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Thread: No Crash Forcasted in Housing Market

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    Default No Crash Forcasted in Housing Market

    "We do not think that there will be a crash. We think that by and large, overall, nationally, there will be a material slowing of the rate of appreciation of housing prices, but not an absolute decline"

    http://money.aol.com/news/articles/_...13093709990010

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    Default Re: No Crash Forcasted in Housing Market

    I think people in real estate and mortgage lending are being too optimistic. Why? So that people do not panic and they can continue to line their pockets before the bottom falls out.

    With the forclosure rate 72% higher this year than last, Fannie Mae paying $400 million for their illegal accounting ( a philosphy that has grown in mortgage lending the past 10years), subprime lenders going bankrupt, the high levels of predatory lending, interest rates going up, and the slowing econmy it is hard to see how they could truely believe what they are saying.

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    Default Re: No Crash Forcasted in Housing Market

    It is easy to believe what they are saying - not.

    I don't know about in the USA, but in the UK, every TV or newspaper article related to property always has some estate agent giving their opinion. Alas, most of these guys in the UK do what they do because they are badly educated but have a gift for sales. Most estate agents (in my experience) have one overriding qualification - self belief.

    In other words, the fate of the nation's wealth is confidently predicted by people who have no clue about economics. It is bizarre.

    The big bank economists, on the other hand, are paid a fortune to tow the company line on TV and keep confidence high.

    A great example would be one of the UK's largest building societies. They do mega amounts of lending (I shant name them). On TV, they tell you about moderate price increases and 'soft landings' etc. Behind the scenes, they have really tightened lending criteria and are refusing lots more applications to ensure their 'book' is not overextended. You don't hear that on TV though - only in business reports which very few read or listen to.

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    Default Re: No Crash Forcasted in Housing Market

    Quote Originally Posted by StuartL
    Most estate agents (in my experience) have one overriding qualification - self belief.
    Awesome.

    If people stop buying in fear of a crash, a crash will happen, commissions will be reduced w/ property values and stagnate while the market is crashing. Agents don't want that.

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    Default Re: No Crash Forcasted in Housing Market

    bottom line is the draining of liquidity from the world economy, causing interest rates to rise, causing lender standards for creditworthiness to tighten, resulting in fewer 'qualified' buyers.

    If people in a particular area don't need to sell their homes, then area values won't decline ! However, if some people DO need to sell their homes, and must reduce the asking price until a 'qualified buyer' actually makes a purchase offer, then values will decline. Thus real estate prices in say Hollywood or the Hamptons are not likely to decline, while suburban real estate prices are likely to decline significantly.

    I also agree that one needs to use a 'grain of salt' when interpreting real estate statistics provided by the real estate industry itself. Public data such as the number of sherriff's auctions, the number of bankruptcy filings etc. seems a bit more objective.

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    Default Re: No Crash Forcasted in Housing Market

    It may be worth noting that historical predictions of wide spread real estate market crashes have usually turned out to be overblown and excessive in the end, both in the US and elsewhere. More than in any other such market, prices tend to be "sticky upwards"; in other words, real estate markets tend to "flatten" or "stall", but not actually drop (much), following bubbles and growth of excessive debt loads.

    There are good reasons for this. Basically the owners and lenders often have too large a fraction of their assets tied up in real estate to be able to accept the losses associated with a big price reduction. This means that the owners tend to sit on their property at something at least close to the price they bought it for until "good times" return and lenders tend to offer refinancing arrangements or other "special deals" so that they do not end up in possession of a lot property which they also cannot sell to recover their investment. The fact that you cannot move real estate elsewhere to sell it in a more favorable market is also a special feature that causes owners and lenders to prefer waiting to a crash.

    Absence of a crash does not mean that no one gets hurt, of course. All of the liquidity that is tied up in a "waiting" real estate market stops flowing through other parts of the economy and may drive those sectors down much further than they would otherwise go. In other words, the expected real estate crash is sometimes "handed off" to some other market(s).

    -Ww
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    Default Re: No Crash Forcasted in Housing Market

    ^^^ yes, but .... with the but consisting of the following ...

    - historically speaking, most homeowners had fixed interest rate fixed term mortgages, whereas a significant portion of today's homeowners are exposed to interest rate increases via ARMS

    - historically speaking, most homeowners had a fair amount of equity in their homes, wherease a significant portion of today's homeowners are exposed to 'small' reductions in market prices / assessed values wiping out their equity

    - historically speaking (at least in the context of pre-70's oil shock), a much smaller percentage of homeowner weekly budgets was allocated to paying income and property taxes, home energy costs, vehicular travel/commuting costs, previously incurred consumer debt etc. - thus as you say many homeowners could afford to simply keep paying these bills and keep making mortgage payments while waiting for local real estate prices to 'recover' before putting their house on the market. However, today's typical homeowner will see major cost increases in all of these areas as interest rates and energy costs continue to rise, which may result in a significantly greater number of 'distressed' sales.

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    Default Re: No Crash Forcasted in Housing Market

    Let me add

    -- Jobs are far less stable these days. Both in the willingness of the companies to layoff as well as the willingness of persons to jump ship to find a better job.

    -- People have bought a lot more house - the term McMansion wasn't coined because everyone was buying "normal" sized houses with "normal" sized mortgages.

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    Default Re: No Crash Forcasted in Housing Market

    Quote Originally Posted by Melonie
    a significant portion of today's homeowners are exposed to interest rate increases via ARMS

    a significant portion of today's homeowners are exposed to 'small' reductions in market prices / assessed values wiping out their equity
    Agreed on the facts, but it is also important to look at it from the lenders' perspectives; these same factors would put enormous pressure on them to offer affordable, painful but affordable, refinancing of those ARMS in the face of a real market crash combined with high interest rates. The alternative would be to see their investments go up in a cloud of debtor defaults/bankruptcies and unprofitable foreclosures. In other words, lenders would have a great incentive to help their customers "wait it out".

    Not to say it can't happen; the Japanese real estate market crashed mightily in the '90s but only after a run-up/bubble far more extreme than the current one in the US. At its peak Tokyo real estate was worth more in total (on paper) than all of the real estate in the US and all of the publicly traded stock of all US corporations combined! And even then, very few people have actually lost, or sold, their homes in the nearly 15 years of falling prices.

    -Ww
    "At this moment what more need we seek?
    As the Truth eternally reveals itself,
    This very place is the Lotus Land of Purity,
    This very body is the Body of the Buddha."
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    Default Re: No Crash Forcasted in Housing Market

    ^^^ again, my response is yes, but ... with some of the buts being

    - compared to historical experience, Fannie and Freddie are now much more likely to be the financial institutions at risk, as the vast majority of banks, brokers, credit unions etc. packaged and resold the mortgages they wrote in the last 10-15 years rather than holding them.

    - in some geographic areas, particularly those where a 'keystone' industry is under serious pressure (i.e. a nearby Delphi plant), there is little reason to hope that there will actually be willing future home buyers 2-3 years down the road - based on the obvious logic that these good paying union jobs needed to afford mortgage payments are disappearing and are not coming back ever.

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    Sitri
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    Default Re: No Crash Forcasted in Housing Market

    And I think I read somewhere, it might have been here or the daily rag that 40% of the current house sales are for second homes not first homes.

    Again, in the long term owning a home vs. renting will be better. Do your home work.

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    Default Re: No Crash Forcasted in Housing Market

    Quote Originally Posted by Sitri
    And I think I read somewhere, it might have been here or the daily rag that 40% of the current house sales are for second homes not first homes.
    I posted that. Bill Maher said it on his Season Finale two or three weeks ago.


    .
    Last edited by Melonie; 06-15-2006 at 03:11 PM.

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    Default Re: No Crash Forcasted in Housing Market

    And I think I read somewhere, it might have been here or the daily rag that 40% of the current house sales are for second homes not first homes.

    I posted that. Bill Maher said it on his Season Finale two or three weeks ago.

    That is, or was, a correct statistic. And of those second homes, many were 'spec' purchases made with the intention of quickly 'flipping' the house at a profit. Obviously, if an investor is not intending to live in the second home, if the second home is not moving at an asking price greater than the investor bought it for, and if mortgage + utility + property tax payments are bleeding money out of the investor, it won't take too many months before that investor decides to unload at whatever 'break even' price the market will bear.

    Also of those second homes, another group were 'vacation' homes. Some of these are owned by the 'very rich'. However, more than a few are owned by $100,000 a year union workers, who are about to see (or already have seen) their pay rate, overtime hours, and benefits cut. Thus it will not be surprising to see a good number of 'vacation' homes being put on the market for a 'distressed' sale at any price.

    In the case of both 'spec' houses and 'vacation' homes, unlike people who wish to sell one house in order to buy/build a bigger one, these will represent 'one-way' sales. In other words, these represent additional housing stock being added to local housing markets. Increasing supply versus fixed (or declining) demand equals lower prices every time.

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    Default Re: No Crash Forcasted in Housing Market

    BUT... (This but game is almost as much fun as a butt game? Sorry, couldn't resist.)

    Although I agree that the ARMS are, "could be" is more accurate actually, a significant problem in driving a real estate crash, note that they have an upside as well. Namely, they give the one knob the Fed can turn, the prime rate, a much more widespread, low level and immediate impact on the economy. It has always been important, of course, but it now instantly (on a one month timescale) affects the cashflow of every homeowner in the country with ARMS debt. Of course, the Fed must consider many factors in setting the rate and there are always pressures in both directions, but in the face of a real and widespread crash in the real estate market (as opposed to a national level stall with local crashes) that threatened to bring down the whole economy, the Fed would be under enormous pressure, both economic and political, to drop the rate sufficiently to let people meet their payments and sit on their property until the market returns.

    Anyway, my point in this thread is not that a crash cannot occur, nor that it will not, but only to point out that there are a lot of factors that make real estate fundamentally different from most other markets and that many of them tend to stabilize it against bursting market bubbles. Obviously, imo, no one understands such a complex economic system well enough to make reliable predictions about what will happen, but it seems to me that the forecasts at the top of the thread suggesting that a stall or flattening is more likely that the bottom falling out nationwide are not implausible. In my opinion they are at least as reasonable as those which suggest a catastrophe around the corner.

    -Ww
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    This very place is the Lotus Land of Purity,
    This very body is the Body of the Buddha."
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    Default Re: No Crash Forcasted in Housing Market

    Here's where I have to respectfully disagree. It's obviously true that the US Fed can directly control the interbank rate, and through open market operations control short term interest rates. But mortgages, fixed or ARM, are tied to LONG term interest rates. For the moment at least, long term US dollar denominated interest rates are set more by the relative borrowing costs in Japanese Yen or in Euros, or by Japanese and Chinese purchases in the US treasury market (i.e. they have to put their dollar denominated trade surplus somewhere), than they are by the US Fed.

    The willingness of foreigners to invest in US dollar denominated long term bonds at a certain interest rate - which ultimately determines US mortgage lending rates - is the result of a very complex financial equation which involves the US import/export trade balance, the US dollar exchange rate trend, the perceived stability of the world in general, the perceived stability and growth potential of the US economy in particular, the perceived US gov't backing of GSE mortgage bonds, and a slew of other variables. Thus any slowdown in US consumer spending could set in motion a vicious circle ... heavily indebted consumers spend less, Chinese and Japanese imported goods purchases drop, the trade balance 'improves', Japanese and Chinese central banks have fewer trade surplus dollars to reinvest in US long term gov't bonds, the US gov't must therefore raise interest rates at gov't bond auctions to attract European / Middle Eastern bond buyers instead in order to keep financing US gov't deficit spending, and thus long term mortgage interest rates go up accordingly. This in turn increases monthly ARM payments, which causes a further reduction in consumer spending, starting the vicious circle all over again.

    Obviously ARM mortgages are not immediately affected by every little uptick or downtick in long term interest rates. However, when ARM interest rates do reset, and there are 1.6 trillion dollars worth of ARM mortgages about to do so in the balance of 2006 and 2007, monthly mortgage payments can take MAJOR jumps. A theoretical jump from say 5.5% to 7.5% on a $400k median price 100% financed house would translate to something on the order of an extra $600 per month in mortgage payment. This magnitude of change in monthly after-tax cash flow is not something that can be easily absorbed by the vast majority of US homeowners. It also will represent a significant diversion of consumer discretionary spending away from (imported) consumer items and toward a larger mortgage payment instead, which will directly contribute to the vicious circle described above.
    Last edited by Melonie; 06-17-2006 at 12:51 PM.

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    Default Re: No Crash Forcasted in Housing Market

    Quote Originally Posted by Melonie
    Here's where I have to respectfully disagree. It's obviously true that the US Fed can directly control the interbank rate, and through open market operations control short term interest rates. But mortgages, fixed or ARM, are tied to LONG term interest rates. ...
    You may well be better informed than me on this matter. The ARMs of which I am aware are tied directly and explicitly to the prime, i.e., the rate is equal to the prime plus something (e.g., 1% point), but maybe they are atypical. If so, I have learned something. I am pretty sure I have seen routine references to this arrangement in media reports of Fed changes in the prime, so perhaps it is not completely atypical.

    -Ww
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    Default Re: No Crash Forcasted in Housing Market

    from a UC Berkeley study ...

    "Recent surveys of major thrifts and mortgage bankers (see, for example, Inside Mortgage
    Finance) indicate that, while there are many different indices underlying adjustable rate
    mortgages in the U.S., four indices dominate the market:
    1. The one year constant maturity Treasury yield,
    2. One year LIBOR,
    3. The Eleventh District Cost-of-Funds Index (EDCOFI),
    4. The Federal Housing Finance Board (FHFB) national average contract interest rate.

    The results of the Ott [18] ARM duration study, and numerous recent studies of the time
    series properties of EDCOFI,2 suggest that only the first of these indices adjusts instan-
    taneously to changes in contemporaneous Treasury rates. The others adjust with a lag.

    Ott [18] uses a classical duration approach to show that this lag can have a signifiant im-
    pact on the interest rate sensitivity of ARMs. However, without explicitly modeling term
    structure dynamics, he cannot address the impact of mortgage prepayment, or additional
    common contract features such as interest rate caps. On the other hand, most recent ARM
    valuation models, using a contingent claims approach with a richer specification of interest
    rate dynamics, can analyze the impact of interest rate caps and prepayment, but they ignore the lag in the adjustment of the ARM coupon to the contemporaneous term structure (see, for example, Kau et al. [10], Schwartz and Torous [23], and McConnell and Singh [13]).
    No previous study simultaneously analyzes the interacting effects of both the time series properties of the index and prepayment/interest rate caps on the interest rate risk of ARMs."


    Thus it would appear that only those ARMS which use the 1 year T-bill rate as their index are 'immediately' affected by Fed interest rate policy - and even then the Fed's interventions re 'overnight' rates don't directly and instantly filter through to the 1 year T-bill market/auction interest rate. The other three 'indexes' have even larger real world economy 'bond/credit market' components, thus the 'lag time' and looser correlation re Fed short term interest rate policy moves.

    There's also the 'quantization' phenomenon, based on ARM terms which allow interest rate/monthly payment adjustment to take place only once per year (typically). This allows ARM mortgage holders to avold seeing the effects of gradual hikes in the Fed/market interest rates on their mortgage payment for a whole year. But when the ARM adjustment does take place, all of the gradual interest rate market moves of the previous year then land all at once like a ton of bricks. Some ARM terms include annual caps to mitigate the size of the annual 'shock', but these annual caps further increase the 'lag time' between increases in market interest rates and increases in monthly ARM mortgage payments -by deferring interest rate/ mortgage payment increases which exceed the cap until the following year.

    I guess the point I'm trying to make is that news reports show that some ARM mortgage holders are already getting into financial trouble based on this year's ARM interest rate reset. But due to the 'lag time' of both the 'bond/credit market' based indexes and the annual ARM interest rate increase caps, this year's monthly ARM mortgage payment increases - which are already causing record mortgage defaults - don't even fully reflect today's actual higher market interest rates yet.

    Thus it's a pretty safe conclusion that even if the Fed were to change policy and stop pushing up interest rates in the future (which is debatable), the 'lag time' aspect of ARM interest rate resets already guarantees that ARM mortgage holders will see another major increase in their monthly mortgage payment next year which will be just as much of a 'shock' as it was this year. If mortgage defaults and bankrupcy filings are already at record levels this year, next year will likely be truly 'ugly' no matter what the Fed chooses to do re future interest rate policy. The situation is likely to be even more 'ugly' if, over the next year, energy costs, costs of basic commodities, property taxes etc. continue to rise as well.

    Based on the above, every house which winds up being thrown on the market as the result of an ARM mortgageholder default represents another 'one way' sale i.e. more housing supply but steady housing demand (i.e. the bankrupt former homeowner is NOT going to be buying another house to move into). The first law of economics would dictate that more supply and steady demand will exert more downward pressure on housing prices.


    As this pertains to possible investments, If someone wanted to take a high risk high return gamble they might consider buying YHIME.X January 08 puts on PHM . Pulte shares are down quite a bit over the past 3 months, but logically speaking there is probably a whole lot more room on the downside !


    ~
    Last edited by Melonie; 06-18-2006 at 07:43 AM.

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    Default Re: No Crash Forcasted in Housing Market

    I would also insert this update that recent economic moves, and recent Fed responses, tend to indicate that interest rates will be hiked by another 1/2% between now and the end of the year. This will further guarantee that 2007 ARM mortgage rate resets are likely to be '1% limit up' just as 2006 ARM mortgage rate resets have been so far.

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    Default Re: No Crash Forcasted in Housing Market

    "Climbing interest rates and cooling speculative demand is putting pressure on the housing boom, but as long as jobs continue to be created and builders curb production, the sector will experience a soft landing, according to Harvard's Joint Center for Housing Studies.

    The center's "State of the Nation's Housing" report, released on June 13, predicted that even though home-price growth will fall to more moderate levels in many areas, sharp drops in prices are unlikely. The absence of severe overbuilding or big job losses in major metropolitan areas is an important factor in the stability, the report said.

    About 1 million people became homeowners last year, and mortgages including low-down payment, hybrid-adjustable and interest-only loans helped them make the purchases amid higher home prices and interest rates, the report said. Most owners with adjustable loans have an initial fixed-rate period of three or more years, and most interest-only loans extend for at least five years.

    "While homeowners with annually adjusting mortgage rates are facing interest increases this year, including those with expiring teaser discounts, only about one in 10 homeowners face higher mortgage payments this year," Nicolas P. Retsinas, director of Harvard's Joint Center for Housing Studies, said in a news release."



    http://finance.move.com/homefinance/...&poe=homestore

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    Default Re: No Crash Forcasted in Housing Market

    I'm a bit reluctant to comment further, so I'll start out by saying that I'm not intending to be argumentative. I don't dispute the Harvard Study's conclusion that only one in 10 homeowners face higher mortgage payments this year. However, less than 1 in 10 houses will be put on the market this year. Logically, this means that a large proportion of homeowners who are putting their houses on the market may be facing rising mortgage payments, and are thus facing increasing pressure to sell.

    I would also add that the 'law of gravity' must come into play at some point. If housing prices have appreciated by 50% in the past few years, it's not unreasonable to expect a 25% downward correction i.e. the housing market giving back 1/2 of its 'recent' gains. Per the theme of the Harvard Study, this would mean that some 90% of homeowners who purchased their houses more than 3 years ago are still sitting on a nice 'capital gain' i.e. they perhaps paid $200k in 2000, could have sold for $400k in 2005, and are currently valued at $300k.

    The homeowners who are in trouble are those that purchased similar houses in 2004 at $350k or in 2005 at $400k, where the current market valuation is less than the amount of their mortgage debt. While these 'underwater' homeowners clearly comprise much less than 10% of all mortgage holders, they may indeed represent a significant percentage of homeowners with houses currently listed for sale on the real estate market as well as the most likely homeowners to be putting their homes on the market in the near future.



    here are some statistics from the 'other side of the fence' ...

    * 29% of mortgages assumed in 2005 are now underwater.
    * 16% of those with mortgages pay over half of their income on housing, up from 2% five years ago.
    * 22% of the $9.3 trillion residential mortgage market is now subprime.
    * $2.7 trillion of adjustable-rate mortgages are expected to reset in the next 18 months with payments increasing on average 45%.
    * Total home inventories and the inventory/sales ratio are at record highs.

    ( from )

    I would also add that, like the stock market, the vast majority of total outstanding stock shares or total homes are not put up for sale all at once. The market price is set at the 'margin' by those comparatively few stockholders / homeowners who choose (or are forced) to sell, versus the price that buyers are willing to pay. However, that market price DOES affect the valuation of all of the stock shares / homes that were NOT put up for sale as well as those that were put up for sale.
    ~
    Last edited by Melonie; 06-24-2006 at 03:47 AM.

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