Here is a pleasant piece taken in bits and pieces from Steven Roach. Draw your own conclusions. I'd love to be investing in RE but I agree with a lot this guy says and think one needs to be nimble. Does anyone one else think current inflation ought to be called "dollar devaluation"? Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish. But you should hear what he's saying in private. Roach met select groups of fund managers downtown last week, including a group at Fidelity. His prediction: America has no better than a 10 percent chance of avoiding economic "armageddon." Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, "It struck me how extreme he was -- much more, it seemed to me, than in public." Roach sees a 30 percent chance of a slump soon and a 60 percent chance that "we'll muddle through for a while and delay the eventual armageddon." The chance we'll get through OK: one in 10. Maybe. In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants. The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded. Less a case of "Armageddon," maybe, than of a "Perfect Storm. Roach marshalled alarming facts to support his argument. To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day. That is an amazing 80 percent of the entire world's net savings. Sustainable? Hardly. Meanwhile, he notes that household debt is at record levels. Twenty years ago the total debt of U.S. households was equal to half the size of the economy. Today the figure is 85 percent. Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes. Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet. You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas. Roach's analysis isn't entirely new. But recent events give it extra force. The dollar is hitting fresh lows against currencies from the yen to the euro. Its parachute failed to open over the weekend, when a meeting of the world's top finance ministers produced no promise of concerted intervention. It has farther to fall, especially against Asian currencies, analysts agree. The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday. Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible. Smart people downtown agree with much of the analysis. It is undeniable that America is living in a "debt bubble" of record proportions. But they argue there may be an alternative scenario to Roach's. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms. Inflation of 7 percent a year halves "real" values in a decade. It may be the only way out of the trap. Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates. You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent.
http://www.siliconinvestor.com/readmsg.aspx?msgid=20806599 "Here is an example of current situations: A customer of mine closed on a 4Br Colonial in Westchester in August. We did a lot of quick paint and spruce up work so they could move from their NYC penthouse which we gut-rehabbed for him several years ago which he sold for around $400k profit. Unfortunately in order to secure the new place he had to go 25% over the asking in a bid war. Now moved in and absorbing all the added costs of being a homeowner (you can't call the super to fix things) along with his wife's decision to quit her six figure job, my customer is already refinancing. His approach involves an interest only for 5 year, adjustable rate mortgage which starts at 4.5% and is capped at 10%. His comment was classic, "I just want to get this payment down to $3800 and worry about the cash flow later. Don't forget, I still have to come up with $22,000 a year for the taxes!" The real fun is likely to start when the financial tensions hit the wall around the dinner table and he ends up visiting the place on alternate weekends to pick up the kids."
http://www.modbee.com/local/story/9506296p-10399817c.html Housing experts say cash in now By J.N. SBRANTI BEE STAFF WRITER SAN FRANCISCO â National real estate experts have advice for California homeowners: Sell now. California home prices have soared 123 percent the past five years, so it's time to cash in, advised Anthony Downs, a real estate economics expert for the Brookings Institution, a nonprofit research organization. "Sell whatever you don't want to keep forever. No one knows where the market peak is, but this must be close to it," Downs said. He presented the keynote address this week at the 27th annual Real Estate & Economics Symposium in San Francisco. The event was sponsored by the University of California at Berkeley's Fisher Center for Real Estate and Urban Economics. Home ownership must be looked at as an investment, Downs said. So a real estate investment should be balanced with other assets, such as stocks, bonds and cash. "Too much investment money is looking for property" right now, Downs said, which makes it a seller's market. Downs wasn't the only expert at the symposium who predicted California's housing bubble soon will burst. "Home prices have moved up too far, too fast," warned Ken Rosen, who is chairman of the Fisher Center and of the Rosen Consulting Group, which tracks real estate markets. "We always get price corrections after (big run-ups) because homeowners cash out and move out of state." During the past year, Rosen said, home prices skyrocketed 31.8 percent in Sacramento and 32.1 percent in San Diego. In Atlanta, by contrast, prices went up 3.4 percent. Rosen said abnormally low interest rates have convinced many buyers â in California and nationwide â to jump into the housing market sooner than they typically would. He said new home sales particularly have increased because of lower mortgage costs. "These low rates have moved demand forward, so I think we're in for a correction," Rosen said. "Higher rates really are going to change things." Mortgage rates will rise this year, Rosen predicted. He expects the 10-year bond rate, which is used as a benchmark for many adjustable-rate loans, to rise from its current 4.2 percent to 5.5 percent by the end of next year. "There's more risk out there. When rates rise, there may be a deflation (of home values)," Rosen said. Rising adjustable mortgage rates also may cause problems for homeowners. "There is a chance for a price correction and defaults and delinquencies." Not everyone who spoke at the symposium agreed. Bruce Karatz is chairman of KB Home, one of the nation's largest builders. He sees more good times ahead. "The doomsayers have been predicting for a number of months that interest rates were going to go higher," said Karatz, noting that rates have stayed steady this year. "I don't see a tremendous fall off in home-buyer demand for some time." Among KB Home's many current developments are Oakcrest in Modesto, Bridlewood in Patterson, and Autumnwood Estates and Villas in Lathrop. Even if mortgage rates go up, Karatz is convinced homes will continue to sell. "Home buyers are driven by events, not by interest rates," Karatz explained. Builder argues rates' affect is small He said people buy houses when they get married or divorced, need more space for children, need less space because they've grown older, want a vacation home or need an investment. Karatz said those events will continue to happen, so homes will continue to sell. But some big-time real estate investors are moving money out of the housing market. The California Public Employees' Retirement System, the nation's largest public pension fund, is selling many of its real estate investments. Michael McCook, CalPERS' senior investment officer for real estate, said the retirement fund has more than $12.1 billion in real estate holdings. Some of those funds are invested with Hearthstone Inc., which is the financial backer for land development on 865 acres at Bellevue Ranch, the master planned community in north Merced. McCook said his fund plans to eventually own $16 billion in real estate around the world, but currently is selling some of its property and banking the profits. "There will be some great opportunities down the road to buy," McCook said. Right now, he agreed, is a good time to sell. Posted on 11/26/04 00:00:00 http://www.modbee.com/local/story/9506296p-10399817c.html
south Florida real estate still rocking and rolling according to all the brokers I speak to... they cant write the contracts fast enough on preconstruction $800k 1 bedroom apts.....lol Home prices doubled here in 1 year and everyone is screaming buy buy buy, gimme gimme gimme more....refi and buy another property.... Housing a long long way from dying
Eqtrdr, Real Estate will never die, but it can correct. It always has. The "issue" that always shocks me is taking the herd mentality as a basis for doing much of anything in accordance with them. Too many buyers is bearish in the stock world. Too many puts is a good reason to look at calls. A parabolic chart is a screaming SELL. In Building it was usually "pie time", the party is almost over. A nice quiet market that is moving up slowly, is the very best time for the avg. RE investor to buy into. Keeping to the stock analogy, real estate values in some areas are way outside the Bollinger Bands. It couldn't be a worse time to buy in terms of timing. Fundamental and technical issues are usually the last thing the herd is concerned with. KBH is the last entity to take seriously. They are being rapped by the Department of Justice and the EPA. Besides, they are financing with corporate bond money (other people's money). I totally agree, that real estate never dies. How did that even become a part of this thread? The Steven Roach predictions are what have me worried. RE won't recover, in the broad sense, until the dollar regains value. That could be a long time. And the dollar just broke the neckline of the 1995 low. Two more closes below that neckline is technically curtains for our dollar until about .75 and then finally .50. Anything lower and there probably won't be a website here. This thread is really about our nation's debt and the value of the dollar. Those two will control the real value of RE, IMO.
You are correct. Soon it will be time when many boomers need to divest themselves of their large 'empty nest' homes and other holdings (vacation homes, etc) and move to smaller quarters....It could be an even larger bloodbath then we imagine, thanks for the heads up.
Oneway, xlnt insight. Something that my wife and I have done. Many others will scale back or just be taking profits on a home that is now too big. More Baby Boomers than X generation so there will be too many large homes with the new, high energy bills. That is why Maine and some other areas have kind of exploded now. Many smaller cheap prefab homes going in, in out of the way places that used to be so cheap. Older people are cashing in for retirement. The falling dollar and cutbacks in SS will cause many to pull in their spending habits and want to hold onto their nesteggs. We are entering a sector rotation on a macro level, IMO. The voters have voted in too many freebees. The nations budget is horrible. High int. rates are coming in order to sell T Bills to pay for debt. I wish everyone good luck in their choice of preparedness. I can't imagine standing pat when everyone can see there is a pink elephant in the room. I'm not into denial (some are). Big things do happen. WWII, Vietnam, The Great Society, The Depression, WWI, etc. If one acts before hand, then you are just hedging against changes. And I don't really know what those changes will look like. All I can do is say risk to reward is bad and try to play it safe. GL
Retirees sell to new employers of the company. Retirees liquidate stuff, invest in bonds, companies issuing bonds find fresh money, use that fresh money to expand business and employ more people, more employed people buy things, economy grows, and housing keeps rolling along. This pattern has been going on for quite some time.
Convert, You didn't read Steven Roach did you? I posted it a couple of pages back. Or read Gross of Pimco. I agree with your chain of events IF we are in that cycle. You're taking a heck of a chance if you put all your $ on that supposition. At the very least one should be very careful now. The sad thing is not happening on this site or thread. This discussion at least presents some balance and airs the issues. The bad deal is all the truly uninformed people who have their heads down and are just plugging along with no clue at all.