Expat

Roubini Now Says House Prices to Fall 30%

Ignore discussions on real estate prices which talk about length of the decline or the percentage, unless those figures are explained. Professor Roubini justifies his 30% by using rental/price and price/income ratios.

The long-term price/income ratio for the median house price in the US is 2.8 times income. I believe this ratio also takes into account a long-term average downpayment of 10% (correct me if I am wrong). Arguments over bigger houses, better insulation, more marble are irrelevant and part of the reason for the bubble. People can keep homes they can afford. The median income in the US is about $48k. The median house price is about $200k; it needs to drop to about $135 just to revert to the mean. But....

But, in order to re-establish the mean ratio, it must "over-adjust" to the downside to balance out, otherwise the long-term ratio increases. There is no economic justification for it increasing. Given the state of US banks (Citi, BOA, Wells Fargo all unable to lend right now) and the US recession, I expect the price/income ratio to head to 2.5. That means the median house price will fall to $120k, a drop of 40% from here.

So, to answer the question as to how long it will take, it depends on how much sellers will cut prices, how quickly banks will foreclose, and what insane measures the government uses to try to prop up prices. Japan, for example, has not recovered from its real estate bubble twenty years on. The US housing market will probably slide for another five years.

The Decline in Median House Prices Sets New Record

Why only ten percent? During average times, the median house price is about three times income. We are in a recession (at least) and a banking crisis which is severely limiting lending. I would argue that the median house price will move closer to 2.6 times median income.

Median income is about $48k and falling. Do the math, Mr. 10%

Jim Rogers on Investment Bank Bail Outs and the Federal Reserve

The issue is not what the cost is. Taxpayers don't want to bail out Wall Street just to see the same bankers come back next year with new billion dollar bonuses. Basically, the money that was made over the past seven to ten years was a sham, an illusion. We want Wall Street bankers and shareholders to pay for their sins.

Defending the bailout by saying it is a better solution than allowing the financial system misses the point. It is not A or B. We can save the financial system and mete justice.

How Will the Housing Crisis End?

Cool! You, my friend, are stinking genius. House prices will go up when people start paying more for houses. Say, that concept could revolutionize the Dismal Science. Could this be applied to other areas of the economy? Would the price of cars rise if people start paying more for cars? It's possible. We need to do some tests. How about the price of socks? Would it work for socks? If people pay more for socks, will the price of socks rise? Gosh, the possibilities are endless.

Now that pesky part about mortgages. You mean, if we let people buy homes they can't afford with loans that are sure to fail, more people will buy houses? Holy cow! You ARE really, truly a stinking genius.

And when people start buying houses (and, wait for it, paying more than the old prices, leading to, get this, higher prices...god, why didn't i think of this?), and when the stock of available homes reaches the equilibrium level of supply and demand, and then when we need more new homes to meet demand, why then (you are going to be astonished...I was) the homebuilders will start making money again. It's so simple. And their share prices will go up.

Dude, are you running for public office. Anything? Dog catcher? Clerk of the County Court? You have my vote. We need you. America needs your ideas.

I am awed. Truly awed by your level of outright stinking geniousity!!!!!!!!!!! (extra exclamation points to express my true awe)

Latest Bank Headache: Home Equity Loans

the average US consumer is apparently pretty stupid, at least about things like finance, savings, mortgages. The average US banker also seems pretty stupid, or is at least blinded by greed.

So who is to blame? Everyone (mostly). The idiots who took out HELOCS. The idiots who loaned out the HELOCs. The rah-rah morons on CNBC who cheered every rise in house prices and every increase in consumer spending. The Fed for facilitating and openly approving all this. The SEC for not regulating anything at all. The White House for letting it happen, profiting from it, and making sure Wall Street got its bonuses. The investment banks who packaged it all up and sold it out. The rating agencies who took the cash, closed their eyes and lied their asses off.

Who in power (media, banking, or politics) ever pointed out that rising consumer spending combined with falling real incomes is not a good thing? Who raised any alarms about the massive leverage and debt being created in financial markets? Who really wanted to moderate house prices on the way up? Who really wants to see them go down?

Everyone is guilty, but guess who will pay? Not Mozillo, not Prince, not Greenspan, not Bush, not Summers. Nope. Middle class and lower class America will pay, because they always do. Foreigners will pay because, well, we pretty much dislike them all anyway. A few rich guys will be served up as token sacrifices to the media, but most will get away with millions of dollars "earned" from the bubble.

There is no acceptable solution so look out for the most bizarre, perverted, and dangerous moves from Washington. Outright government purchases of mortgages and MBS's. Direct government funding of a few major banks or broker/dealers. War with Iran. A few more terrorist attacks in the US and abroad. Inflation at 15-30%. Euro at 2.00 USD. Yen at 75.

UBS: U.S. Bailout for Homeowners Will Arrive by October

I know the blogosphere is filled with "I told you so's", but I told you so. A month or so ago i was mocked for saying the government would end up simply buying all mortgages at or near par. I was told this was simply ridiculous.

Now I reading articles in "serious" publications with suggestions like paying mortgage holders the difference between the mortgage and the present value (want to guess where valuations will go if that takes effect?), freezing mortgage payments for x number of years, and, finally, demolishing any home unsold and unoccupied for x period.

As long as we have lost all semblance of rationality, why not simply cancel all mortgages (government pays off all lenders), government buys all new, unsold homes from builders at cost plus ten percent, anyone without a mortgage gets a one-time tax-free payment of $200k, and income tax is eliminated on the first 100k of income.

At this point, who cares? Make our kids pay later, those spoiled ungrateful brats. Kill the USD and make the Arabs and Chinese pay. Free Hummers for everyone. More subsidies for ethanol. Bring back coal-fired trains and factories. Ten weeks vacation.

Costly, you say? Dude, we OWN the frickin' printing presses. We can do whatever we want.

Housing Prices Are Still Headed Down

Inventory, schminventory. There is tremondous pent-up demand! They're not making more land. Population is booming. Economy is rocking! Interest rates getting slashed.

Housing is going to recover. There is only one final piece of the puzzle and it's on its way. Prices just have to decline another 35%.
Or maybe 40%.

But we are on the way, baby! Recovery city! Just one last dip and it's off we go! Wheeeeee!

Injecting Accountability into the Credit Crisis

Bluefire: Great idea. And while we are working on ideas of Great Genius and Sophistication, why don't we help to bail out Ford and GM by systematically torching entire parking lots of cars are shopping malls and football games. Think of the boom in car buying! GM and Ford stock would soar!

Why stop there? Let's knock down skyscrapers. Let's sink the entire US fleet. Hey, we could even eliminate unemployment!

House prices bubbled up irrationally. Everyone thought they were rich. Too many people made bad bet based on this bubble. Now house prices are reverting to long-term levels and everyone is upset (except those who did not buy yet).

House prices have another 25-40% to go. It's reality. It might suck for you, but I love it.

Latest Case-Schiller Report Shows the Sky is Falling

I don't think the estimates make much sense when they are given in a vacuum. "Down 28% from the peak" "Another 10% to go" Blah, blah, blah.

The reality is that the US housing market is massively overpriced as measured against the only thing that matters, affordability. Ignore the wealthy who rarely buy as much as they afford (otherwise, Bill Gates would live in a one hundred million square foot sold silver home).

Median house price is now at $201k (I don't know why this measurement is used, by the way). Median income is about $49k. The long-term affordability ratio for house prices is about 2.8 times income. Consequently, the median house price should revert to about $137k, implying another 30% drop.

What does this 2.8 times income ratio mean? It's not a fantasy number pulled out thin air. It represents the ability of the income to service the loan at typical interest rates and lending conditions. It means you pay one-third of your income on your housing (ALL costs included) in order to remain solvent and save for retirement. It also assumes typical wage growth.

This ratio does not take into account 100% mortgages or option ARMS with teaser rates. It does not take into account the lending backlash as prices collapse (what was loose and easy on the way up becomes tight and restricted on the way down). It is also likely to be a mean-reverting ratio which implies that it needs to go BELOW the long-term average in order to balance out with the insanity on the upside.

Given the insolvency of our major lending institutions, the eradication of irresponsible lending, negative savings rates, widespread debt, record housing inventory, and the recession, we are likely to see the affordability ratio head down towards and below 2.5 times income.

Look out below. The median home price needs to drop to about $120k to signal a bottom.

Inflationists vs. Deflationists: Who's Right?

Gee, Thanks Rob. Great advice. Can I borrow your magical watch?

Inflationists vs. Deflationists: Who's Right?

The US consumer is broke and has been for years, but with easy and excessive credit there was no need to admit it. The US boom stoked "growth" worldwide. The mountains of money also stoked inflation. The result: lots of plastic junk and "obselete" electronics as well as one of the largest bubbles in history (world real estate).

It's all over now (at least for now). There will be massive deflation in housing , but this is not counted in government statistics so it won't affect inflation. Cars may drop in price, but car prices are not highly elastic; at some point, it makes no sense to sell a car. Other things will continue to rise, such as food, healthcare, and taxes. Overall, the affect will likely be inflationary, though there should be some disflation.

(By the way, I love this term "disflation". I understand it to mean that inflation will slow, so, for example, instead of prices rising at 5% per year, they will rise at only 4%. Disflation is the third derivative of price. Deflation would imply that prices are actually going down in nominal terms.)

Oil and other commodities are dropping recently, but they are well above last years averages. Consequently the inflationary affects leaking into CPI and PPI will continue with a lag effect.

Frankly, we are headed to stagflation. Overall demand for many basic things will continue, including food. While food is not counted by the government in inflation, try convincing yourself that it doesn't matter next time you buy groceries. The thirld world is unlikely or incapable of shifting back to traditional foodstuffs and will probably not die off massively in the next year just to help the US consumer (despite what Cheney might wish for). While all this goes no, recession and massive hangover from the credit bubble will wreak havoc in the economy.

The US no longer has a real economy to drive a recovery. Everything is either finance or consumption. Even the much-touted stimulus package is aimed entirely at getting some fat slob to buy more lattes and an iphone. It's just another quick fix for the junkie.

The US is no longer a rich country. It is a country with lots of toys. A few of us have lots of dollars, but we have seen just how valuable those things are. When Helicopter Ben slashes the interest rate and Bush further damages our solvency with more tax cuts, the dollar will continue its slide. We are owned by those we hold our debts, mainly the Asians and Arabs. But they won't be able to help us much more as the global contagion guts their bubble economies as well.

It is going to be ugly. It won't be Armaggedon, but I don't think a depression is out of the question.

Housing Prices Expected to Bottom in 2010, 21% Off '06 Highs

Once again, another house appreciation number based on long-term historical increases. The facts are: house prices bubbled WAY above affordability, "owners" over-extended themselves massively, builders over-built, recession is here, real wages have NOT increased in ten years, banks are bankrupt and new loans will be very hard to get and very expensive.

All this means that house prices will need to hit historical lows (in P/E and income ratio terms). In order to revert to the long-term 2.8 times income ratio, we need to go seriously under the long-term average to compensate for being so far over it.

Owners will not be trading up for years to come as they work through the huge negative equity in their existing homes. New buyers will have a hard time buying as banks demand 20% down and limit price to income. How many under-30's have $40k lying around? How many over-30's have it?

Forget about inflation justifying a 5% rise per year. Take median income, multiply by two. That's your new target for house prices in 2009 and 2010.

The National Association of Realtors' Fuzzy Math

Sounds like modern, accepted accounting principles to me! What works for corporate America can work for YOU!

Even more cynically, is it possible the NAR (isn't it eery how close that is to NRA?) is calculating its commission as being a 94% return on your downpayment?

2008 Crystal Balls Are Bad for Your Health

this sure sounds like a stock bull griping and moaning and blaming everything on the media and pundits. Of course, the same media and pundits were gleefully cheering on the bubbles but back then they were "right" and "righteous".

And since when does a prognosticator need to be one hundred percent accurate?

We arbitrarily divide our time into discete quanta: days, months, years. There is a great deal of signifigance to calendar years because of accounting rules. So, predicting annually makes perfect sense.

As for the rest, you are merely stating that no one can predict unpredicted events. yup. you got us there.

So, if I now give you my predictions for 2008;
1. DOW 38,000
2. median house price 422,750 USD
3. USD/Eur at 0.82
4. Average income tax rate cut to 8%
5. Average dividend on NYSE goes to 18%
6. Peace, love, and happiness for all mankind forever and ever

Am I good or what?

Look What They're Saying About the Housing Market

Correction: house prices need to revert to 2.5x income