like they're going to be building a lot of condos,'' McCarthy says.

Being Cautious

Even within the Fed system, though, there's some room for discussion on whether housing prices are peaking. A new study by Morris Davis, a Federal Reserve economist, and Jonathan Heathcote, a Georgetown University economics professor, focuses more on the increase in land prices over the past five years.

Davis and Heathcote concluded that U.S. land prices may post a ``cumulative decline of 6.3 percent'' over the next three years with nominal growth in home prices at 2.6 percent over that period.

``This would be the smallest three-year nominal increase for home prices on record,'' the authors say.

The debate on whether home prices will rise or fall is largely academic because the Fed's interest-rate increase may only spur potential homeowners into a frenzy to take advantage of the lowest mortgage rates in a generation. In a possible nod to that view, Freddie Mac, the second-biggest buyer of home loans, predicted U.S. sales of new and existing homes will total 7.3 million this year, beating last year's record of 7.19 million.

Speculative Frenzy?

Sales and prices of existing homes hit record highs in June, the National Association of Realtors said in Washington today. Sales of previously owned homes unexpectedly increased 2.1 percent from a 6.81 million-unit rate in May, the trade association said. Existing home sales were forecast to fall to a 6.65 million annual rate in June, according to the median estimate in a Bloomberg News survey. The median selling price rose to a record $191,800.

If the U.S. housing boom is coming to an end, buyers certainly aren't acting like the party's over.

``People are buying without money down and using interest-only loans,'' says George Marotta, a research fellow and former financial planner at the Hoover Institution in Palo Alto, California.

``I think we're coming close to the end'' of the housing boom, he says. ``It's not a good time to buy. I hope I'm wrong, but it looks like the stock market bubble.''

Like many in the bubble school, Marotta is concerned about high household debt levels, which he calls ``the biggest bubble of all.''

Marotta says it's troubling that while personal debt has risen, average U.S. home equity has ``dwindled to 57 percent, compared with 85 percent a half-century ago.''

Watch for Overpricing

Randy Johnson, a mortgage broker for Independence Mortgage Company in Newport Beach, California, says it pays to watch for speculation and overpricing in your market if you are buying now.

``I would put an appraisal contingency in every offer and get an appraiser I trust,'' Johnson says, advising the use of the lender's appraiser instead of the agent's to ensure that you're not overpaying for a home.

``What happens in this stage of the cycle is the sub-standard properties come on the market under the `if I can get that much for it, I'll sell it' philosophy,'' Johnson says.

``I have seen people putting these houses into escrow and finding out upon inspection that they need to do a lot more work than they thought.''

``I think that there really are people who are buying property on speculation that they can quickly resell at a huge profit,'' Johnson says. ``You can't build a market on speculators selling to the next wave of speculators.''

Just as all real-estate pricing is local, so should your focus be on your long-term financial goals and debt level. Stop worrying about whether your market is frothy and check if you're saving enough for emergencies, retirement and college. That's the best way to avoid another, more personally damaging kind of financial bomb.

[GoodBuyAmerica]

очень хорошая статья
Is Your House Really An Asset?

Guest Commentary, by Brian Ochsner
July 29, 2004

http://www.prudentbear.com/archive_comm ... _idx=34603

По-моему, это очень запутанная и невнятная статья. Как это часто случается, правильные посылки ведут к непонятным выводам.

Является ли дом Вашим самым большим asset? Скорее всего - нет. Самый большой asset для большинства трудоспособного населения - это способность зарабатывать деньги. Через работу на дядю или в своей компании. Но из этого не следует что дом не нужно покупать.

По поводу покупки дома. Следует чётко разграничить покупку дома для того, чтобы в нём жить и покупку дома с целью вложения капитала. Первое практически всегда имеет смысл, второе - далеко не всегда. Вам всё равно нужно где-то жить, и жить в своём доме практически всегда выгоднее чем в рентованном жилье. Просто потому, что Вы не платите никому прибыли и пользуетесь большими льготами от государства. Можно ли потерять деньги на СВОЁМ доме? You bet. Собственно, платя ренту Вы платите владельцу дома за риск. Но шансы пролететь не так и велики.

Стоит ли рассматривать свой дом как источник дохода? Вот это уже более сложный вопрос. Обычно - нет. Хотя возможны варианты. Известный трюк: купить квадруплекс, сдавать три юнита и из прибыли платить весь mortgage. Работает очень хорошо, но Вы покупаете себе half time job as a property manager. Более опасный трюк - использовать equity как collateral для лоана на финансирование другого бизнеса, real estate или иного. Если бизнес прогорит - sorry. Но под дом Вы получите лучшие условия кредита, что даст Вам некоторые преимущества перед конкурентами. Самый опасный трюк - вытаскивать equity из дома и обращаться с ним как с доходом, то есть проживать equity. Но все эти подходы к дому как к источнику дохода вполне имеют право на существование и могут быть успешно использованы домовладельцами для достижения финансовых целей. А можно просто жить в доме, наслаждаться возможностью вбить гвоздь куда хочется, и выплачивать по-тихоньку motrgage.

[ax3816]

По-моему, это очень запутанная и невнятная статья. Как это часто случается, правильные посылки ведут к непонятным выводам.

Ну, ты ведь понимаешь, что на каждую проблему каждый человек смотрит из своего болота? Из одних и тех же фактов разные люди сделают разные выводы, и каждый из них будет по своему прав. Доказывать другому человеку, что он не прав - неблагодарное занятие - всё равно каждый останется при своём мнении.

Является ли дом Вашим самым большим asset? Скорее всего - нет. Самый большой asset для большинства трудоспособного населения - это способность зарабатывать деньги. Через работу на дядю или в своей компании. Но из этого не следует что дом не нужно покупать.

Здесь я respectfully disagree. Давай взглянем на определение слова asset:

http://www.google.com/search?hl=en&ie=U ... gle+Search

ASSET: Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

По поводу покупки дома. Следует чётко разграничить покупку дома для того, чтобы в нём жить и покупку дома с целью вложения капитала. Первое практически всегда имеет смысл, второе - далеко не всегда. Вам всё равно нужно где-то жить, и жить в своём доме практически всегда выгоднее чем в рентованном жилье. Просто потому, что Вы не платите никому прибыли и пользуетесь большими льготами от государства. Можно ли потерять деньги на СВОЁМ доме? You bet. Собственно, платя ренту Вы платите владельцу дома за риск. Но шансы пролететь не так и велики.

В обоих вышеуказаных тобою случаях - когда ты покупаешь дом для того, чтобы в нём жить и с целью вложения капитала - это всё равно investement. Ты со временем выкупаешь дом часть за частью. В идеале, через какое-то время ты полностью выкупаешь дом и сможешь его продать. В случае с рентом - ты всё это время просто покупаешь "сервис" у владельца недвижимости.

Никто не спорит, что в своём доме лучше жить чем в рентованой квартире. Да и как правило - это экономически более целесообразно. Автор статьи просто говорит, что покупка дома - не всегда гарантия того, что дом вырастет в цене и при определённых экономических условиях вы просто можете оказаться в долговой яме.

Суть статьи в том, что не стоит ожидать того, что купленый вами сегодня дом за $500К будет продан через год за $535К, всего лишь исходя из утверждения, что "исторически цена на недвижимость поднималась на 7%". Не надо поддаваться чувству стадного инстинкта, надо самому смотреть по сторонам и делать свои выводы.

Но все эти подходы к дому как к источнику дохода вполне имеют право на существование и могут быть успешно использованы домовладельцами для достижения финансовых целей. А можно просто жить в доме, наслаждаться возможностью вбить гвоздь куда хочется, и выплачивать по-тихоньку motrgage.

Поинт в том, что нужно покупать такой дом и за такую сумму, чтобы в любой момент ты смог его продать и не потерять денег, а не чтобы он превратился в financial liability.

[GoodBuyAmerica]

По-моему, это очень запутанная и невнятная статья. Как это часто случается, правильные посылки ведут к непонятным выводам.

Ну, ты ведь понимаешь, что на каждую проблему каждый человек смотрит из своего болота? Из одних и тех же фактов разные люди сделают разные выводы, и каждый из них будет по своему прав. Доказывать другому человеку, что он не прав - неблагодарное занятие - всё равно каждый останется при своём мнении.

Насколько я понял, вывод из статьи - не покупайте жильйе на перегретом рынке. Это плохое вложение капитала. Но я считаю, что не нужно рассматривать дом, в котором ты живёшь только как вложение капитала. Статья смешивает в кучу разные понятия и получается венигрет, а не логичное построение. Из этого венигрета можно сделать любые выводы, которые ничего общего не имеют с реальностью потенциального покупателя.

Является ли дом Вашим самым большим asset? Скорее всего - нет. Самый большой asset для большинства трудоспособного населения - это способность зарабатывать деньги. Через работу на дядю или в своей компании. Но из этого не следует что дом не нужно покупать.

Здесь я respectfully disagree. Давай взглянем на определение слова asset:
http://www.google.com/search?hl=en&ie=U ... gle+Search
ASSET: Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

Ну и напрасно не соглашаешся. Твоя квалификация в сочетании с умением себя вести в коллективе и выдерживать нагрузки как раз и является тем самым "anything of monetary value", которым ты владеешь, которое ты продаёшь работодателю или клиенту, и которое тебе приносит регулярный доход. Доходу от дома в котором ты живёшь очень сложно соревноваться с доходом от работы, даже в San Diego или Bay Area последие пять лет. Спроси у тех, кто стал инвалидом, какой у них был самый большой asset, сразу со мной согласишься.

По поводу покупки дома. Следует чётко разграничить покупку дома для того, чтобы в нём жить и покупку дома с целью вложения капитала. Первое практически всегда имеет смысл, второе - далеко не всегда...

В обоих вышеуказаных тобою случаях - когда ты покупаешь дом для того, чтобы в нём жить и с целью вложения капитала - это всё равно investement...
Суть статьи в том, что не стоит ожидать того, что купленый вами сегодня дом за $500К будет продан через год за $535К, всего лишь исходя из утверждения, что "исторически цена на недвижимость поднималась на 7%". Не надо поддаваться чувству стадного инстинкта, надо самому смотреть по сторонам и делать свои выводы.

Согласен с тем, что чувству стадного инстинкта поддаваться не стоит. Согласен с тем, что дом можно считать инвестицией (хотя я считаю, что часто этого делать не стоит). Согласен с тем, что дом может и не вырасти за следующий год на 7%. So what? Если грамотно и осторожно подходить к покупке жилья, it should not matter.

Поинт в том, что нужно покупать такой дом и за такую сумму, чтобы в любой момент ты смог его продать и не потерять денег, а не чтобы он превратился в financial liability.

Если бы я был бы осторожным и мудрым человеком , я бы покупал бы дома только в том случае, если бы смог бы дать 20% down И гарантированно смoг бы прожить в доме 5 лет. Не сможешь ты "в любой момент" продать дом и не потерять денег. Продать дом стоит 7-10% от его цены. На эту сумму он должен вырасти между покупкой и продажей. Но за 5 лет дом вырастeт на эти 7-10%. Скажу даже больше, за 10 лет цена дома скорее всего удвоится. Вот из этого и нужно исходить оценивая investment. Дом как вложения капитала отличается очень низкой ликвидностью. Зато малым риском! Если это понять, сразу станет легче оценивать стоит или не стоит покупать дом, какой ARM брать, и т.д.

[GoodBuyAmerica]

А у меня сосед на прошлой неделе дом продал. Всего неделю табличка простояла. А вчера его риэлтор мне рекламку подкинул.
Дом продался в два раза дороже чем был куплен новым три года назад.

Кстати, ShellBack, как Вы думаете, Temecula растёт из-за San Diego или сама по себе? Если из-за San Diego, то что будет у Вас если в San Diego цены начнут проседать? Это не наезд ни в коем случае, просто интерено Ваше мнение.

[Nwaylock]

Я так чувствую, в понедельник народу будет чем заняться на работе

И во вторник. Работать ведь еще когда-то надо в понедельник.