Didn't they get the message? Hucksters, propagandists, shysters and con-men are supposed to rip off *other* people! But they're doing the same crap (foolish massive leveraging) to themselves! What's up? Are they snorting Tony Robbins' smack or something?
Midas. i think you're making a very relevant comparison here with the stock market sectors and the housing market cities. here is what makes me generally nervous. if you look at the housing markets that are in bubble zone (cali, nyc, miami, boston, dc, vegas, AZ), it's easy to see that, yes, the bubble is in fact contained to specific regions. however, just add up the value of all the homes in bubble regions and then compare that number to the value of non-bubble places like buffalo and detroit. imho, this sort of weighted indexing would show that a ton of the aggregate wealth of our national housing is tied up in bubble cities.
Is this the payment schedule on one of those "fancy" loans.....omg, then fancy that. This is the classic "frog in the hot water" scenario. Slowly but surely over the next 5 years, the water will get hotter and hotter. At some point, maybe 2008-2011, hundreds of thousands of homeowners are facing over 100% rises in their payments and may also be upside down on their mortgages........OWP. http://www.philly.com/mld/philly/news/13243812.htm "Here is an example of what worries Dugan and Lereah: A buyer with an option ARM borrows $360,000 at an initial interest rate of 6 percent. The borrower makes only the minimum monthly payment (initially $1,200, rising to $1,600 incrementally) for the first five years. In year six, if there is no change in interest rates, the payment is up to $2,500. If the interest rate has climbed to 8 percent from the current 6 percent, the monthly payment jumps to $3,166." "If half the homeowners in a region have those mortgages, and if interest rates won't accommodate refinancing, and if house prices have fallen below the value of the loan, what happens? 'It wouldn't be a soft landing,' Lereah said." Little detour ahead for speculators...
http://www.latimes.com/classified/r...0,2141207.story?coll=la-class-realestate-news HOUSING SCENE Many are unprepared for a downturn By Lew Sichelman United Feature Syndicate November 27, 2005 WASHINGTON â A sizable group of the country's most recent home buyers may be about to embark on an economic ride, according to new research into how they plan to deal with a possible slowdown in housing values. Until recently, the housing gravy train has been hurtling along the tracks of appreciation at breakneck speed. But what happens if the engine that has driven the entire economy for the better part of four years hits the proverbial wall? If prices simply stop rising, one in four homeowners say they'd have to rearrange their budgets, according to a recent poll of the 2,261 homeowners in the 13 areas of the country with the greatest concentration of new construction or the highest rates of appreciation. If values should fall by 10%, one in three would have to tighten his or her belt. And if values should drop by 25% â an amount that is not unprecedented â one out of every two homeowners would be financially challenged. "Homeowners in markets where prices drop are in for a hairy ride," says James Chung, president of Reach Advisors, the Belmont, Mass., market strategy and research firm that conducted the survey in September. "Even if prices simply flatten, it is going to cause significant pain and have a large impact on the economy. Appreciation isn't bonus money for a lot of families; it's money that's already been spent." The long run of good fortune is all some people talk about, whether the venue is a formal cocktail party or a neighborhood block party. For many, according to Chung's "Moving Away From Easy Street" study, a house is not only a roof over their heads but also a high-performance investment vehicle, a home equity cash cow and the mainstay of their retirement planning all rolled into one. Chung isn't yelling that the sky is falling, or that the end is even near. Rather, the researcher says he wanted to learn what consumers might do if the housing market turns. "A sizable part of the population is betting that housing prices are going to continue to increase," he found. "So if prices don't keep gaining ground, many people will be forced to alter their spending habits, which is an issue that has major macroeconomic implications." Just one in three families with adjustable rate mortgages (ARMs) have a plan in place for handling higher house payments if their loan rates should increase. Chung isn't an economist. But he knows mortgage rates are heading north, ever so slowly. And he worries that rates â and therefore housing costs â may turn up so aggressively that these optimists won't be able to avoid a train wreck. Just how badly folks will be hurt depends on how deep house prices drop, if they drop at all. But based on the results of his survey, Chung says the number of people affected by declining values rises as prices drop, largely because many are not prepared for a downturn. "Every major homebuilder and developer has a plan in case the market turns south, but this isn't the case for American homeowners," he says. Hardest hit could be the Generation Xers, many of whom have never known rates above 6%. As a group, they are twice as likely as others to believe the current rate of appreciation will allow them to trade up from their starter homes to bigger and better models. In addition, those who hold ARMs are nearly twice as likely as others to expect to refinance into more favorable loans. Unfortunately, Gen-Xers have stretched their finances the most to tap into the allure of easy appreciation and easy financing. Indeed, they hold more inflation-adjusted housing debt than baby boomers did at the same age. "They're really stretched," Chung says of young home buyers. "They're the ones in the most precarious situation, and that's where the greatest percentage of foreclosures will be." Boomers, on the other hand, can afford to live large because they have amassed extremely large amounts of home equity. So "the fortunate generation," as Chung calls them, has the least problem with a potential drop in home prices. "They're in pretty good shape because they don't owe anything," the researcher says. Because of their state's extremely high housing costs, Californians are the least likely to hold more conventional â and safer â fixed-rate loans. Buyers in this state "are the most likely to be counting on real estate appreciation," Chung reports. "If their outlook wasn't so darn sunny, California might be a rather gloomy place."
By the way if anyone is looking to buy some homes on Lakewood Ranch Florida they will be on the MLS this week. I am negotiable because they went up 40% last year. One home will not be ready until about April.
people who foreclose in "bubble zone" will need to rent, driving up demand and stripping rental supply. rent prices rise. assuming the economy gains steam. rental markets get hot. real estate investors w/deep pocket then shift gear and rent out their properties for income, rather than speculate on price growth. worse case scenario for all real estate is deflation. highly unlikely, which is why banks are so creative about mortgages.
One thing you are leaving out is the number of vacant homes due to foreclosure. Remember the last cycle when you could pay "house sitting" rent way below market?? A friend of mine was paying $400 a month to rent a 5000 sq foot house in Atlanta. Rents are not going anywhere in the bust areas because people will be leaving in droves. John
It seems like many here assumes that Fed will not raise rate a lot, say, greater than 6%, because if they do so, the economy will be badly affected. The problem is, there is a case where the Fed simply cannot decrease rate to stimulate the economy, if, US dollar drops sharply against all other major currencies. When that happen, both long end and short end of the interest rates will automatically go up as there is lower demand for US interest rate securities due to the currency risk.
"When that happen, both long end and short end of the interest rates will automatically go up as there is lower demand for US interest rate securities due to the currency risk. " And that is one likely reason for the discontinuance of M3 figure by the Fed: to surreptitiously monetize increasing amounts of debt in future on the expectation of lower demand for US interest rate securities. This will have the effect of keeping long term rates, at least in the initial stages, at much lower levels than one would otherwise expect. Anyone who assumes that the Fed will act responsibly to protect the US$ and the American middle class will IMHO be in for a rude surprise with Ben, Printing Press, Bernanke, at the helm of the Fed.
if the choice is between monetization and catastrophic debt-induced depression, then monetization is a better choice, out of two bad choices. The Japanese should have been monetizing, and writing off bad debt at banks quickly, instead of muddling through with pointless and corrupt government infrastructure projects. I don't think the "value of the $" is more important than actual economic activity. Some people sound as if there is some moral nature to it, like preserving virginity or something. What in the end really matters is what real people do in the real physical world---and which policies encourage the best outcomes. Dollars are not people nor do they have any moral value, they are a unit of accounting. At present I don't see how or why the USD would drop significantly against all other currencies---most other majors have at least as many problems. The housing boom is global. The one currency it needs to drop against is of course the yuan, but China is actively stopping this as a matter of policy. Their intent is strategic deindustrialization of the US: mercantalism, not capitalism. Despite the orthodoxy of the economists, it may just well work.