Biggest economic bubble in world history ready to collapse

[Clark Santos]

How well I remember, spent $20,000 and a lot of time on improving a 49K
tax valued rent house, only to have it lowered to 26K value. The rent
dropped from 425 to 390 and it took six months for Alice (Rivers)
Whitley's company to rent it. Good thing it was an unpermited 20K
improvement.

Don't get in a hurry or string yourself out to thin, that house has rented
for $750 to $950/month since 1993 and will sell this month for 125K net
before the bubble breaks. If it doesn't, and the bubble breaks, I'll rent
it till 12/21/2012 of Maya calendar fame.

Clark
El Patron


> Texans should remember the fall of '86-'88. In Austin you couldn't buy a
> house for a few years because no one could determine the value and the
> banks which were left solvent would not issue mortgage loans. Lots of
> people caught it in the teeth. The largest banks in the state went belly
> up. Remember downtown Austin where building projects were halted when the
> money ran out? The state bought some of those buildings for a song and
> converted them into office space.
>
> I had been consulting with friends on the inside of the bubble and they
> told me to sell. I did, in '84. The house I sold was vacant for 2 or 3
> years after the crash. I used to come to Austin to hang out and drive to
> my old place and camp overnight in the driveway. Neighbors dogs all knew
> me, etc.
>
> But Austin recovered and returned to normal (inflated values) within a few
> years. Those big banks are still owned by North Carolina interests which
> bought them very reasonably at the bottom of the bust.
>
> If you own a house in Austin, hang on! Or sell it soon. This next crash
> will be nationwide.
> G
>
>> Gee motherfuckin' willakers! So sell your house now and use a little
>> of the proceeds to pay rent? Could be. Also, the current high dollar
>> homes homes tend to be the worst energy guzzlers; overall energy
>> efficiency will be the new mantra. Which means small, central city,
>> transit friendly, near job, in a moderate climate, etc. We're
>> entering Kunstler's "long emergency". Waves of California homeless? -- R
>>
>>                  ******************************
>>
>> http://www.economist.com/finance/displayStory.cfm?story_id=4079027
>>
>> The global housing boom
>>
>> In come the waves
>> Jun 16th 2005
>>  From The Economist print edition
>>
>>
>> 
>>
>>
>> The worldwide rise in house prices is the biggest bubble in history.
>> Prepare for the economic pain when it pops
>> NEVER before have real house prices risen so fast, for so long, in so
>> many countries. Property markets have been frothing from America,
>> Britain and Australia to France, Spain and China. Rising property
>> prices helped to prop up the world economy after the stockmarket
>> bubble burst in 2000. What if the housing boom now turns to bust?
>>
>> According to estimates by The Economist, the total value of
>> residential property in developed economies rose by more than $30
>> trillion over the past five years, to over $70 trillion, an increase
>> equivalent to 100% of those countries' combined GDPs. Not only does
>> this dwarf any previous house-price boom, it is larger than the
>> global stockmarket bubble in the late 1990s (an increase over five
>> years of 80% of GDP) or America's stockmarket bubble in the late
>> 1920s (55% of GDP). In other words, it looks like the biggest bubble
>> in history.
>>
>>
>>
>> 
>>
>> The global boom in house prices has been driven by two common
>> factors: historically low interest rates have encouraged home buyers
>> to borrow more money; and households have lost faith in equities
>> after stockmarkets plunged, making property look attractive. Will
>> prices now fall, or simply flatten off? And in either case, what will
>> be the consequences for economies around the globe? The likely
>> answers to all these questions are not comforting.
>>
>> The increasing importance of house prices in the world economy
>> prompted The Economist to start publishing a set of global house-
>> price indices in 2002 (see article). These now cover 20 countries,
>> using data from lending institutions, estate agents and national
>> statistics. Our latest quarterly update shows that home prices
>> continue to rise by 10% or more in half of the countries (see table).
>> America has seen one of the biggest increases in house-price
>> inflation over the past year, with the average price of homes jumping
>> by 12.5% in the year to the first quarter. In California, Florida,
>> Nevada. Hawaii, Maryland and Washington, DC, they soared by more than
>> 20%.
>>
>> In Europe, prices have long been at dizzy heights in Ireland and
>> Spain, but over the past year have also spurted at rates of 9% or
>> more in France, Italy, Belgium, Denmark and Sweden. Both France (15%)
>> and Spain (15.5%) have faster house-price inflation than the United
>> States.
>>
>> By contrast, some housing booms have now fizzled out. In Australia,
>> according to official figures, the 12-month rate of increase in house
>> prices slowed sharply to only 0.4% in the first quarter of this year,
>> down from almost 20% in late 2003. Wishful thinkers call this a soft
>> landing, but another index, calculated by the Commonwealth Bank of
>> Australia, which is based on prices when contracts are agreed rather
>> than at settlement, shows that average house prices have actually
>> fallen by 7% since 2003; prices in once-hot Sydney have plunged by 16%.
>>
>>
>> 
>>
>> 
>> The danger of a global house-price collapse
>> Jun 16th 2005
>> Economic slowdown 
>> Jun 9th 2005
>> The frothy housing market
>> May 26th 2005
>> Global house price 
>> Mar 3rd 2005
>> The Economist's global house-price index 
>> Mar 28th 2002
>>
>>
>> 
>> America's economy
>>
>> Asian economies
>>
>> Britain's economy
>>
>> Property
>>
>>
>> 
>> Click to buy from Amazon.com: â??Irrational Exuberanceâ?? (second
>> edition), by Robert Shiller (Amazon.co.uk).
>>
>> Housepricecrash.co.uk collates information and statistics on house
>> prices in Britain. Nationwide and the Royal Institution of Chartered
>> Surveyors give differing appraisals of Britainâ??s housing market. A
>> study from America's National Association of Realtors, summarised
>> here, found that one-quarter of houses bought in 2004 were for
>> investment, not owner-occupation. See also the Federal Reserve.
>>
>>
>> 
>>
>> 
>>
>>
>> 
>> Britain's housing market has also cooled rapidly. The Nationwide
>> index, which we use, rose by 5.5% in the year to May, down from 20%
>> growth in July 2004. But once again, other surveys offer a gloomier
>> picture. The Royal Institution of Chartered Surveyors (RICS) reports
>> that prices have fallen for ten consecutive months, with a net
>> balance of 49% of surveyors reporting falling prices in May, the
>> weakest number since 1992 during Britain's previous house-price bust.
>> The volume of sales has slumped by one-third compared with a year ago
>> as both sellers and buyers have lost confidence in house valuations.
>> House-price inflation has also slowed significantly in Ireland, the
>> Netherlands and New Zealand over the past year.
>>
>> Since 1997, home prices in most countries have risen by much more in
>> real terms (ie, after adjusting for inflation) than during any
>> previous boom. (The glaring exceptions are Germany and Japan, where
>> prices have been falling.) American prices have risen by less than
>> those in Britain, yet this is still by far the biggest boom in
>> American history, with real gains more than three times bigger than
>> in previous housing booms in the 1970s or the 1980s.
>>
>> The most compelling evidence that home prices are over-valued in many
>> countries is the diverging relationship between house prices and
>> rents. The ratio of prices to rents is a sort of price/earnings ratio
>> for the housing market. Just as the price of a share should equal the
>> discounted present value of future dividends, so the price of a house
>> should reflect the future benefits of ownership, either as rental
>> income for an investor or the rent saved by an owner-occupier.
>>
>> Calculations by The Economist show that house prices have hit record
>> levels in relation to rents in America, Britain, Australia, New
>> Zealand, France, Spain, the Netherlands, Ireland and Belgium. This
>> suggests that homes are even more over-valued than at previous peaks,
>> from which prices typically fell in real terms. House prices are also
>> at record levels in relation to incomes in these nine countries.
>>
>>
>>
>> 
>>
>> America's ratio of prices to rents is 35% above its average level
>> during 1975-2000 (see chart 1). By the same gauge, property is
>> â??overvaluedâ?? by 50% or more in Britain, Australia and Spain.
>> Rental yields have fallen to well below current mortgage rates,
>> making it impossible for many landlords to make money.
>>
>> To bring the ratio of prices to rents back to some sort of fair
>> value, either rents must rise sharply or prices must fall. After many
>> previous house-price booms most of the adjustment came through
>> inflation pushing up rents and incomes, while home prices stayed
>> broadly flat. But today, with inflation much lower, a similar process
>> would take years. For example, if rents rise by an annual 2.5%, house
>> prices would need to remain flat for 12 years to bring America's
>> ratio of house prices to rents back to its long-term norm. Elsewhere
>> it would take even longer. It seems more likely, then, that prices
>> will fall.
>>
>> A common objection to this analysis is that low interest rates make
>> buying a home cheaper and so justify higher prices in relation to
>> rents. But this argument is incorrectly based on nominal, not real,
>> interest rates and so ignores the impact of inflation in eroding the
>> real burden of mortgage debt. If real interest rates are permanently
>> lower, this could indeed justify higher prices in relation to rents
>> or income. For example, real rates in Ireland and Spain were reduced
>> significantly by these countries' membership of Europe's single
>> currencyâ??though not by enough to explain all of the surge in house
>> prices. But in America and Britain, real after-tax interest rates are
>> not especially low by historical standards.
>>
>>
>> Betting the house
>> America's housing market heated up later than those in other
>> countries, such as Britain and Australia, but it is now looking more
>> and more similar. Even the Federal Reserve is at last starting to
>> fret about what is happening. Prices are being driven by speculative
>> demand. A study by the National Association of Realtors (NAR) found
>> that 23% of all American houses bought in 2004 were for investment,
>> not owner-occupation. Another 13% were bought as second homes.
>> Investors are prepared to buy houses they will rent out at a loss,
>> just because they think prices will keep risingâ??the very definition
>> of a financial bubble. â??Flippersâ?? buy and sell new properties even
>> before they are built in the hope of a large gain. In Miami, as many
>> as half of the original buyers resell new apartments in this way.
>> Many properties change hands two or three times before somebody
>> finally moves in.
>>
>> New, riskier forms of mortgage finance also allow buyers to borrow
>> more. According to the NAR, 42% of all first-time buyers and 25% of
>> all buyers made no down-payment on their home purchase last year.
>> Indeed, homebuyers can get 105% loans to cover buying costs. And,
>> increasingly, little or no documentation of a borrower's assets,
>> employment and income is required for a loan.
>>
>> Interest-only mortgages are all the rage, along with so-called
>> â??negative amortisation loansâ?? (the buyer pays less than the
>> interest due and the unpaid principal and interest is added on to the
>> loan). After an initial period, payments surge as principal repayment
>> kicks in. In California, over 60% of all new mortgages this year are
>> interest-only or negative-amortisation, up from 8% in 2002. The
>> national figure is one-third. The new loans are essentially a gamble
>> that prices will continue to rise rapidly, allowing the borrower to
>> sell the home at a profit or refinance before any principal has to be
>> repaid. Such loans are usually adjustable-rate mortgages (ARMs),
>> which leave the borrower additionally exposed to higher interest
>> rates. This year, ARMs have risen to 50% of all mortgages in those
>> states with the biggest price rises.
>>
>> The rapid house-price inflation of recent years is clearly
>> unsustainable, yet most economists in most countries (even in Britain
>> and Australia, where prices are already falling) still cling to the
>> hope that house prices will flatten rather than collapse. It is true
>> that, unlike share prices, house prices tend to be somewhat
>> â??stickyâ?? downwards. People have to live somewhere and owners are
>> loth to accept a capital loss. As long as they can afford their
>> mortgage payments, they will stay put until conditions improve. The
>> snag is that eventually some owners have to sellâ??because of
>> relocation, or job lossâ??and they will be forced to accept lower
>> prices.
>>
>> Indeed, a drop in nominal prices is today more likely than after
>> previous booms for three reasons: homes are more overvalued;
>> inflation is much lower; and many more people have been buying houses
>> as an investment. If house prices stop rising or start to fall, owner-
>> occupiers will largely stay put, but over-exposed investors are more
>> likely to sell, especially if rents do not cover their interest
>> payments. House prices will not collapse overnight like stockmarketsâ??
>> a slow puncture is more likely. But over the next five years, several
>> countries are likely to experience price falls of 20% or more.
>>
>>
>>
>> 
>>
>> While America's housing market is still red hot, othersâ??in Britain,
>> Australia and the Netherlandsâ??have already cooled (see chart 2).
>> What lessons might they offer the United States?
>>
>> The first is that, contrary to conventional wisdom, it does not
>> require a trigger, such as a big rise in interest rates or
>> unemployment, for house prices to decline. British home prices
>> started to fall in the summer of 2004 after the Bank of England
>> raised rates by a modest one and a quarter percentage points. Since
>> 2002, the Reserve Bank of Australia has raised rates by exactly the
>> same amount and unemployment is at a 30-year low, yet home prices
>> have fallen. The Federal Reserve's gradual increase in rates by two
>> percentage-points over the past year has done little to scare away
>> buyers, because most still have fixed-rate mortgages and long-term
>> bond yields have remained unusually low. But as more Americans have
>> been resorting to ARMs, so the housing market is becoming more
>> vulnerable to rising rates.
>>
>>
>> Rung at the bottom
>> British and Australian prices have stalled mainly because first-time
>> buyers have been priced out of the market and demand from buy-to-let
>> investors has slumped. British first-timers now account for only 29%
>> of buyers, down from 50% in 1999. And, according to the National
>> Association of Estate Agents, buy-to-let purchases are running 50%
>> lower than a year ago. As prices become more and more heady in
>> America, the same will happen there.
>>
>> British experience also undermines a popular argument in America that
>> house prices must keeping rising because there is a limited supply of
>> land and a growing number of households. As recently as a year ago,
>> it was similarly argued that the supply of houses in Britain could
>> not keep up with demand. But as the expectation of rising prices has
>> faded, demand has slumped. According to RICS, the stock of houses for
>> sale has increased by one-third over the past year. America has
>> faster population growth than Britain, but its supply of housing has
>> also been rising rapidly. Economists at Goldman Sachs point out that
>> residential investment is at a 40-year high in America, yet the
>> number of households is growing at its slowest pace for 40 years.
>> This will create excess supply.
>>
>> Another mantra of housing bulls in America is that national average
>> house prices have never fallen for a full year since modern
>> statistics began. Yet outside America, many countries have at some
>> time experienced a drop in average house prices, such as Britain and
>> Sweden in the early 1990s and Japan over the past decade. So why
>> should America be immune? Alan Greenspan, chairman of America's
>> Federal Reserve, accepts that there are some local bubbles, but
>> dismisses the idea of a national housing bubble that could harm the
>> whole economy if it bursts. America has in the past seen sharp
>> regional price declines, for example in Boston, Manhattan and San
>> Francisco in the early 1990s. This time, with prices looking
>> overvalued in more states than ever in the past, average American
>> prices may well fall for the first time since the Great Depression.
>>
>> But even if prices in America do dip, insist the optimists, they will
>> quickly resume their rising trend, because real house prices always
>> rise strongly in the long term. Robert Shiller, a Yale economist, who
>> has just updated his book â??Irrational Exuberanceâ?? (first published
>> on the eve of the stockmarket collapse in 2000), disagrees. He
>> estimates that house prices in America rose by an annual average of
>> only 0.4% in real terms between 1890 and 2004. And if the current
>> boom is stripped out of the figures, along with the period after the
>> second world war when the government offered subsidies for returning
>> soldiers, artificially inflating prices, real house prices have been
>> flat or falling most of the time. Another sobering warning is that
>> after British house prices fell in the early 1990s, it took at least
>> a decade before they returned to their previous peak, after adjusting
>> for inflation.
>>
>> Another worrying lesson from abroad for America is that even a mere
>> levelling-off of house prices can trigger a sharp slowdown in
>> consumer spending. Take the Netherlands. In the late 1990s, the
>> booming Dutch economy was heralded as a model of success. At the
>> time, both house prices and household credit were rising at double-
>> digit rates. The rate of Dutch house-price inflation then slowed from
>> 20% in 2000 to nearly zero by 2003. This appeared to be the perfect
>> soft landing: prices did not drop. Yet consumer spending declined in
>> 2003, pushing the economy into recession, from which it has still not
>> recovered. When house prices had been rising, borrowing against
>> capital gains on homes to finance other spending had surged. Although
>> house prices did not fall, this housing-equity withdrawal plunged
>> after 2001, removing a powerful stimulus to spending.
>>
>> Housing-equity withdrawal has also fallen sharply over the past year
>> in Britain and Australia, denting household spending. In Australia,
>> the 12-month rate of growth in retail sales has slowed from 8% to
>> only 1.8% over the past year; GDP growth has halved to 1.9%. In
>> Britain, too, a cooling of the housing market has been accompanied by
>> an abrupt slowdown in consumer spending. If, as seems likely, home
>> prices continue to fall in both countries, spending will be further
>> squeezed.
>>
>> Even a modest weakening of house prices in America would hurt
>> consumer spending, because homeowners have been cashing out their
>> capital gains at a record pace. Goldman Sachs estimates that total
>> housing-equity withdrawal rose to 7.4% of personal disposable income
>> in 2004. If prices stop rising, this â??incomeâ?? from capital gains
>> will vanish.
>>
>>
>> And after the gold rush?
>> The housing market has played such a big role in propping up
>> America's economy that a sharp slowdown in house prices is likely to
>> have severe consequences. Over the past four years, consumer spending
>> and residential construction have together accounted for 90% of the
>> total growth in GDP. And over two-fifths of all private-sector jobs
>> created since 2001 have been in housing-related sectors, such as
>> construction, real estate and mortgage broking.
>>
>>
>>
>> 
>>
>> One of the best international studies of how house-price busts can
>> hurt economies has been done by the International Monetary Fund.
>> Analysing house prices in 14 countries during 1970-2001, it
>> identified 20 examples of â??bustsâ??, when real prices fell by almost
>> 30% on average (the fall in nominal prices was smaller). All but one
>> of those housing busts led to a recession, with GDP after three years
>> falling to an average of 8% below its previous growth trend. America
>> was the only country to avoid a boom and bust during that period.
>> This time it looks likely to join the club.
>>
>> Japan provides a nasty warning of what can happen when boom turns to
>> bust. Japanese property prices have dropped for 14 years in a row, by
>> 40% from their peak in 1991. Yet the rise in prices in Japan during
>> the decade before 1991 was less than the increase over the past ten
>> years in most of the countries that have experienced housing booms
>> (see chart 3). And it is surely no coincidence that Japan and
>> Germany, the two countries where house prices have fallen for most of
>> the past decade, have had the weakest growth in consumer spending of
>> all developed economies over that period. Americans who believe that
>> house prices can only go up and pose no risk to their economy would
>> be well advised to look overseas.
>>
>>
>>
>>
>