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US housing to crash?

by Colman Wed Sep 27th, 2006 at 08:11:48 AM EST

Bonddad over on dKos thinks so:

I almost always avoid making hard economic predictions; it's almost impossible to be right.  However, below are three charts that indicate there is practically no way in hell housing can have anything but a hard and ugly landing.  So, I am officially going on the record as saying housing will die painfully within the next 18 months.  

Could be exciting if he's right. The graph - based on a paper by Alan Greenspan no less - at the end of the story is fascinating: it shows the current growth in the US as being driven almost entirely by people borrowing against their homes.


Display:
Exciting?

You mean as in the old curse:

May you live in interesting times.

?

by Metatone (metatone [a|t] gmail (dot) com) on Wed Sep 27th, 2006 at 08:32:28 AM EST
That's the one.
by Colman (colman at eurotrib.com) on Wed Sep 27th, 2006 at 08:43:59 AM EST
[ Parent ]
Don't be suprised if Ireland isn't far behind.

I'm not sure about the presence of exotic financing arrangements like ARMs (Adjustable Rate Mortages) in Ireland, the UK, or Spain, but there has been a tremendous run up in prices (.pdf) the puts all but the most hyperactive US housing markets to shame.  Remember that large parts of the US housing market outside of major metropolitan areas have been relatively stable for the last few years. Look at the year to year debt rise for Spain and Ireland, and then look at the residential debat to GDP, and then compare to the US.  Two quick observations, Ireland and Spain both have real estate bubbles growing rapidly, and they have somewhat more capacity to absorb debt on a residential debt to GDP basis.  Perhaps Jerome can clarify if this all actually means that there is a European housing bubble, I think that there is, and I think that in the UK it popped in 2003 or 2004, hence the relatively low rate of growth but high debt.




And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Sep 27th, 2006 at 10:41:00 AM EST
[ Parent ]
It's been a long day already, so why don't I just explode in frustration and leave it at that.

  1. Fixed rate mortgages are pretty much unknown in Ireland. Almost all mortgages are based on the ECB base rate plus a margin and are fixed for at most a few years. It has always been so.

  2. Ireland and Spain have rapidly growing economies. Ireland's GNP has been growing at damn near 10%  per annum for a decade, we've has gone from high to low unemployment and from mass emigration to mass immigration. There are a few demand factors at work here. Spain is in a similar, if not as extreme, situation. Both have young populations. The structure of the economy is somewhat different to that of the US.

  3. There is going to be a correction in Ireland at some stage as well. A crash? Maybe, but I'm guessing a slowdown in price increases. The top of the market is probably headed for trouble though.
by Colman (colman at eurotrib.com) on Wed Sep 27th, 2006 at 10:53:51 AM EST
[ Parent ]
Don't explode Colman.  I'm just noting that the real estate bubble is not just an American affair.  Spanish and Irish houing prices have been rising rapidly as well, let alone the massive Chinese real estate bubble.

Fixed rate mortgages are pretty much unknown in Ireland. Almost all mortgages are based on the ECB base rate plus a margin and are fixed for at most a few years. It has always been so.

EMI (European Monetary Integration) has led to relatively low inflation as individual nations have lost their ability to inflate their debt away (which was fairly common for Italy and Spain.)

And EU interest rates for home purchases are at slightly more than half US rates (which are currently floating around 6% for a 30 year fixed mortgage.)  I also imagine that the insidous phenomenon of house flippers, people who purchase homes as an investment renovate the house, and sell it within 1-2 months and make 15-20% profit off of each sale, are absent in Ireland.  That is to say that I imagine that there's not much in the way of short term speculative investing going on.

Ireland and Spain have rapidly growing economies. Ireland's GNP has been growing at damn near 10%  per annum for a decade, we've has gone from high to low unemployment and from mass emigration to mass immigration. There are a few demand factors at work here. Spain is in a similar, if not as extreme, situation. Both have young populations. The structure of the economy is somewhat different to that of the US.

I know that Irish growth has been extremely rapid in the last 15 years, celtic tiger and all, but is that sustainable in a world where there are millions of equally educated Indians willing to take jobs for a 5th or less of the wages of Irish workers?  An excellent educational system is the secret of Ireland's success, but is that enough.  And is 300% housing growth over a 5 year period sustainable when GDP growth per capita has been but a 1/10th of that?

I'd write more, but I have to go.  Take it easy, and try to avoid expoding.  All I'm saying is that this is a global problem.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Sep 27th, 2006 at 11:28:14 AM EST
[ Parent ]
I have a long rant half-written about the secret of Ireland's success that I'll finish someday when I can get the time to do it.
by Colman (colman at eurotrib.com) on Wed Sep 27th, 2006 at 11:52:25 AM EST
[ Parent ]
You should.

I was watching PBS (US Public TV) and they had a special about Irish lesson for Indiana.....

They never mentioned a word of the social pacts, but quite a bit about "flexibility" and about the role of Irish education in the Celtic tiger phenomenon.  The stuff about education was all that was palatable.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Sep 27th, 2006 at 02:22:40 PM EST
[ Parent ]
Please do.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Fri Sep 29th, 2006 at 12:48:27 PM EST
[ Parent ]
Something about eating our seed corn comes to mind.

We all bleed the same color.
by budr on Wed Sep 27th, 2006 at 09:14:53 AM EST
From Wikipedia, on the causes of the Great Depression.

Debt

Macroeconomists, including the current chairman of the U.S. Federal Reserve Bank Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher. In the 1920s, in the U.S. the widespread use of the home mortgage and credit purchases of automobiles and furniture boosted spending but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble--even if they kept their jobs--and risked default. They drastically cut current spending to keep up time payments, thus lowering demand for new products. Furthermore the debts grew, because prices and incomes fell 20-50%, but the debts remained at the same dollar amount. With future profits looking poor, capital investment slowed or completely ceased. In the face of bad loans and worsening future prospects, banks became more conservative in lending. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.

As Bonddad says - have a nice day.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Sep 27th, 2006 at 09:41:24 AM EST
Not really comparable.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Sep 27th, 2006 at 12:44:55 PM EST
[ Parent ]
Explain.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Wed Sep 27th, 2006 at 02:35:38 PM EST
[ Parent ]
Housing/Land ("property") is productive Capital, and produces a stream of "Value" in the form of Property Rental which has a value in exchange.

The key market is that in property rentals, not property prices.

The property market will always be supported by the market in propery rentals, in the same way that the stock market will always have a floor consisting of the Net Present Value of the expected dividend income.

Provided that there are people out there wishing to live somewhere, the "clearing" market property rental will be related to their ability to pay.

The last UK property crash in the early 90's was a "hard landing" because a lot of people lost their jobs and were forced sellers.

That does not appear to be happening now. What is happening is a lot of speculative "buy to let" and many investors nursing continuing losses since market rentals are less than their financing costs. But most appear to be gritting their teeth and hanging in there waiting for earnings (and hence the ability to afford higher rentals) to catch up.

It appears that maybe in the US there will be something of a clear-out of speculators, but the key question for me is what is happening to the market in property rentals in the US?

Having said all that, it is of course the case that the great majority of new money in circulation comes into existence as "deficit-based" but "asset-backed" mortgage loans by credit institutions, and if that source of money dries up, the prospects for a US recession look grim - that could lead to a "hard landing".

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Sep 27th, 2006 at 11:35:23 AM EST

The borrom two are the same as the top one (GDP growth minus a component of debt, left is US, right is eurozone).

Europe's grwoth thus also has quite a strong debt component. Whether it's "good" debt or not (as per Colman above) is hard to tell, but it's clearly there.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Sep 27th, 2006 at 12:29:06 PM EST
OK, I know nothing about real estate, but does all this mean that me planning on buying a small apartment is a bad idea?

After all I need somewhere to live, recession or no recession.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Sep 27th, 2006 at 02:11:50 PM EST
[ Parent ]
I rent, both for mobility and because of the bubble.

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Wed Sep 27th, 2006 at 07:08:22 PM EST
[ Parent ]
As long as it is not in the US, you should be alright. Houseprices go up and down and though it is be a bad idea to buy when everybody agrees that the prices will soon crash. Then you wait until they actually crash to buy.

But in general it depends largely on how long you plan to keep it and what area it is. If you for example plan to live somewhere for the a rather long time, and pay down loans while you live there buying is probably not a bad idea. When you move and sell you might turn a profit or a loss compared to living in a rented flat. But unless you bought at the peak or your area becomes depopulated you should be able to pay back your loans and have a downpayment for your next home.

And as you say, you need somewhere to live.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Sep 28th, 2006 at 11:33:35 AM EST
[ Parent ]
I'll keep the apartment for at least 2-5 years. If housing values crash I will not be inclined to sell the place but instead rent it to someone else if I decide/have to move away.

The area will absolutely not become unpopular or depopulated. And I won't loan the money but pay in cash.

And renting is not an option. In Sweden we have rent control (aargh!) which means it is impossible to find an apartment to rent.

Any more ideas and comments?

Please! :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Sep 28th, 2006 at 07:06:56 PM EST
[ Parent ]
Why wont those pesky poor people get out of your way, eh? Stop whining about your upper middle class travails. Poor you that has to suffer through rent control.

I only wish Oslo still had some rent control housing. Maybe I could hope to afford renting an appartment here then... But then I don't own an appartment in the "right" part of Stockholm and cheer when the conservatives win elections.

by Trond Ove on Sat Sep 30th, 2006 at 06:51:43 AM EST
[ Parent ]
Rent control is the single most efficient way to destroy a city, including nuclear weapons. 99 % of all economists from all different political camps agree on this. Rent control is the reason I have to buy an apartment instead of renting one, as there are no apartments to rent.

So stop your whining about my upper middle class travails.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Oct 2nd, 2006 at 06:56:32 PM EST
[ Parent ]
Are there diagregated figures available for the UK, Ireland and Spain?  As the piece I linked to said, there's a strong divergence between the Anglo-Saxon economies + Spain (+Ireland, eh semantics?) and the Germany and France.  Can the EU maintain the fiscal policy coherence needed to avoid the Euro being disintegrated by centrifugical forces?  Remember Italy last year about the Euro, and leaving the euro?

That possibility, pressure to leave the euro, to reinstate inflationary policies to mitigate private and public debt, that is the danger I see to "Europe" (as in the plural) rather than Anglosaxons plus Spain.

On another note, I should find the post from Escolar showing "renovated" living spaces up for sale in Spain.  Precious, I had to do the measure conversion to English units, but I know that 15m2 is a small flat no mater what the unit of measure.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Sep 27th, 2006 at 02:30:50 PM EST
[ Parent ]
Zulitos.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Wed Sep 27th, 2006 at 02:38:35 PM EST
[ Parent ]
15m2 sounds like a large tent.  450sq.ft?  The Spanish market is all bubble and there are a lot of horror stories, particularly for foreign owners.  Be careful.

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Wed Sep 27th, 2006 at 05:34:13 PM EST
[ Parent ]
15m2 is about 160 sq.ft; not a large tent...
by Bernard on Thu Sep 28th, 2006 at 04:20:40 PM EST
[ Parent ]
Are you familiar with the term outhouse?

Because they're damn near the same size.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Sep 28th, 2006 at 10:06:27 PM EST
[ Parent ]
No, I'm not.
by Bernard on Fri Sep 29th, 2006 at 04:49:40 PM EST
[ Parent ]
An outhouse is a shed outside a house, where people go to perform bowel movements.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Fri Sep 29th, 2006 at 05:20:07 PM EST
[ Parent ]
The best ones are the 7m^2 flats. That's about 75 sq ft.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Fri Sep 29th, 2006 at 05:22:20 PM EST
[ Parent ]
Why is such a strong difference between the two graphs for the USA? (It appears as if borrowing was taken into account with a different multiplier.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Sep 28th, 2006 at 03:45:51 AM EST
[ Parent ]
I think that the top is given in dollars, and the bottom in percent, so that one in dollars appears flatter.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Sep 28th, 2006 at 08:16:07 AM EST
[ Parent ]
No, I don't mean that. I mean the line for growth minus borrowing, which on one graph goes clearly into minus in the Bush era, on the other just passes under it.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Sep 28th, 2006 at 08:22:46 AM EST
[ Parent ]
The top one deducts all of net new debt from GDP volume; the bottom one deducts 60% of the percentage of growth of debt from the percentage of growth of GDP.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Sep 28th, 2006 at 11:48:58 AM EST
[ Parent ]
Huh!? What sense makes the second?

I wonder what the EU's graph would be done the fort way.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Sep 28th, 2006 at 02:49:50 PM EST
[ Parent ]
If US housing crashes does this affect the US governemnt ability finance spending by loaning? Does it affect the US dollar?

From my non-economist point of view it seems that there should be a connection but I do not know how it looks...

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Sep 28th, 2006 at 11:41:47 AM EST
Don't let not being an economist put you off - it's probably a qualification, since Economics as practised is total fantasy.

My guess, and it's as good as yours, is that a US housing crash will dramatically affect US consumption through cutting off new "equity release", and therefore reduce the trade deficit.

However, the US government will continue to fund this deficit by selling bonds to the Chinese etc etc

It's the effects within the US that are interesting in terms of defaults and the ability of the financial system to cope.

If and when the international community then get the jitters re the US and the dollar, the Fed will be between a rock and a hard place, since raising rates to support the dollar would only intensify the problem.

But this is what you get when you allow the banking system to create Money as interest-bearing credit....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Sep 28th, 2006 at 12:06:59 PM EST
[ Parent ]
Mostly a housing market crash affects the housing market. If you have a fixed rate mortgage (common in the U.S.) and still have your job, the loss in value is a paper loss that doesn't change your economic status. If the crash is evenly distributed, you can even move from one area to another and stay in the same basic economic situation.
by asdf on Thu Sep 28th, 2006 at 10:53:09 PM EST
[ Parent ]
Especially if your real estate taxes are also lowered. It can even be beneficial.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Thu Sep 28th, 2006 at 10:54:55 PM EST
[ Parent ]
I live in one of the US's hot housing markets, or did until recently. The cost of homes shot up something like 25-30% in my area during 2005, but have probably declined 20% this year. However, even with the 20% decline, I calculate that there has been about a 9-10% annual average increase in prices over the past 10 years. I would guess that the slow rise in fixed mortgage interest rates (which are still very low in comparison to historic rates) are not the cause of the decline but rather (1) the rapid rise in prices over the past couple of years; (2) continuing discussion in the news and elsewhere that the top of the market had been reached and was likely to be followed by a slow down and decline in prices.  The word now is that there is no real reason for a housing crash other than that potential buyers are sitting on the sidelines waiting for the market to bottom out.  This may sound like a simplistic explanation, but I'll bet it's closer to the truth than all the charts combined. (Or at the very least, I hope it is!) Yes, there will be some hurting puppys among those who bought at the top for speculative reasons. Especially those who used "creative" financing to obtain below market interest rates.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Thu Sep 28th, 2006 at 10:53:15 PM EST


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