"housing Bubble Is Finally At Bursting Point"

[Scooter]

Analysis

The Times August 29, 2006

Housing bubble is finally at bursting point

American View with Gerard Baker

THE thing with bubbles, to paraphrase Joni Mitchell, is that you don’t really know you’ve got one till it’s gone.

When the air is expanding inside a speculative balloon, stretching the film of credibility that contains it to an ever-more improbable thinness, you can always find someone to explain why this time it’s different — why technological/demographic/astrological factors justify valuations today that have always proved historically unsupportable.

Until the bubble actually starts to deflate or burst, there’s just enough doubt about whether prices really will revert to their historical mean to keep us all guessing. Even the most convinced sceptic can never say with any certainty when a bubble will collapse, and so the science of identifying bubbles is an inherently retrospective activity.

But it looks now as though we can say with some confidence that the long American housing bubble is over.

To the anecdotal evidence accumulating over the past year — estate agents cancelling holidays in the South Pacific, the houseowner around the corner who is said to have dropped her asking price three times — we now have some firm and depressingly clear data. Last week we learnt that existing home sales in July were 11 per cent below last year’s levels. Within a couple of days, the next report said that new home sales had fallen in the same month by 21 per cent from a year earlier. Just a week before that, it was reported that housing starts fell 13 per cent from a year earlier.

If the housing market really is in retreat, the two important questions are: how far will it fall, and how much damage will it do to the US and, by extension, the world economy? It is not an exaggeration to say that the buoyant US economy has been kept afloat in the past five years by its housing sector. The first and most obvious effect has been the direct contribution a booming real estate market has had on employment and income.

If you dissect the official employment data over the past five years, and lump all the housing-related stuff together — construction, estate agents, mortgage broking, home improvement, housing insurance investment — you get some staggering numbers.

By some estimates all this housing activity has accounted for more than 40 per cent of all the jobs created in the US since 2001. Now, all these new jobs are not going to disappear in a housing slump. But even if residential real estate activity falls by half in the next year or two it will represent a sizeable blow to the labour market that could, if there is nothing else to take up the slack, push unemployment significantly higher, and income somewhat lower.

The much bigger effect of a housing slump, however, is likely to be on household balance sheets. According to the Federal Reserve’s latest figures, the total amount of residential housing wealth in the US just about doubled between 1999 and the first quarter of 2006 — up from $10.4 trillion (£5,500 billion) to $20.4 trillion.

Thanks to a highly efficient housing finance market, Americans have been withdrawing a significant part of this wealth to finance current spending. Exactly how much they have withdrawn is hard to gauge, but the wealth effect of housing on spending has been observed to be substantially larger than traditional estimates of the wealth effect of equities, which is about 1.5 per cent. If the right figure for housing is 3 per cent, that suggests over $300 billion has been taken out in the past six years, about $50 billion a year, or an average of about 0.4 per cent of US GDP. This seems a conservative estimate, as some economists put the wealth effect much higher.

However, people do not join a wave of selling when prices fall: most simply sit tight. Furthermore, the US market is a vast, diversified one, nothing like as dominated by a single, frothy urban market in the way the UK is affected by London. Prices nationwide have in fact never fallen in any year in the last half century.

But even if prices stay flat on aggregate over the next few years, that still suggests a substantial hit to GDP and, given the run-up in prices in the past five years, the chances of an outright, first-ever decline in prices must be substantial.

The other large effect of a housing slump might be considered a non-linear one: the impact on financial conditions of the millions of Americans who will default on mortgage payments as prices flatten, interest rates rise and the economy stalls.

In previous periods of weakness in property markets there have been huge institutional collapses. The savings and loans debacle of the early 1990s is the most recent example. Today, again thanks to increased financial efficiency, the risk of such a massacre seems smaller. The securitisation of the nation’s mortgage market has spread the geographical and sectoral risks to the broader economy.

But there will still be many financial institutions with significantly impaired balance sheets as the value of their mortgage-backed securities declines sharply over the next year. All in all, even on the most optimistic assumptions, post-bubble conditions in the housing market would be highly uncomfortable for America and could seriously sap demand in the world.

Of course, that is what the pessimists said about the collapse of the tech bubble in 2000. But back then, like a guardian angel, along came the housing boom just in time.

Is there anything that might do the same for the US in the next few years? There’s not much room for fiscal support. Unfortunately, and though interest rates have edged lower in the past few weeks, inflation pressures may limit the potential for support there. A further decline in oil prices would be useful, but can hardly be counted on. Which may leave the US in the unaccustomed position of hoping that the rest of the world can come to its rescue with a period of really strong demand growth. Who would bet the house on that?

[Realistbear]

Yes, the the US have had shocking HPI over the past 7 years--up 100% in the bubble markets at by more than 20% overall. Shocking--how can any market sustain such rises and expect to avoid a massive correction?

Let's see, we are up 3 times the US rate with 300% HPI since 1997, we have more per capita debt that the US (1.2 Trillion pounds compared with 11.1 trillion dollars with a population 5 times the size), we are losing jobs at a much faster rate, our twin deficits are among the worst in Europe, we have record rates of bankruptcy and repossession and some say it won't happen here?

When did it ever NOT happen here when the US tanked?

This quote sums it up nicely:

However, people do not join a wave of selling when prices fall: most simply sit tight. Furthermore, the US market is a vast, diversified one,

nothing like as dominated by a single, frothy urban market in the way the UK is affected by London.

Prices nationwide have in fact never fallen in any year in the last half century

.

Now that the US market is feeling the pain of all that HPI-MEW what can we expect here we have overdone it by a long margin? Hell is about to be unleashed! *

_____________________

*

Edited August 29, 2006 by Realistbear

[PropertyGuru]

US housing market stagnation is actually the worst possible outcome for the Americans.

Better to 'get it over with' fast, and get back on the growth trail.

As it stands, this could plunge the entire US economy into a depression lasting till the decade after next. Not what you need when the rest of the world just suddenly 'globalized' and is stealing your captive economic audience.

[Realistbear]

US housing market stagnation is actually the worst possible outcome for the Americans.

Better to 'get it over with' fast, and get back on the growth trail.

As it stands, this could plunge the entire US economy into a depression lasting till the decade after next. Not what you need when the rest of the world just suddenly 'globalized' and is stealing your captive economic audience.

Unfortunately, the US is the captive economic audience given its rate of consumption of the world's production. When the US stop buying from the rest of the world recession is the inevitable result. Its the customer that's going down here not the seller. The UK is heavily dependent on US consumption given our status as the No. 2 trading partner next to the EU. Germany are going to feel it also as they are the world's 4th largest exporter and most of their goods end(ed) up in the US.

[Scooter]

Unfortunately, the US is the captive economic audience given its rate of consumption of the world's production. When the US stop buying from the rest of the world recession is the inevitable result. Its the customer that's going down here not the seller. The UK is heavily dependent on US consumption given our status as the No. 2 trading partner next to the EU. Germany are going to feel it also as they are the world's 4th largest exporter and most of their goods end(ed) up in the US.

Why will no one actually write this stuff (bubble popping) about the Uk market in its own right? :angry:

[mikefluk]

Why will no one actually write this stuff (bubble popping) about the Uk market in its own right? :angry:

Because they are still all in denial. Excellent article by the way - thanks

[Scooter]

Because they are still all in denial. Excellent article by the way - thanks

You are welcome. It made quite good reading on The Times website first thing this morning.

[since the beginning]

Yes, the the US have had shocking HPI over the past 7 years--up 100% in the bubble markets at by more than 20% overall. Shocking--how can any market sustain such rises and expect to avoid a massive correction?

Let's see, we are up 3 times the US rate with 300% HPI since 1997, we have more per capita debt that the US (1.2 Trillion pounds compared with 11.1 trillion dollars with a population 5 times the size), we are losing jobs at a much faster rate, our twin deficits are among the worst in Europe, we have record rates of bankruptcy and repossession and some say it won't happen here?

Obviously our debt is bad but using your figures it is not worse than the US, your maths is wrong.

[Van]

Here is an interesting graph for US RE all the way back to 1890. Any chartists want to have a go at interpreting it?!

[Realistbear]

Fed may let inflation rip to save house market from anihilation:

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Fed May Tolerate Faster Inflation as Housing Sags, Growth Slows

By Craig Torres

Aug. 29 (Bloomberg) -- Federal Reserve officials may be prepared to live with a pickup in inflation over coming months as they consider the cost to housing and jobs of higher interest rates.

``When you have a very visible strain in the economy like housing at present, something that probably won't break but just might, the Fed gives more weight to the potential for exponential losses,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ``A policy shock would be more costly than usual at present.''

Minutes released today of the Federal Open Market Committee's Aug. 8 meeting, where interest rates were kept steady for the first time in two years, will likely show how worried policy makers are about a property downturn versus the dangers of accelerating inflation.

The minutes will be released at 2 p.m. Washington time.

It won't take Gordon much time to jump on THIS bandwagon if true.

Edited August 29, 2006 by Realistbear

[AwaitingFairPrices]

Unfortunately, the US is the captive economic audience given its rate of consumption of the world's production. When the US stop buying from the rest of the world recession is the inevitable result. Its the customer that's going down here not the seller. The UK is heavily dependent on US consumption given our status as the No. 2 trading partner next to the EU. Germany are going to feel it also as they are the world's 4th largest exporter and most of their goods end(ed) up in the US.

Anyone know how Canada is and how its being influenced by the whole HPI/HPC cycle? I'm thinking of moving over there in the next couple of years and want add them to my observing the US and UK markets.

AFP

[Guest mattsta1964]

Fed may let inflation rip to save house market from anihilation:

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Fed May Tolerate Faster Inflation as Housing Sags, Growth Slows

By Craig Torres

Aug. 29 (Bloomberg) -- Federal Reserve officials may be prepared to live with a pickup in inflation over coming months as they consider the cost to housing and jobs of higher interest rates.

``When you have a very visible strain in the economy like housing at present, something that probably won't break but just might, the Fed gives more weight to the potential for exponential losses,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ``A policy shock would be more costly than usual at present.''

Minutes released today of the Federal Open Market Committee's Aug. 8 meeting, where interest rates were kept steady for the first time in two years, will likely show how worried policy makers are about a property downturn versus the dangers of accelerating inflation.

The minutes will be released at 2 p.m. Washington time.

It won't take Gordon much time to jump on THIS bandwagon if true.

What to do? Hang on,let inflation erode your debt and hope to God you will saty in employment or sell now, bank the cash and possibly have the proceeds decimated by inflation? Buggered if I know which way to go!

[Realistbear]

What to do? Hang on,let inflation erode your debt and hope to God you will saty in employment or sell now, bank the cash and possibly have the proceeds decimated by inflation? Buggered if I know which way to go!

Dr. Bubb may say the shiny stuff is the only place to go. It closed down on the NY market:

Gold Charts

GOLD

08/28/2006 13:30 614.90 616.40 -6.90 - 1.11%

Swiss Francs possibly. Anything IR sensitive will be hit hard so I would stay out of bonds, property and stocks. INflation protected bonds may do well in the long term because if the Fed allow the inflation monster out of the cage it will take years to contain it again. IMO, Ben will not take this route but allow the house market to crash instead as that will only last 5-7 years.

[jp1]

Fed may let inflation rip to save house market from anihilation:

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Fed May Tolerate Faster Inflation as Housing Sags, Growth Slows

By Craig Torres

Aug. 29 (Bloomberg) -- Federal Reserve officials may be prepared to live with a pickup in inflation over coming months as they consider the cost to housing and jobs of higher interest rates.

``When you have a very visible strain in the economy like housing at present, something that probably won't break but just might, the Fed gives more weight to the potential for exponential losses,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ``A policy shock would be more costly than usual at present.''

Minutes released today of the Federal Open Market Committee's Aug. 8 meeting, where interest rates were kept steady for the first time in two years, will likely show how worried policy makers are about a property downturn versus the dangers of accelerating inflation.

The minutes will be released at 2 p.m. Washington time.

It won't take Gordon much time to jump on THIS bandwagon if true.

Looks like it. After all US and UK simply can't afford to have a recession

IMO there's too much talk of the dodgy CPI basket in Nulabour mouthpiece press [Times, Sunday Times] for my liking. I think our Dear Leader In Waiting Gordon will soon introduce a new measure, along with a "revised" inflation target

Edited August 29, 2006 by jp1

[Impartial]

Dr. Bubb may say the shiny stuff is the only place to go. It closed down on the NY market:

Gold Charts

GOLD

08/28/2006 13:30 614.90 616.40 -6.90 - 1.11%

Swiss Francs possibly. Anything IR sensitive will be hit hard so I would stay out of bonds, property and stocks. INflation protected bonds may do well in the long term because if the Fed allow the inflation monster out of the cage it will take years to contain it again. IMO, Ben will not take this route but allow the house market to crash instead as that will only last 5-7 years.

the august low was/is expected in gold, i will be buying more this week. And silver too.

[svag]

Looks like it. After all US and UK simply can't afford to have a recession

IMO there's too much talk of the dodgy CPI basket in Nulabour mouthpiece press [Times, Sunday Times] for my liking. I think our Dear Leader In Waiting Gordon will soon introduce a new measure, along with a "revised" inflation target

I am a bit confused, how will GB keep wage rises at 2% then?

[Wol]

Anyone know how Canada is and how its being influenced by the whole HPI/HPC cycle? I'm thinking of moving over there in the next couple of years and want add them to my observing the US and UK markets.

AFP

Me too. Van, Edmonton and Calgary have seen huge price increases in the last couple of years. The east has been much more moderate.

http://van-housing.blogspot.com/

[Broken Fan]

Dr. Bubb may say the shiny stuff is the only place to go. It closed down on the NY market:

Gold Charts

GOLD

08/28/2006 13:30 614.90 616.40 -6.90 - 1.11%

Swiss Francs possibly. Anything IR sensitive will be hit hard so I would stay out of bonds, property and stocks. INflation protected bonds may do well in the long term because if the Fed allow the inflation monster out of the cage it will take years to contain it again. IMO, Ben will not take this route but allow the house market to crash instead as that will only last 5-7 years.

Bubb should stop promoting gold. As a good enviromentalist he should know what massive pollution and civil and human rights violations the hunt for gold creates. Cyanide poisoning of the water courses, child slavery, energy intensive extractiopn processes. mmm...wonderful.

[AwaitingFairPrices]

Me too. Van, Edmonton and Calgary have seen huge price increases in the last couple of years. The east has been much more moderate.

http://van-housing.blogspot.com/

Cheers, will look at that this evening. They have a scary graph by the looks of it too! Now I'll be praying to the HPC gods for 2 crashes

AFP

[AvidFan]

IMO, Ben will not take this route but allow the house market to crash instead as that will only last 5-7 years.

Not wishing to sound too insistent RB, but surely with deficits and debts in the Western Economy and a surplus of Western Cash in the Eastern Economy, inflation (stagflation) would be a "win-win" for the West compared to recession and a HPC in nominal terms as this means falling asset prices, making the flood of foreign dollars buy even more US and UK assets.

If we're going to go that way, it's be like someone landing on "Mayfair" and putting a hotel on it straight away. The Saudis and Chinese could literally go shopping for whole towns and cities in the US and UK...

Surely... inflate or die ?

[stoffey]

realist has it right, when they sneeze we catch a cold. Australian Market looks pretty nasty to.

[Guest Shedfish]

I am a bit confused, how will GB keep wage rises at 2% then?

2.5 million more immigrants... make any kind of dissent (e.g. industrial action) an offence under the terrorism act... time bomb stealth taxes (like not moving IHT threshold in line with Bilderberg-sized HPI)... make any kind of moaning 'un-british', compulsory morris dancing i dunno

but he ain't gonna get away wid it

[Xurbia]

Bubb should stop promoting gold. As a good enviromentalist he should know what massive pollution and civil and human rights violations the hunt for gold creates. Cyanide poisoning of the water courses, child slavery, energy intensive extractiopn processes. mmm...wonderful.

......bit like houses then. The concrete/cement is a very high energy consumer and creates scars in the landscape. Houses prevent natural drainage. The huge mortgages to buy houses makes slaves of us all.