Construction Down, Prices Up |
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June 01, 2006
Ian Shepherdson, Chief U.S. Economist of High Frequency Economics has touted his bearish housing market views for months. In fact, he predicted something of a summer meltdown. He’s certainly in an enviable position to say “I told you so,” to his critics, especially since current statistics continue to prove him right. Most recently, he reported on the growing supply of homes on the market.
"The absolute number of existing single family homes for sale is now 35% higher than a year ago, a record. The number of months’ supply, which takes account of the slowing in home sales since last summer, is up 41%, also a record. As a result, price increases are screeching to a halt. Single-family home prices are now up just 4.3% year-over-year, compared to a peak rate of 16.9% just six months ago. Seasonally adjusted, prices are now falling outright, and we expect the year-over-year rate to dip below zero in the summer. If we’re right, implied real mortgage rates will rise towards 10%, a level that in the past has always driven home sales well below their long-term trend. Right now, total home sales are about 35% above trend, so it should be clear that we think the downside risk for housing activity is substantial."
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I live in Chicago on the north side which is very heavy condo and for the past month there are "for sale" signs on top of "for sale" signs. I don't know why sellers are selling NOW that the market is down. I walk & bike in this area several times a week and many of the "for sale" signs are on brand spanking new condos that were just occupied 6 months to 2 years ago. Down the street, the developer is having an auction and it's the first time an auction is going. Chicago in my opinion is over-developed. The sad part is that the developers and builders keep converting to condo and building new condos. I wonder, where are the people who can afford these condos? Where is the mass migration to Chicago? Are there jobs being created that I don't know about?
There are conversions sitting on the blocks nearby that only have a couple of people living in them. The developers are taking a BIG hit, but they keep building. I don't get it.
Posted by: Sally at June 4, 2006 08:45 PM
What are "implied real mortgage rates"?
Posted by: Nancy at June 5, 2006 09:24 AM
As I understand it, implied real mortgage rates are sort of like mortgage rates adjusted for inflation and changes in the prices of properties. For example, if your mortgage rate is 6%, inflation is 2%, and you think prices are going to fall 4% in the next year, then your implied real mortgage rate is 6 minus 2 plus 4, for a total of 8% over the next year.
Posted by: Peter Coy at June 5, 2006 04:13 PM
The most likely scenario will be somewhere between the cheerleaders and doomsayers. There is little doubt in my mind we will see zero or negative price appreciation this year but that fact alone doesn't mean that we're in for a meltdown. What it does mean is that many speculators will be washed from the market, some losing their golden egg, some walking away with a little egg on their face. Both camps will then declare victory, forgetting the lost productivity and massive opportunity costs from this stupid obsession with housing.
In order for the housing market to completely crash there must be some externality (dollar crash, war).
Posted by: Wes at June 6, 2006 02:35 PM
I believe there are many people out there simply trying to assist in "scaring" the housing market down. They are people who were not able to get in on the boom for whatever the reason and are purposely trying to bust the market with their hysterical claims.
Posted by: Frank at June 8, 2006 03:15 PM
It's a matter of economics. Law of supply and demand. Any neighborhood built in the last two years in Florida have for sale and for rent signs scattered evertwhere. Some of the neighborhoods that allowed investors did have clauses that rental properties had a minimum of one year lease. They can't compete with the other rental homes and the apartment complexes that are offering free rent and much lower prices. The flippers in these neighborhoods are doomed!
To say people are assisting in scaring the housing market down because"they were people who didn't get in on the boom" is ridiculous! That's like my poor neighbor who spent money like it was going out of style and drove a car that said .com it on his liscense plate in 2000. My husband would shake his head and wonder how these companies stock prices were so high when they hadn't even shown profit. At the height of all the hoopla he bought some Microsoft and Cisco. And he is in investments and knew better. We sold our shares for the tax write off. At the time were we jealous of our neighbor, maybe, but we certainly weren't when he had to sell his precious mercedes and 3600 square foot home, move into an apartment and go back to work for AT&T for less money than when he left.
Real Estate was fast money for the lucky ones, that's for sure. However, the supply far exceeds the demand here in Florida. It's just simple economics. The difference between the .com fiasco and the real estate boom is the speed at which people will lose their money. Thanks to creative financing and loose criteria in the lending business, more people jumped on this bandwagon than the .com. This is going to be bigger. How is the fed going to fix this. With the Nasdaq bust, they lowered interest rates to help the economy. Wonder what they will come up with next. This time I hope to get in early on the next boom market? We missed the boat on stocks and yes, we missed the boat on real estate. Of course, we look at a house as a place to live not a savings account.
Posted by: lizziebeth at June 9, 2006 11:06 PM
I live in Atlanta, and the condo market here apparently mirrors the Chicago condo market.
The high-rise condo market here is on very shaky ground.
Spire, a glass high-rise condo on Peachtree Street, sold-out quite quickly. But those initial buyers had no intention of calling Spire home. Now, almost two years later 180 condos are for sale. WELCOME TO FLIPPER HELL.
Developers keep announcing plans for yet another high-rise condo almost on a weekly basis it seems.
It's just insanity. "I don't get it either."
I echo the thoughts of the poster from Florida.
Why is real estate a completely different animal than the stock market? Froth is froth is froth is froth is froth is froth.
Of course, real estate varies from location-to-location, but speculation has been the driving force-not basic, sound fundamentals. In addition, the second-home market has been a huge driving force.
I highly suspect Alan Greenspan will have a lot of egg on his face when the market implodes.
Some markets will impode, others will be more stable, but a general melt-down is in the making.
This world can be quite "ugly." A few of the posters here seem to think that ugliness has certain boundaries. I DON'T THINK SO!!
People lose their jobs, sons and daughters die in Iraq, and some people will lose their shirts by buying small condos for $700,000.
Life can be beautiful, but it can also be quite ugly.
Posted by: Ryan at June 27, 2006 05:14 PM
there is a condo glut where I live in Chicago- Prices are falling rapidly and it's now a buyers market
Posted by: Ryan tredwill at July 18, 2006 09:22 AM
My husband and I just left Chicago for Denver where we have hopes we may be able to afford our own home. We decided to rent a cheap apt.-to eventually save enough for a down payment. We just found jobs here, but were not sure both of our incomes will even qualify us for a home loan to pay for a condo/house over 250000. I never prospered from the purchase and resale of a condo or home-like some lucky people did. But I know a lot of people are trying to get out now-a little too late possibly. There are houses within a 3 block radius that have been on the market for over 2 months.
I feel bad for those who truly want to sell their home after having actually lived in it, but I could care less about stupid "flippers" who raise the cost for everyone else looking to buy an affordable home.
Posted by: Dreamsicle at August 19, 2006 06:35 PM
Over 2 MM homeowners have in excess of 2 Trillion Dollars worth of ARMs due to reset in next 18 months at rates beyond the borrowers incomes. Beyond that this year current homeowners are expected to take billions in equity from their current properties to make ends meet (or buy that flat screen TV) - deflating their cushion in event of income reduction, relocation or health issues.
Look for bank failures, extensive job losses in housing related income and unprecedented defaults by next summer. As the above comment states - it is all about supply and demand. As selling lead times extend, the "flippers" will be the first to default. Shortly there after real estate related income loses, and therefore consumer spending, will force many second home owners to sell one of them at the reduced market value. When the banks start squeezing the appraisals and the home equity wells dry up, the potential for a free fall is not "negative nabobism" - it is, like gravity, a reality.
The following is the last paragraph of an article entitled "Full House" by two senior economists in yesterday's WSJ ed-op page:
"Unfortunately, there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected. Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today. Listen hard and watch out."
Posted by: Mackado at August 31, 2006 12:57 PM
“The foreclosure rate in Indianapolis is a perfect example of a very unsettling American economic trend,” said Addison Wiggin, author of Empire of Debt and editorial director of The Daily Reckoning. “Overseas manufacturer outsourcing, an undereducated working class, and a housing glut have combined to produce the nations highest foreclosure rate.”
Posted by: Matthew at December 5, 2006 08:36 AM
as some have expressed here I too am perplexed by the continuing seemingly unchecked new development activity in areas where there are hundreds of condos for sale. I realize that developers have two things going for them that existing sellers don't 1) they have new properties (albeit sometimes with less than ideal material) and 2) they can discount prices more aggressively than homeowners who are concerned about losing money on a sale. But even so in areas where the market has slowed tremendously (especially the condo market) why do they keep building and building ?
Posted by: rightsaidfred at April 11, 2007 03:30 PM
relative to the condo market. Condos are no place to live in my opinion. Most owners are unwilling landlords who just try to rent the place out to keep their heads above water. Renters in condo are usually not good because they treat it just like an apartment and there is no loyalty in the community.
You never know who your neighbors are and the flippers are always doing construction that keep the complexes dirty and noisy. I would recommend to people to avoid condos if at all possible. Sharing walls with a never ending sea of strangers is no way to live. And of course trying to sell a condo now is a nightmare.
Posted by: tarlton at April 11, 2007 03:35 PM
Who is to blame for the big number of foreclosures, lenders or borrowers? I vote for lenders, 100%. Lenders are financial people who are desperate for profits and will do what ever they can for short-term gains. Borrowers are willing to accept the recommendation of lenders because they want the good life. When the borrower cannot make the payments, the lender gets caught with the loss, which I suppose is somewhat short term and the borrower’s credit goes south for a longer time.
My advise to borrowers, “Do your own analysis and be certain that you can sustain the mortgage payment”. Be a good Boy Scout, “Be Prepared”.
Posted by: Larry Galloway at April 13, 2007 08:00 PM