From Slate:
Bubble, Bubble, Toil, and Trouble
As the housing boom comes to an increasingly ugly end, the parallels between the real-estate industry today and the technology industry in 2000 and 2001 are astonishing. Blogger Barry Ritholtz last month posted eerily similar charts of the NASDAQ composite index in the tech-bubble years and the index of housing-related stocks in the real-estate-bubble years. Both show rapid rises, a swift correction, and a subsequent rally when analysts and insiders proclaimed (prematurely) that the worst was over.
Echoes from 2000 can also be heard in the continual false calls of a market bottom. The Web site Minyanville has documented the repeated bottom-calling attempts by National Association of Realtors economist David Lereah. Lereah believed the housing market had stabilized in March 2006 and again in April, June, October, and November.
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It sounds like a replay of the 2000-01 period, in which software, technology, and dot-com companies, riding a wave of growth, thought the slowdown was a small blip. (David Lereah, who published a book in 2005 telling readers how they could get rich participating in the endless housing boom, published a book in 2000 advising readers how they could get rich from the endless information technology boom.)
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The persistent optimism of housing and tech advocates has the same basic source. When a set of changing circumstances—an exciting new technology like the Internet or a climate of low interest rates and easy credit—comes along, executives start to believe that their blessed industry has slipped the surly bonds of the business cycle. The prospect of a slowdown that lasts for two years simply doesn’t jibe with their new worldview.By the end of a boom, all the pessimists have been demoted or passed over for the optimists. Executives who come of age during booms are punished for caution and rewarded for doubling down. In 2000, this translated into companies building insane amounts of fiber-optic cable ahead of demand or blowing hundreds of millions of dollars on warehouses for Webvan. In 2005 and 2006, this translated into Wall Street firms paying large sums of money for subprime lenders—right at the top of the credit cycle—and home builders shelling out cash to lock up thousands of empty lots. Just as investors in technology companies had to write down the value of that fiber-optic cable and Webvan’s warehouses, investors in lending companies and home builders are already writing down the value of those subprime lenders and all that land.
The other reason it’s so hard to call a bottom has to with how bubbles burst. After investors and corporations overreact on the upside, they overreact on the downside. As a result, it generally takes more than a few quarters for equilibrium to return to turbulent markets. For example, lenders are just now starting to tighten standards on the loans they make to subprime borrowers—a measure that is sure to weigh further on an important sector of the housing market.
All of which means that the housing industry in 2007 may be where technology was in early 2001—engaged in the first serious hard times the industry had seen in more than a decade, finally aware of the problem, but still a long way from the bottom.
“(David Lereah, who published a book in 2005 telling readers how they could get rich participating in the endless housing boom, published a book in 2000 advising readers how they could get rich from the endless information technology boom.)”
Love this quote, Lereah comes across as such a fool. Always a day late and a dollar short, perhaps it would be useful to track him for years, he is a good indicator of when to get out.
In 2005, when I began researching the housing bubble and following the related blogs, I recall reading bloggers comments that it wouldn’t be safe to buy in some areas until 2010. I thought that was a ridiculous timeframe from an extremist viewpoint. Now, I’m not so sure.
Froma commodity/financial market perspective, the housing market needs to “clear” before they can head higher again. Since the market, in terms of sales, turns like an aircraft carrier, this clearing may be years away. There is a lot of housing in “weak” hands. Until that inventory sells into “strong” hands, the housing market (viewed as a macro market, not a micro market) will remain weak and search for lower pricing in order to clear.
read: http://www.iht.com/articles/2007/03/02/business/wbmarket03.php
Off the Charts: U.S. house price pain may be just starting
By Floyd Norris Published: March 2, 2007
In the autumn of 2005, the biggest boom in home prices in the United States was in Phoenix. People stood in line just to get on lists to buy new homes. It was possible to make lots of money selling a place on a list well before the house was actually built.
At the peak of momentum in that market, according to the Standard & Poor’s/Case-Shiller home prices index, house prices in Phoenix rose 49 percent in one 12-month period.
That was then. When S&P issued its final 2006 price numbers this week, it reported that Phoenix home prices rose just 0.3 percent in 2006. And it said that home prices peaked in June and fell 2.6 percent in the final six months of the year.
Home prices are notoriously difficult to compare. Every house is different from every other, in location if not in construction. The government compiles national averages, but it is hard to determine what they mean, since regional differences are huge.
The S&P indexes, which now cover 20 regions of the United States, try to deal with that by recording all sales in an area, and then comparing the price to the same price that house fetched the last time it changed hands. They include only single-family homes, not condominium or cooperative apartments, which can distort the picture in areas where such apartments form a major part of the housing market.
The graphic shows the performance, on a year-over-year basis, of the indexes for 12 areas. They illustrate the wide regional variances, showing that Phoenix was not the only part of the desert that boomed. Las Vegas, with a 53 percent year-over-year rise in the autumn of 2004, set the mark for best annual performance. In 2006, prices there rose just 0.9 percent.
Big coastal markets also did very well, although not to that extreme, and are now coming down. Prices in the New York region slipped just a bit in 2006, although that figure is distorted because it ignores Manhattan apartment prices, which have been strong. Larger declines were recorded in Boston, Washington, San Francisco and San Diego, but Los Angeles eked out a 2 percent rise for the year.
These indexes cover two Florida areas, Miami and Tampa, which seem to still be doing well. But it is condominiums that have the most problems there, with many of them having been bought by speculators who planned to sell quickly, and now find that difficult to do.
The worst performance for the year came in Detroit, which never really boomed. With the automobile industry continuing to suffer, prices fell 5.9 percent in 2006.
Some areas continue to do well. Prices in Seattle rose 12.1 percent last year, the only double-digit rise, although Portland, Oregon, came close with a 9.9 percent gain. In 2005, by contrast, half the areas recorded double-digit gains.
Home sales are falling, which is bad news for builders, but for those who already own homes the really important issue is price. So far, prices are not very far below peak levels in most markets, but continued weakness could change that, and create pain for those who must sell, or who need to refinance their mortgages.
US economy suddenly appears vulnerable
by Rob Lever
Sun Mar 4, 5:39 PM ET
http://news.yahoo.com/s/afp/20070304/bs_afp/useconomygrowth;_ylt=AtMpF0Z4YfYo.pqUYQBTbBGyBhIF
WASHINGTON (AFP) – The US economic expansion suddenly seems more fragile than thought just weeks earlier, after a sharp downward revision to the past quarter’s growth and renewed fears about the slump in real estate.
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The latest revision to US gross domestic product ( GDP) showed the world’s largest economy expanded at a tepid 2.2 percent pace in the fourth quarter, instead of the 3.5 percent growth spurt in the official estimate a month earlier.
That was the sharpest downward revision in a decade, and was attributed to weak business spending and a drawdown of inventories from cautious firms.
Still, most forecasters say the economy will muddle through 2007 at a sluggish pace, in line with Federal Reserve forecasts.
But some say the picture is more shaky than it appeared a few weeks ago. And many are renewing forecasts for interest rate cuts by the Federal Reserve sometime this year to help pick up the pace of economic activity.
Manufacturing has been sluggish, highlighted by the 7.8 percent drop in durable goods orders last month.
And some say the US has yet to see the full effect of the housing downturn, reflected in the 19.1 percent slide in residential investment in the fourth quarter.
The end of the real estate boom has resulted in high failure rates among risky or “subprime” mortgages, given to borrowers with below-average credit ratings, and some say this crisis could spill over.
“We are seeing cracks in this easy-money-now-not-so-easy environment,” said Andrew Busch, analyst at BMO Nesbitt Burns.
He said 20 subprime lenders “have either shut down or been forced to shut down” and more failures are expected. While most major banks are not in the sector, a wave of failures could spread throughout the financial system, some warn.
Stephen Gallagher, economist at Societe Generale in New York, said the sub-prime lending pullback “is a mini crisis that raises questions about complacency in general.”
“It has become a case of extreme illiquidity that tends to shake out weaker hands,” he said.
Another concern is the rise in the Japanese yen, which could hurt the so-called “carry trade” that provides liquidity to the US and other markets.
These concerns have whipsawed global equity markets, which saw one of the worst weeks in years, sparked by a nine percent plunge in Shanghai’s stock market on Tuesday.
“Hedge funds borrow yen at very low interest rates to fund US investments. When the yen strengthens, it makes the repayment of those loans more expensive,” said Dick Green, analyst at Briefing.com.
“So, perhaps a rising yen will force some hedge funds to sell stocks to cover exchange rate losses. Perhaps.”
Paul Sherard, economist at Lehman Brothers, said there may be some economic turmoil ahead but he sees no major crisis.
“Wobbly markets probably do not presage serious economic trouble ahead,” he said in a note to clients.
“However, the global economy is still sitting uncomfortably in a configuration of ultimately unsustainable imbalances centered on a current account deficit of 6.6 percent of GDP in the US (2006) and current account surpluses of 9.1 percent in China and 3.9 percent in Japan.”
Sherard said he expects “a gradual but generally orderly unwinding of these imbalances with occasional but inevitable bumps. But the market can be forgiven for getting occasional jitters that a faster and more painful path of adjustment may lie just ahead.”
Federal Reserve chief Ben Bernanke told lawmakers Wednesday there was “no material change in our expectations for the US economy” since the official forecast delivered February 14, calling for growth a range of 2.5 to 3.0 percent for 2007.
Bernanke said the downward revision of the fourth quarter GDP numbers “was actually more consistent with our overall view of the economy than were the original numbers.”
“So we expect moderate growth going forward,” he added.
The possibility of a recession, evoked over the past week by former Fed chairman Alan Greenspan, has few followers. Among them, New York University economist Nouriel Roubini, who has been calling for a “hard landing” since last year.
“This hard landing will certainly be, at a minumum, a painful growth recession and, much more likely, a much more ugly outright recession,” he said.
Others say the Bernanke view is more likely, saying consumer spending and other segments of the economy are holding up.
“If the US economy is sliding into recession .. someone forgot to tell the American consumer. Consumers, who account for 70 percent of economic activity, are still frolicking on the beach oblivious to the swirling storm clouds overhead,” said Sal Guatieri of BMO Financial Group.
Nariman Behravesh, chief economist at the research firm Global Insight, said excluding inventory adjustments and other temporary factors, “you’re looking at growth of around 2.5 percent and we think that may strengthen to about three percent by the end of the year.”
He said this situation could mean rate cuts ahead if inflation stays in check, despite the hawkish rhetoric from the central bank.
“Our view is there is still chance that in the middle of the year, with the economy still sluggish, the Fed may cut once or twice. But I’m not going to make a huge bet on that.”