I link to Mish’s Global Economic Trend Analysis a blog that contains the single best summation of the HB that I have seen thus far. You’ve got to scroll down a bit to read the whole thing, it’s entitled Exhaustion. It digs a bit deeper into the housing numbers released yesterday as well.
In part:
Triggers
I would have thought that by now Miller would have figured out what the “trigger” was to this downturn. Perhaps the answer is just too simple for many to understand. The trigger (or lack thereof really) is called exhaustion.
The short version of the process is simple: “The pool of greater fools dries up”.
The long version of the process is as follows:The Exhaustion Process
- After years of price runups, people started buying homes not to live in but for investment purposes. In 2004 and 2005 a whopping 40% of all homes sold were for second homes or for investment purposes.
- The above happened in spite of the fact that home prices to wages relationships, and home prices to rental prices had both risen 4 standard deviations above norm.
- Credit standards steadily declined to rock bottom levels such that anyone who could fog a mirror could get a loan
- Lenders passed on risk to hedge funds, pension plans, etc who could not get enough of what eventually will become toxic waste, but at the time seemed like a good idea. Risk yield spreads collapsed as people started assuming prices of houses would never decline.
- Fannie Mae lost trillions in derivative hedging as interest rates gyrated but no one really cared.
- Homebuilders provided down payments via charities to those who could not afford to buy a house. The IRS has been looking into this practice and it may be illegal.
- Magazine covers, books, and financial wizards of all sort were touting “Buy now before prices rise further”.
- All sorts of creative financial products were unleashed on the unwary.
- As the pool of eligible and willing buyers shrank, subprime loans, pay option arms, and stated income loans soared as a percentage of all loans. Anything and everything was done to keep the bubble expanding.
- The masses embraced the trend just as it was ending.
- Panic buying reached a peak in the Summer of 2005 with people camping out overnight in Florida to buy condos for ridiculous prices hoping to flip them. No one bothered to figure out there was no one to flip them to.
- David Lereah, chief propagandist for the National Association of Realtors, published the same book twice. His book “Are You Missing the Real Estate Boom?”was published in February 2005 about 6 months before the peak. One year later in February 2006 (about 6 months after the peak) Lereah retitled his book “Why the Real Estate Boom Will Not Bust—And How You Can Profit from It.”
- Pent up demand collapsed and home sales plunged. The pool of greater fools, reached its pinnacle, depending on location, somewhere between Summer of 2005 and Winter of 2005.
- The unwinding process has really just started.
- Given that the housing boom lasted for close to 20 years and sustained panic buying happened over a 3-5 year period, selling capitulation and inventory work off can easily take 7 years or more. We are nowhere close to selling exhaustion.
- Global wage arbitrage, outsourcing, rising bankruptcies, and rising unemployment will ensure this process will take a long time to fully unwind.
- Prices will continue to fall until bankruptcies and selling exhaustion are in.
Everyone seems to have enjoyed the bubble post of yesterday so I’ll try a post like that every now and then. Go read those blogs though because I’m just linking to what stands out to me.
Regarding those cops, teachers and firefighters there was this little nugget over at Ben’s blog.
“‘In some new-home neighborhoods in Florida, there are more ‘for sale’ or ‘for rent’ signs than there are drapes in the windows,’ adds Jack McCabe, a real-estate consultant in Deerfield Beach, Fla.”
“Debbie Terry, director of recruitment for the Collier County school system in Naples, says the district is suffering a ‘double whammy’ from steep real-estate prices. About 25 new teachers hired this summer later rescinded their contracts because they felt home prices in Naples were too high.”
“Meanwhile, a growing number of more-experienced teachers have been selling their homes to lock in big profits made during the boom, and then moving to less-expensive places like south Georgia.” (emphasis mine)
So I guess when I move to Georgia or some other place like it I will be amongst the 100k or less crowd and we can all talk about being priced out of real estate.
Another one from Ben:
From CNN Money . “Home price increases have slowed nationwide and even reversed in many markets. Inventories are up and new home builders are cutting back. More and more sellers are having difficulty selling their properties. We’ve profiled some of these sellers and that has produced a flood of reader emails from other troubled sellers. Sellers have reacted to the quickly changing market almost with disbelief.”
“K. Gordon, Amarillo, Texas: ‘I bought a brand new house in Amarillo. Unexpectedly, 4 months later I had to move back to south Florida. 14 months and 3 agents later, the house has not sold. I’ve tapped out my credit making payments on that house as well as my current rent.”
According to most of the material I’ve read, the actual numbers in real estate lag by about three months and the ones released for the press are estimated projections. Some of the stories coming out of these blogs are startling and suggest a far worse picture than the news of yesterday paints.
And last, for your RE fraud news of the day (I predict you will be reading a lot more of these types of stories):
“One house was sold at about $100,000 more than its $350,000 market value. The other, next door, sold for $50,000 more than its $350,000 value. The biggest loser is the Indianapolis bank that loaned the money. And once the real-estate market bottoms out, the dominoes of loan defaults that will likely result will reveal even more mortgage fraud cases, says Lance Caldwell, one of Portland’s assistant U.S. district attorneys.”
“‘It reminds me,’ Caldwell says, ‘of the savings and loan crisis.’”
CSG
