Mort Zuckerman of U.S. News and World Report gave a gloomy assessment of the housing market yesterday:
How much longer will house prices keep falling? That collapse is a larger threat to our economic well-being than even the headline-grabbing problems of our increasingly frozen financial system. We’ve had half a century of rising home values, capped by an inflation-adjusted rise of 85 percent from 1997 to 2006. Now the loss of value tops $1 trillion, and the financial world has incurred hundreds of billions of dollars of losses on the premise that U.S. home prices would never fall. The median price of a new home is at $206,500, receding to where it was in November of 2003, thus wiping out more than three years of price appreciation. It takes 6.3 months to sell a finished home compared with 4.3 months a year ago. The ratio of inventory to sales is the highest since October 1981—there’s an unsold extra backlog of a million single-family homes and condominiums. Builders have cut their housing starts by approximately 40 percent over the past year. David Rosenberg of Merrill Lynch estimates construction will fall from a million units to approximately 700,000 units, an all-time low since World War II.
House prices, though, haven’t fallen enough to tempt buyers, despite sales incentives and rebates. According to the Conference Board, fewer Americans plan to buy in the next six months than at any time since 1994. The decline in conventional mortgage rates has failed to spark sales because it has been trumped by tighter lending standards. Speculators, who helped fuel the bubble, have virtually disappeared from the market.
The rest of the article is also interesting, and he did a good job of discussing the problem of fighting a deflating bubble with lower interest rates:
Lower rates can help those with adjustable-rate mortgages, but they cannot stop the deflation of the housing bubble or prevent a tidal wave of mortgage defaults. This is partly because mortgage rates reflect the 10-year treasury bond yield more than the federal funds rate. That rate has dropped, but the spread of both fixed- and adjustable-rate mortgages over treasuries has widened, which means smaller declines in mortgage rates. Then there are those many borrowers who got mortgages in 2003 and 2004 when the federal funds rate was 1 percent; they’re not going to get a better deal than that. And if they now have zero or negative equity in their home, they won’t be able to refinance in any event.
Zuckerman made this recommendation:
There is no time to delay in combating the trends. Monetary policy cannot make bad investments turn good. Cheaper mortgages won’t cure the market where properties are plunging so much in value. The collapse of value will affect all homeowners and, through them, the whole economy. It’s bound to be the most pressing issue in this presidential election year. Voters in the primaries and general election should look to candidates with credible policies in mind to address this downturn.
Too bad "candidates with credible policies" are in short supply. Too many of our politicians seem to believe that government can somehow stop the trainwreck if enough money is thrown at the problem.
The effects of the downturn can be addressed, but the downturn itself cannot be stopped. Policy can’t combat gravity.
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I agree that we need to have prices correct, however, we are facing a boatload of banks that are in danger of disappearing. We unfortunately need them despite their bad behavior.
Speaking of “policy,” check out this RJ article.
“Slowdown lands on gaming.”
[says Station Casinos:]
“It’s incumbent upon us to run our business the most efficient way possible. It is also our responsibility to right-size our operations to the current economic conditions. Unfortunately, that includes some layoffs.”
http://www.lvrj.com/news/15661402.html
But, I thought gaming was going to save the Las Vegas housing market! How will I ever unload my 28 condos!!?
Metro-
I definitely agree we need the banks, but policy makers aren’t going to be able to prop them up by propping up the housing market. They are going to have to accept asset deflation, and figure out how to keep the banks going in spite of it– housing is going down.
NVAttorney-
Thank you, I’m feeling vindicated. People may gamble even in the bad times, but I believe they gamble less, and closer to home.
However appealing the weekend in Vegas may be for people, I think a lot of folks are looking at their bank account and saying, “When you don’t got it, you don’t got it.“
Twist I am afraid that a new RTC is in order. I remember houses in Austin, TX selling for firesale prices like $35-50,000 in that down turn. Asset deflation is inevitable and I look forward to that happening, what I am worried about is interest rates going sky high due to the banks not trusting anyone and pricing in nonexistent risk. The article I sent you today explains some of that happening right now.
Wow, owning a 4 BR with a pool in North ‘Dale for $50,000. Sounds like my kind of housing market. Maybe if I buy some more SKF I can get a whole neighborhood. I might have to put together a partnership: “Dumb*ss Renters’ Revenge LP”. Twist, I’ll reserve a couple units for you and Mr. Twist. And Asset Hunter…that way we can argue about religion over our common fence instead of boring everybody here.
Agnostic-
That sounds like a plan. I have a house full of teenagers, and having them in their own place next door at times has a certain appeal.
I’m thinking desert landscaping in the common area would be better than greenbelts. If we’re the only ones in the HOA, I don’t want to have to take turns mowing!
No worries on the mowing. We’ll have plenty of Euros to pay the ex-mortgage brokers who will be competing for our landscaping business.
Sounds great, Agnostic!
We can fire up all the BBQ grills with Mr. & Mrs. Twists’ substantially sized family, and have “walking on the water” contests in the pools!
Although I doubt anyone who knows me would call me prejudiced, the simple practicality of an English speaking landscaper would be refreshing.
From what I’ve been reading about Scottsdale HOAs recently, I’m not sure mowing would be the biggest issue… maybe we’d want to abolish the HOA and let common sense or even majority vote rule.
I can’t afford many $ 80,000 light fixtures!
How many Euros is that, anyway?
Ok, so gambling won’t save vegas or the economy. I think our only hope is alcohol. When times get tough, people go drinking. When times get REAL tough, they become alcoholic. It’s a new golden age for Budweiser! Buy their stock now or be priced out forever!
Linenoise,
“When times get REAL tough, they become alcoholic. That’s what I thought too, but California’s “Alcoholic Beverage Excise Tax” for January is down $524,000 from last year.Looks like at least some are sobering up.
Igor says spiral
“{Twist I am afraid that a new RTC is in order. I remember houses in Austin, TX selling for firesale prices like $35-50,000 in that down turn”
I remember modest but nice houses circa 1999-2000 in the outer Phoenix suburbs retailing for $90K. For another 20 or 30 grand, the houses were pretty elaborate. Then I remember the cheapest of those houses selling for over $200K in late ’05, with the bulk of the “gains” occuring over the previous two years.
But asset deflation has certainly arrived. Not just for the 3,000-plus square foot stuff, but the modestly sized stuff as well.
BTW, there was stuff on the radio local news this morning about school enrollment down in many districts here in Arizona. The decrease was attributed to the children of illegals leaving the state since the new employment law took effect. Of course, both legal and illegal residents will find housing-related employment to be scarce.
The Fed thinks they can just tweak interest rates, borrow from the Chinese for a stimulus package, and promote bogus mortgage modifications that only put off inevitable foreclosures.
We need serious recommendations that include honestly renegotiating mortgages so folks with negative equity have a reason to hang on. You bet the banks will balk at this but the alternative is more folks just walking away.
We are staring at the abyss and our policy makers have no balls. This is a great read:
“The Worst is Just Beginning”
Henry Paulsen’s Wild Ride on the Economic Hindenberg
http://www.counterpunch.org/whitney02152008.html
I agree that these banks are toast riding the current wave. A fix to this problem is over my pay grade.
Bruce,
Interesting article. However, house depreciation cannot be stopped. Our leaders, big business and the people themselves created this monster. It is going to be painful, but the only way to restore balance will be for prices to dropped to fundamentally affordable prices.
Igor’s word shrub as in the shrub administration.
Asset Hunter-
I’m okay with abolishing the HOA–
I may not like someone’s pink plastic flamingo and/or yard gnome, but will defend their right to have them in the front yard if they feel so inclined!
If AH puts up a statue of Jesus then I’m putting up a statue of that So-Crates guy.
Surak-
I alternate between depression and hope as this impending demise looms. Part of me realizes that human frailty has gotten us into this mess and part of me wants to believe that human fortitude will be our salvation. I desperately think I’m just being overly pessimistic because no one wishes for the nightmare that awaits.
Why are we assuming this future period will be a nightmare? If unemployment stays below 7%, interest rates are moderate by historical standards (even with historical risk assumptions built back into the spreads), and housing is reconnected to fundamentals of affordability, isn’t this the sort of change we want?
Yes, yes, there will be lots of folks experiencing another nightmare…but it will mainly be those who bought into the last nightmare, which has occurred already! Speculating into a housing ponzi scheme was an obvious mistake for all of us who backed away and watched. We watched as banks, rating agencies, agents, brokers, appraisers, investors, and especially flippers and buyers all drank the kool-aid together.
My wife and I are sitting here with lots of cash, a great marriage, with both of us in good, secure jobs because our investment has been in developing our skills, our networks, and always maintaining very strong work ethics.
We’re flat out rejoicing that reality is returning…the nightmare of a “fath-based economy and society” is almost over. Time for more hard work, less fear and lies, and more fellowship.
We’re excited about the future. And we think we’re in the majority of Americans- really good people at heart who’ve been marketed to the edge and can now come back to their senses.
DCBeacon,
A very positve and and other side of the coin perspective. “Time for more hard work, less fear and lies, and more fellowship.”
Amen!!
Igor gave me “shrub” again
Agnostic – I think all we’re missing now is a big golden buddha statue and our neighborhood will be fully enlightened!
(of course, we’ll need to consult a feng shui expert to help us arrange them all properly with the car tires & pink flamingos)
Metro,
Fear not for the banks. The overwhelming majority of them are just fine with respect to subprime debt. A few small town banks have closed and a few of the big Wall Street banks are sucking wind, but they will be OK with respect to subprime. The real danger for all banks is a severe contraction in the credit markets. Most banks are contracting their balance sheets now because they are too afraid to lend. There is illiquidity in the secondary market and counter-party risk in many cases is unknown. This country has never gone into a recession (wich I think we are) from a position of such easy money and credit. It will be a new experience. For expample, everyone may want to take a look at their credit card interest rates that seem to be inching up by the month as easy money disappears. My own card that is always paid off every month was at 10.99% for most of 2000-2007 and just in the past three months went up to 21.99%. Nothing else has changed in my credit profile and the card is backed by a brokerage account with a minimum balance (i.e. it is supposed to have a low rate from low risk). Makes me wonder…
As an aside alcohol consuption does indeed go up during recessions. The reason that alcohol taxes drop is that people consume cheaper beverages such as beer and cheap wine which are taxed less.
Smart people buy decent shelter and live below their means. When you live below your means you have cash left over after paying your expenses. You take the cash and put it in the stock market or savings. Even today, savings accounts get 4-5% when everything else is dropping. Putting all your apples in an asset like a home is bad financial management.
twist -
That was a very significant find. Mort happens to be one of the most powerful men in America, and perhaps the most powerful native Montrealer (although it’s possible Professor Tremblay is not on his Xmas card list
).
When Bill Kristol prints an article as detailed and concerned in The Weekly Standard I’ll know all the important grownups have correctly read the writing on the wall. There now remain very few key Americans who haven’t correctly spotted the financial tsunami on the horizon.
DCBeacon (#19) -
1) Perpetual war
2) Fiat currency (now we learn money is a social contract)
3) Ghawar
4) Lake Mead
… sorry (codeword “doom”)
Hi, John M.
I agree that we have some very challenging years ahead of us reversing some very serious negative trends. But do you really think we’re over the edge…that it’s too late to do anything…that all hope is lost? Can a few Wall Street securitization geeks really have set the wheels in motion for Armageddon?
You might be right…but what I’m saying is we have a fighting chance if our eyes are truly open and we work together.
I think this blog helps us do that…it doesn’t really suggest “doom” as much as it suggests “hope through reason” to me.
Hi DCBeacon,
I think WD II got baked into the pie when Nixon closed the gold window in ’71 and then we decided to wage perpetual war on a bunch of our erstwhile Cold War allies after ’91.
I don’t blame the financial engineering of securitization per se, but the use of SFAS 140 to juice yields by taking on insane amounts of hidden (off-balance-sheet) risk has turned an inevitable crisis into a looming catastrophe. Just this week FASB has realized to their horror what they have done, and now want to end QSPEs altogether. I’m still guessing that it was Tim Howard at Fannie who was the original innovator in this area, but it’s possible he wasn’t the first, or that a whole lot of people piled into Rule 140 as soon as it was promulgated. Whatever, it’s the $1.4+ trillion of senior F&F debt backed by the implicit guarantee that’s poised to crash down on Congress, smothering America’s monetary freedom of action for a generation.
All that being said, I did have fun recently linking some of those Wall Street geeks with a character out of W. H. Auden. WD I lasted less than a decade, so most of us should make it through the 21st Century version OK too (Igor says, “short”
)
DCBeacon-
I think “hope through reason” sums it up nicely. What is “doomed” is our current system of debt and the housing pyramid scheme– I’m hoping the ultimate outcame is a wiser, more frugal world.
Twist,
It may be too much to hope for but it would be nice if someday we could really ‘OWN’ property instead of just leasing it from the State.
Igor says short
and I plan to.
Hutch-
I had a friend who’s husband was a “conspiracy theory” type, and I generally discounted what he said. The one thing that [depressingly] he said that was right was: “No one owns property in this country- we just lease it from the government. If you believe otherwise, quit paying your taxes and see how long it is yours.”
If I worry about that one too much though, I’ll get started on other government abuses, which should be left for another forum. I’m hoping that one of the better effects of the housing bust though, will be that an overextended government has less money, and consequently less opportunity, to violate the rights of it’s citizens.
How about a housing policy which puts housing first, and integrates all other policies around that policy?
Ban housing evictions now. Said it before. Will say it again. The economy will CONTINUE TO DECLINE until a housing eviction ban is imposed. NOTHING ELSE will stop economic decline.
And by the way, read my book: The Eminent Domain Revolt (New York: Algora, 2006). What a cheap ad!
jryskmpr,
How is a ban on housing evictions going to stop economic decline?? How about stopping the insane war and stop giving tax breaks for exporting jobs. In addition, put back in place the Glass/Stegall act of 1933 (strict lending standards), which would lower housing prices and greatly lower foreclosures, so there would be no need for so many evictions.