Scooping the Froth Off of Housing

It almost seems like the expectation of a housing slowdown is turning into a self-fulfilling prophecy. But fundamentals such as the slow increase in mortgage interest rates in recent weeks are also at play:

Real-Estate Speculators, Pulling Back, Help Fed Remove 'Froth', Bloomberg: ...Investors who helped fuel the U.S. housing boom by bidding up prices are now so desperate for buyers that some are offering cash bonuses in such markets as Washington. That's a sign the Federal Reserve is succeeding in removing some of what Chairman Alan Greenspan called ''froth'' from the market. Inventories of unsold single-family homes are near a 17-year high as demand from speculators wanes and mortgage rates have risen more than a percentage point from a four-decade low reached in 2003. ''We're at the turning point,'' says Susan Wachter, professor of real estate at the University of Pennsylvania in Philadelphia. ''We're all hoping for a flat market, and not a plummeting market.'' That would be welcomed by Fed policy makers as a sign that they are succeeding in slowing the economy to a sustainable pace of growth...

Applications for loans to purchase real estate are down 12 percent from the record set in June, the Mortgage Bankers Association reports. ... The falloff in demand is already being felt in regions such as Las Vegas, the fastest-growing housing market in the U.S. a year earlier. ''The mom-and-pop investors are unloading their properties,'' says Greg Sullivan, 42, a partner in Cash Now Vegas LLC, a Las Vegas company that buys homes from investors and resells them. ''When home values were going up $10,000 a month, everyone wanted in. Now, all those properties are sitting empty.'' ... Investment buying accounted for almost a quarter of U.S. home transactions last year, according to the Realtors group. ... ''This is the sign of a soft landing in the marketplace,'' Nicolas Retsinas, director of housing studies at Harvard University in Cambridge, Massachusetts, said in an interview. ''I do believe the levels of price appreciation in some of the markets, particularly the two coasts, were unsustainable. At some point they had to moderate.''

Still, demand for less expensive housing remains strong. ... The Fed is ''getting exactly what they wanted, and that is a little bit of the froth taken away, but still the economic growth, and growth that supports housing,'' Bob Walters, chief economist at Quicken Loans Inc. in Livonia, Michigan, said in an interview. Lyle Gramley, a former Fed governor ... says market forces played a larger role than speculation in pushing up home prices. Prices rose because of economic growth, low interest rates and a shortage of building lots in some markets, he says. ''When fundamental factors drive prices up, it certainly does encourage speculation and more buying by investors,'' ... ''And when the froth begins to come out of the market, those are the first people who run for the hills.'' ... Gramley foresees ''declines in home prices of maybe 10, 15 or 20 percent on both coasts on a year-over-year basis.'' ''The economy can take that,'' he says. ''It won't cause a major problem, but we don't know if it will stop there.''

Comments

[Spectator]

It's fascinating how gullible people can get. Here is the Fed coming to the rescue of froth in the housing market, a direct product of the liquidity the Fed created. That and loose credit standards. It's like your garbage company dumping garbage in a neighborhood, and riding to the rescue to clean it up.

Housing in the last few years has been the mother of all pyramid schemes. As with all pyramid schemes everyone is happy while it lasts. Buffet has said, "In any pyramid scheme early investors make money, but no money is actually created." In this case paper money is created all right - by the Fed. Only it means the value of money is soon destroyed in a manner that misleads the public.

You bet we don't know if it will stop there.

[calmo]

Sometimes I need to sit down just to get my bearings.
This (Susan Wachter, professor of real estate at the University of Pennsylvania in Philadelphia) is a real person with a real academic position.
Ok, I do have to pass that through my satire analyser a couple of times for mental security clearance. Associate professor of loans and quick cash, Michael Snowem may also be a member.
I just need to get up to speed: university education costs money and students want a return on that investment. They aren't going $50,000 into debt to learn Romance Languages (or languages like C++ apparently)(not in droves like they used to). It will just take me some time to adjust to our new and flexible universities.

Spectator passes that phrase 'mother of all pyramid schemes' by me which is unusually comforting --something probably not intended. Is it because it houses the problem in a well understood format with nice clean boundaries? Is it just the word 'mother' that not only tells us it's The Biggest Mama but also that we will record it as such and in considerable style?

That question of whether our currency will survive seems to have been entertained by none other than Greenspan in his Nov 15 speech. He dismisses the idea of a joint currency without offering the pretext for even introducing it. [A more disturbing little piece for me than if he had discounted the existence of a pyramid scheme.]

[ilsm]

Spectator,

Defaulted loans 'destroy' money (reverse of buying notes makes money) with far less impact- no currency devaluation which is called inflation.

How much of the trillion in risky ARM's will dissolve away? Check the banking and S&L crises of the latter 1980's.

Hope the regulators have a better war fund than the PBGA.

[calmo]

ilsm, do you have an opinion on the new ~$400B budget proposal(provision?) for helping the PBGC out of it's financial problems? This involved higher costs to employees IIRC. Probably the perfect fish for Bruce who may need something to sink his teeth into lately.

[ilsm]

A curmudgeon such as I has many opinions.

I think the PBGC problem is rooted in anti-deflation of "assets" (Bernanke 2002), along with 'skip the recession' fiscal and monetary policy that drove up the needed NPV of everyone's pension fund, defined benefit and defined contribution alike.

Deficit spending, takes money away from savings and productivity investing.

The message is don't save when the urgent need is to save. I blame Bush, and Greenspan for destroying the security of the nation.

I suspect the working lower class taxpayer will cover the PBGC as they did the S&L and FDIC in the 1980's. Get rid of social security for them so they have to work til they die.

[Spectator]

ilsm,
There are those expecting large-scale defaults and destruction of paper wealth, i.e. deflation. That would be the sensible way to go when debt gets out of control.

But that would be an acknowledgement of the problem, with resultant misery and everyone looking for root causes. Will "Helicopter" Ben let people discover the root cause? You can bet your bottom dollar on the printing press running at full clip as promised.

[slink]

u folks are spittin flames....very lovely i must say
one question do u think all this is a mish mash of unintended folly or are there a few clear headed devils about ????

[ilsm]

Spectator,

I think the 'print our way out using a helicopter' will be the preferred way in the Fed, saves a lot of "bailing".

They jave been doing it since late 02. Some time along the line outside people will stop buying our bucks.

[ilsm]

slink,

Clear headed devils: make lots of money making and flipping mortgages, sell them to folks who may or may not have considered risks.........

[anne]

From the perspective of a homeowner or diversified and flexible investor, the real estate boom from 2000 was entirely welcome and other than what I would guess will be sticky prices for some while I find no reason to think there will be a significant price decline. I refer to a real estate boom, because the boom has been beyond housing. I would suggest looking to the Vanguard real estate investment trust index as a reflection of the various real estate markets, and the indication is as long as long term interest rates are reasonable the REIT index will hold reasonably.

[anne]

The increase in real estate values has provided lots of fine employment, helped household balance sheets, provided for lovely neighborhood renewal in a number of major cities, and been pleasant for investors. Why should I be annoyed? With the exception of the final 50 basis point tightening in May 2000, which seemed needless in a gently slowing low inflation economy, I find no fault in Federal Reserve policy. Watch and go along :)

[ilsm]

I live in a significant MSRP in the northeast.

In the past 20 years I have bought and sold three times:

Selling experiences chronologically: once on the early downtrend (fair gain), once on the early up trend (slight loss), and once mid of up trend (good gain).

I do not think interest rates were a big deal in each sale.

I think psychology was.

I am now renting in the market because: my analysis is I do not risk tying equity on the down side and monthly outlays are competitive, even with tax advantage, and I do not mow a lawn/no maintenance time or outlays.

[anne]

Makes perfect sense to me, and the value in renting is a reason I would guess there is rather little upside for a while :)

[anne]

Also, there have been selective severe real estate shocks in the last 3 decades, local market shocks from Houston to Boston to Los Angeles, mutual fund real estate partnership shocks, mortgage financing shocks. Interestingly, however, the REIT index has been remarkably stable through 30 years. Now, of course, we have value for the index that are far higher than historical norms, but nonetheless the historical stability is impressive.

[anne]

Interesting comment about the importance of psychology in real estate investing, so let us think of relative interest rate levels as driving the market.

[ilsm]

I am reminded of a tech sales person I knew. Every decision including the buy of computers has a personal dimension.

Psychology works, you think prices are rising you get in early. The reverse is true.

[anne]

Well, I prefer to think of relative value at a given time then wait :)