On the edge of the precipice and whistiling in the wind ? From the WSJ
only 10% of homeowners polled said they believe that rising real-estate values had affected their spending, according to a survey of 1,001 consumers conducted this month by Royal Bank of Canada's RBC Capital Markets unit.
Some 85% of homeowners surveyed said they had experienced real-estate gains in the past three years, and more than 70% saw gains of more than 10% in that period, the study found. But more than half of those surveyed said they firmly disagreed with the idea that their spending had changed, even though half of all respondents had extracted equity from their homes through refinancing, home-equity loans or lines of credit.
I get it, the house value went up, they borrowed against it and spent the money (or maybe bought an "investment property") but the rise in their house price hasn't affected their spending, Yeah, right. If you believe that one I've got a 1500 sq ft home in LA to sell you for $1.5 mln. Wait, according to most folks that's a good deal since:
Almost 60% of homeowners polled by RBC said they expect their home values to rise by at least 5% annually in the next several years, and a quarter of those respondents anticipate annualized gains of 10% or more in the next few years
could it be people are in deep denial ? :
we did get this from Chairman Alan earlier in the week:
Mr. Greenspan's new data show that borrowing against home values added a stunning $600 billion to consumers' spending power last year, equivalent to 7% of personal disposable income -- compared with 3% in 2000 and 1% in 1994
From a speech by Chariman Greenspan that is worth reading:
These findings raise the question of whether people spend more freely than they otherwise would because of their real-estate gains, and they simply don't recognize it," said Scot Ciccarelli, a managing director at RBC Capital Markets. "If that's the case, a simple slowing of real-estate gains, not just a fall in housing prices, could have a significant adverse impact on spending patterns."
So borrowing against home equity amounts to 7x as much of disposable income as it did ten years ago but individuals don't think it has affected their spending. NOT !!
As the chairman pointed out:
Survey data suggest that approximately a fourth to a third of the value of home equity loans and cash-outs finances personal consumption expenditures directly. Another fourth funds repayment of nonmortgage debt that had been used, in effect, as bridge financing, predominantly of personal consumption expenditures. Home mortgage debt is thus the final source of funding of some consumer outlays originally financed by extensions of credit card and other consumer debt
in other words at least half of home equity borrowing goes right into consumption. But as the RBC survey indicates, people don't even realize what their doing !
The Chairman also noted:
the implied increase over the past decade in consumption expenditures financed by home equity extraction, rather than by income and other assets, would account for much of the decline in the personal saving rate since 1995.
In other words individuals are pretty much like the government - they are borrowing to pay current expenses, saving nothing and living beyond their means. At least the individuals are borrowing against a real asset not just a promise, like the US treasury does.
Back to the RBC survey:
Rising gas and energy prices, however, are having an effect already, with 60% of respondents saying those costs were causing them to pull back their spending.
So 60% have cut back on their spending...and they haven't even seen the bills for heating their homes this winter which could easily be double last year's. But folks will still be willing to pay ever higher prices for homes and even trade up to bigger, more expensive to heat homes. Yes home springs eternal.
The Chairman's speech contains what in Greenspanspeak are pretty direct warnings on the housing bubble.
Strangely he seems to find comfort in this:
as of mid-2005, less than 5 percent of borrowers had current LTVs (loan to value) exceeding 90 percent. In large part, this share was small because the recent growth in house prices has rapidly pushed down the effective LTV for many homeowners. Only the most recent, and the most highly leveraged, home purchasers have high LTVs.
But Mr Chairman in a market like South Florida or Souther Calif that has risen over 100% in five years a mere drop of 20% (giving back around one year's worth of recent price increases) from those highs will wipe out the equity of many of those folks who took out equity from their homes.
In classic Greenspanspeak we get this:
How significant and disruptive such adjustments (that's Fedpeak for a big drop in RE prices )turn out to be is an open question. Nonetheless, as I have pointed out in previous commentary, their economic effect will, to a large extent, depend on the flexibility inherent in our economy. In a highly flexible economy, such as the United States, shocks should be largely absorbed by changes in prices, interest rates, and exchange rates, rather than by wrenching declines in output and employment, a more likely outcome in a less flexible economy.
translation : it could be quite ugly
Some private economists don't mince words as much as The Chairman, as the San Diego Tribune reported :
Economists say Greenspan is trying to cool the housing market gradually, in the hope that it will not collapse.
"Greenspan understands the huge implications of having the housing market come unglued," said Michael Swanson, economist at Wells Fargo Bank. "He's working the bully pulpit, jawboning to raise awareness and put some fear of risk back into the market."
Peter Morici, economist with the University of Maryland, said Greenspan is "getting increasingly frustrated by his inability to curb the housing market, much the same as he was unable to curb the bubble on the stock market when he talked about the 'irrational exuberance' of investors in 1996."
Morici said Greenspan is "quite concerned that the housing market is oversold and that when the market readjusts, it could hurt the economy too much."
Here in CA the results of a housing drop could ripple across the economy:
UCLA economists warned yesterday that a slowdown in housing prices is coming that could severely weaken the economy.
The widely followed UCLA Anderson Forecast said the economic outlook is mediocre at best and that a deep drop in housing prices could prompt a recession by the end of next year.
"The California economy right now is built on housing," said Christopher Thornberg, an economist at the University of California Los Angeles. "The housing market is still hot right now, but at some point in time in the next several months, housing is going to peak."
...when the housing boom ends, every sector of the economy will feel the impact. He said he is especially concerned about how tightly the state's job market has become intertwined with the housing boom.
Over the past five years, much of the job growth in California has been in professions tied to the housing market: construction workers, real estate brokers, mortgage lenders and bankers. Other fields that once fueled the state's growth – such as factory work or information technology – have been on the decline...
year-over-year sales of housing units have already declined by nearly 10 percent in San Diego County and 16 percent in San Francisco.
..."If we see the balance of the state starting to follow the Bay Area and San Diego in their cooling trends, the countdown begins," the report warned
one more:
Prices for luxury homes in hot housing markets such as Boston's will likely decline over the next few years, the head of home mortgage buyer Freddie Mac said Thursday.
But while appreciation should slow for more affordable homes, Chairman and Chief Executive Richard F. Syron told local business leaders, he expects no nationwide decline in home prices.
Syron said the recent spike in high-end housing prices in places such as metropolitan Boston, New York City and in California constitute a bubble that will soon burst.
He did not offer a specific forecast on how far prices in those markets could decline. But he said the drop could be big enough to affect the overall economy as owners of pricey homes see their property values decline and become reluctant to spend on other items, like cars.
"Even a modest downturn in housing would be felt throughout the economy," he said.
So even a modest downturn in housing would have reverberations throughout the economy (and add in the spike in energy prices, and the fed shows every sign of continuing to raise rates, and lenders, according to the WSJ, are starting to tighten up on their credit standards) but there will be no nationwide decline in housing prices. Sorry if I miss the logic on that one.
it's just a matter of time and unfortunately in my experience things in the financial markets are usually worse than anticipated when the stuff hits the fan.
take a look at the NYT article on rent vs buy from Sunday, use the calculations and spreadsheet and plug in a decline of just 10% in real estate values over the next 5 years.. It could prove instructive
Little surprise then, to hear Eli Broad, billionaire founder of Kaufman and Broad the king of tract housing, tell CNBC that he feels the attractive segment for real estate is apartment buildings as houses become less affordable and more people are pushed into renting. Unlike the housing market where it is impossible to find a good way to compare "market clearing prices" (the price at which a sale could be consummated on the spot), the stock market does that on an ongoing basis. A 3 - month chart of the stock of Mr. Broad's company Kaufman and Broad (KBH) is picture above. It is down a little under 20% (there's that 20% number again) from its 52 - week high of 78.
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