Fed Article

[Dubious]

A very good read:
http://moneycentral.msn.com/content/P119372.asp

Have a good day!

[nodoodahs]

Historically housing "bubbles" have involved 20-30% declines in price, taking around 3 years to decline, with recovery in 9-10 years. That's what I'm looking for in selected markets.

Even a "slowdown" will kill a lot of marginal players - Henry is dead on about that. But I expect the actual decline along the lines of 20-30%, taking place over a period of 3 years, with recovery in 9-10 years, for the most egregiously appreciated markets.

Flippers have been around a long time, typically taking "distressed" properties, adding sweat equity and cosmetics, and reselling, or focusing on REO or pre-forclosure market. These are specialists. When flipping becomes mainstream (as it is now) for mom-and-pop actors, watch out.

Henry, I don't buy all the BLS statistics on "productivity" etc. Bottom line, if I were in the "market" and saw the Dow, Nasdaq, and S&P500 go up over 100% in five years, or 25% in one year, I would be planning a switch to cash and/or bonds at the first sign of trouble. I don't buy the "new era" because one the major signs of a mania are people saying "it's different this time." Let's look at the record: from 1995 to 2000 the S&P 500 went from 500 to 1500. I think everyone not in love with the mania knew it was a bubble. Three years later, we're back about 1000. Eight years to double, hmm, that's reasonable appreciation. Five years to triple, hmm, that's a bubble (and the proof's in the popping). Now let's look at real estate in some markets: five years to more than double ... is that reasonable appreciation or a bubble? I like the mention of YHOO, AMZN, EBAY as they were all pretty much bubble stocks at the time. I think it was Cramer who referred to "amazon.org" because they were a "non profit" company! The internet mania swept through the insurance industry and I think we see that the death of the independent agent has been greatly exaggerated.

Pete, the "money in older homes" argument is specious at best. The money spent on gut-and-redos in Highland Park and Little Five Points is totally dwarfed by the 95%+ of resales and refis that are pretty much unchanged except for a pressure washing and some interior paint. So (generously assumed) maybe 10% of the 100% appreciation in the past five years is due to "improvements" - the other 90% is the bubble. A probably more reasonable 30-40% appreciation from inflation of money supply would be ignored by me.

No, I own a fairly cheap house given my net worth and salary, in a non-bubble area (one with about 30% appreciation over the last five years). If I lived in Boston, Miami, NY, or LA I would be renting. I have thought about buying a trailer park, though ...
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Pete-

Not meaning to play with words here but please see my previous commentaries as to what position I am taking. My definition of "bubble" in housing shouldn't be taken out of context - all I'm looking for now is a weakening growth in housing prices in some of the hottest areas and potentially even slight declines. This alone will kill off the marginal speculators with interest-only loans, etc.

I understand that flippers have been around for a long time - along with the fact that margin traders have been in the U.S. stock market for the last 200 years. But when "widows and orphans" are doing the same thing that professionals are doing, then that definitely calls the bull trend into question.

Just playing devil's advocate here,

Henry

[pete richardson]

Now guys --

Home flippers have been around since the late 1960s.

In the 1970s and early 1980s at prime CA home developments like Mission Viejo the boys would auction 'em off to the highest bidder. It
was wild stuff.

How about this: Bubble means a $600,000 house will fall to $300,000
in value....Typical post boom weakness has a $600,000 house falling
to $560,000.

To me, a bubble bursts with cataclysmic downside...Is that what we are talking about?

[HenryTo]

Bill,

I am not sure if price appreciations can be used solely to determine whether a bubble exists. Let's take the stock market in the late 1990s, for example. Were we in a "new era," so to speak? Yes, definitely. The Berlin Wall has just fallen and hundreds of millions of workers are now available as part of the global workforce. With the advent of the internet, this newly-freed workers finally have a voice and finally have potential access to gigabytes and gigabytes worth of information out there. Yahoo, Amazon, eBay, etc., completely redefined the ways we do business and forced existing companies to rethink their business models.

We became more productive. And now you have Google dominating the web with just seven years as a company under its belt. However, this is not unprecedented. It took Rockefellar only 11 years since Drake drilled the first oil well to monoplize the entire refining capacity (over 90%) in the United States. This is a much more impressive feat than Google or even Microsoft. The internet has changed the world in a profound way, and yet you cannot really say this is unprecedented. Moreover, it is really not clear to me how the internet "revolution" ranks with all the other disrupting technologies up there. e.g. printing press, railroads, automobiles, television, etc.

In a way, rising stock prices in the late 1990s are really not a bubble - given that outsized profits were being made and that exponential growth were being experienced. However, what struck me as an oddity in this argument is the immense amount of retail and "widows & orphans" participation in the stock market - along with the proliferation of margin buying and options trading, etc. At some point, the leverage and the concentration of speculation (note that the NYSE A/D line topped out in April 1998) just got too crazy and the whole thing fell apart - which isn't all that dissimilar to a pyramid scheme. The proliferation of interest-only loans and the flipping of houses sounds and looks very familar to a pyramid scheme to me as well.

Henry

[pete richardson]

Permit another demurrer...

Many communities in the US have also witnessed a substantial flow
of money into older homes to increase size, comfort, utility and value.
Older homes that do not offer at least some of the prized features of new homes will not go begging, but will be priced lower and are sometimes even demolished to make way for the new.

I presume you have sold your ranch and are now renting or perhaps have
moved to a trailer park.......

[nodoodahs]

Actually there is arguing with people who see a housing bubble, because ... we're engaging in it.



What I've observed is a strong market in volume with moderate price appreciation when newe home $ prices are adjusted or new features and larger square footage.

Your statement is a "new home price bubble" argument - I am not addressing its accuracy here, I'm also not addressing the demographic argument, I've not investigated either aspect enough to discuss intelligently.

I am merely pointing out that "old home sales" do have a price bubble. Please see http://www.ofheo.gov/media/pdf/1q05hpi.pdf. The "Housing Price Index" is published on a quarterly basis by OFHEO and tracks average house price changes in repeat sales or refinancings of the same single-family properties. OFHEO’s index is based on analysis of data obtained from Fannie Mae and Freddie Mac from more than 29.74 million repeat transactions over the past 30 years. The HPI reflects price movements on a quarterly basis of sales or refinancings of single-family homes whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac.

There are 19 metro areas with "old home sales" appreciation in excess of 25% last year. There are 23 metro areas where "old home sales" appreciation has doubled in the last 5 years (annual appreciation >14.8% sustained). Those areas are bubbles IMO.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[pete richardson]

I take issue with this argument. Most of it is old hat and the Fed has moved well beyond the liquidity bubble that sustained the tech booms.
Most of that money was burned off in the crashes of the tech sector and the market for the stocks.

Sharp economists have known for nealy fifty years that there would be a huge housing boom in the US from 1970 - 2000. The US housing market was rather weak from 1990 - 95 and we are now seeing the catch-up and completion of the boom.

There will be another boom in housing starting 2018 and running through
2038. Baked into the cake, thanks to the demographics.

The housing market will be slower over the 2008-2018 period, the natural
result of less favorable industry demographics.

What I've observed is a strong market in volume with moderate price
appreciation when newe home $ prices are adjusted or new features and larger square footage.

I also see that the consumer balance sheet is well positioned for higher interest rates. Over 80% of the debt is longer term, and if interest rates
rise, interest income will rise at a dramatically faster rate because of how
the sector's balance sheet is constructed. Over 1987 - 2005, consumers
lost $ trillions in interest income.

There's no arguing with people who see a housing bubble, so I merely
register my strong dissent.