Wednesday, February 08, 2006

Trouble for the bubble?

Numerous signs are beginning to appear, and there seems to be no doubt that the home market is cooling off. Will it be a gradual decline or a bust?

MSN Money today points out that Home loan applications have fallen for a 2nd consecutive week: U.S. mortgage applications fell for a second consecutive week, led by a decline in home purchase loans, as interest rates hit their highest levels since early December, an industry trade group said on Wednesday.

As mortgage rates started climbing in September, the market began to cool, and recent economic data has pointed to sustained slowing in the sector.

The U.S. housing market will cool this year as rising mortgage rates dampen home buyers' demand and lead to lower sales volume, smaller house price gains and a decline in construction, Freddie Mac Chief Economist Frank Nothaft said in an interview on Wednesday.

This Washington Post article points out that US Home inventories have risen sharply:

With the key spring selling season about to get under way, the inventory of homes on the market is climbing sharply in a number of major cities.

It is the latest sign that the balance of power between buyers and sellers is shifting as the once red-hot housing market continues to cool. The slowdown is affecting both existing homes and new homes. Tuesday, the nation's largest builder of luxury homes, Toll Brothers Inc., reported a 29 percent decline in new orders in its first quarter, which ended Jan. 31. That was below many analysts' expectations and prompted a sharp selloff in Toll Brothers stock. And Ryland Group Inc., a Calabasas, Calif., builder that sells homes in a wide range of prices, recently announced that new orders declined 4.7 percent for its quarter ended Dec. 31.

Economists and real-estate experts are watching the inventory numbers closely for signs of whether the housing market is poised for a soft landing -- or something worse. When inventories are tight, buyers competing for scarce properties bid up prices. As the supply of homes on the market increases, price increases slow and buyers gain negotiating power.

As orders slow, builders are engaged in heavy discounting and promotional activity, particularly among homes for the second-time, move-up and luxury buyer. A survey conducted last month by the National Association of Home Builders found that 64 percent of builders are now using incentives such as offers to pay closing costs and free upgrades; 19 percent are cutting prices.

These two articles (SACRAMENTO BEE and NEWS 10) report that California Mortgage defaults are up sharply:

According to DataQuik Information Systems, a Southern California company that monitors foreclosure activity, there was a 31 percent increase in defaults in Sacramento County in the last quarter of 2005 compared to the same period in 2004. Yolo County saw 82 percent more foreclosures, while Yuba County saw a 66 percent rise. In El Dorado County, 31.1 percent more defaults were recorded and in Placer County there was a 12.9 percent increase.

Statewide, there was a 15.6 percent increase in the number of foreclosure notices sent out by lending institutions from October-December 2005 compared to the last quarter of 2004.

FORBES says we are beginning to feel real estate Tremors in California:

Across the state, the number of default notices sent by lenders to borrowers was 14,999, up 19% from the prior quarter and up 15.6% from the fourth quarter of 2004. The company attributed the rise in foreclosure activity to slowing appreciation rates, which dropped from a high of 22.8% in the second quarter of 2004 to 14.5% in the last quarter of 2005 and are expected to decline further this year. When home values are going up quickly, increases in equity provide plumper financial cushions for home owners.

This FMNN article touches on real estate prices and FED activity:

Will real estate prices continue to rise? Not likely, according to analysts such as Paul van Eeden and Richard Russell; they foresee an uneasy calm with prices neither accelerating nor de-accelerating sharply.

Lorimer Wilson, writing on has a different, more alarming take. Any cessation of price-activity will be the product of massive inflows of newly created Federal Reserve money, he predicts. The money generation will be provided by relatively low interest rates - pegged there no matter what by a Fed which believes that these rates are the "sine qua non" of maintaining the entire economic system’s well-being.

Citing the increasingly risky behavior of Freddie Mac’s and Fannie May’s mortgage repackaging practices and the declining quality of more recent home borrowers, he fears an unraveling of the entire debt pyramid if rates rise sharply, and believes the Fed is well aware of it too. He notes the Fed has been injecting record amounts of liquidity into the market recently. “There must be a crisis of historic proportions coming," he observes. "And the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation’s fragile financial system. The amazing thing is that the Fed’s actions mean they know what is about to happen.”

Financial Express takes an even broader look and asks if the GLOBAL HOUSING BUBBLE is ready to burst:

In three years house prices have rocketed in South Africa by 95%, in China by 68%, in Australia by 56% and in America and Thailand by 29%. In Britain they rose 50%. The world has never seen a boom of such breadth and scale.

According to estimates by The Economist this week, residential property in developed economies has leapt in value by more than £16,500 billion to more than £38,000 billion, in just five years. That sum is the equivalent to the entire GDP of all the countries in question. Only in Germany and Japan have prices failed to jump over the last decade.

It is the gigantic bubble that swallowed the world, bigger than the stock market boom of the 1990s and almost twice the size of the Wall Street bubble of the roaring 1920s.

I believe this is just the beginning my friends. Soon, this issue will be making all the mainstream headlines as thousands of people start losing their homes and then people begin to lose their jobs (construction, finance, realtors, home improvement, etc). Eventually, a panicked state government will cry out for federal assistance... This will be the beginning of a Nation-wide housing crisis. Will the Helicopter man come to the rescue?


MMAfia said...

Haha... he's really in a 'conundrum'... print more bills! (whew, glad we go rid of M3 in time!!!)-> uh oh, we got inflation! -> uh oh, time to raise interest rates to fight the inflation i just created! -> uh oh, now i just punctured the housing bubble! -> uh oh, that just started a recession! -> uh oh, waitaminute, how's the USD currency holding up? -> yikes!

Could happen... perhaps with the order of things switched around a bit... but the time is coming... soon. I can smell it.


Out at the peak said...

Word is on the currency market that USD is gaining strength with traders assuming interest rates will hike to 5%. The currency market doesn't care too much about the big picture right now.

Since most of the world has experienced a housing bubble, and it could all come down together, will USD stay relatively even with the other currencies where their bubble popped?

What are the safe currencies at this point? Yen, Deutchmark, and Swiss Franc? How about the Krone/Kronas?

41cadillac said...

Who is going to pay the mortgage?

General Motors cutting 30,000 employees. Ford cutting employees.
Delta Air Line pilots threaten strike. Delphi employees see cut in pay.

NOW this!

Oracle detailed its plans to cut jobs in the wake of its $5.85 billion takeover of Siebel Systems, saying that," 2,000 people -- culled from both firms -- will be let go" , Ellison said.


A bubble here a bubble their pretty soon it adds up.


Bubbles will burst.