Just saw an article in the Orlando Sentinel...ouch...
In more bad news for the beleaguered housing industry, sales of new homes fell in January for a third straight month, pushing activity down to the slowest pace in nearly 13 years. The median price of a new home dropped to the lowest level in more than three years.The Commerce Department reported Wednesday that new home sales fell by 2.8 percent last month to a seasonally adjusted annual rate of 588,000 units, the slowest pace since February 1995.The median price of a new home dropped to $216,000 in January, down 4.3 percent from the December median sales price, the point where half the homes sold for more and half for less. That was the lowest median price since September 2004 and underscored that the steep slide in housing is still under way.Analysts believe that housing activity has further to fall as a tidal wave of mortgage foreclosures is dumping more unsold homes on an already glutted market. For January, the inventory of unsold homes dropped but since the pace of sales activity slowed as well, the number of months it would take to exhaust the current inventory rose to 9.9 months, the longest period in more than 26 years.Until this inventory backlog is worked down further, economists are predicting more declines in prices in the months ahead.The 2.8 percent drop in new home sales in January followed even bigger declines of 4 percent in December and 13.1 in November and represented weakness in every part of the country except the West, which saw sales increase by 2.2 percent.Sales fell by 10.3 percent in the Northeast and dropped by 7.6 percent in the Midwest and 2.4 percent in the South.Earlier this week, a real estate trade group reported that sales of existing homes had fallen by 0.4 percent in January, pushing existing home sales down to a seasonally adjusted annual rate of 4.89 million units, the weakest showing on records going back to 1999.Median prices for existing homes dropped to $201,100, down 4.6 percent from a year ago, while the inventory of unsold existing homes rose to 10.3 months' supply, just below the two-decade high of 10.5 months hit in October.Analysts forecast further price declines until the inventory levels are worked down further. However, a rising tide of mortgage foreclosures is pushing even more unsold homes onto the glutted market and financial institutions have tightened lending standards since a credit crisis hit with full force last August, making it harder for prospective buyers to qualify for loans.The weakness in housing has spread to the rest of the economy, raising the prospects the country could fall into a full-blown recession. The country is being battered by the prolonged slump in housing, a serious credit squeeze and soaring energy prices.In another sign of trouble, the Commerce Department reported Wednesday that orders to U.S. factories for big-ticket manufactured goods plunged in January by the largest amount in five months, an indication that manufacturers are being caught in the weakness engulfing the rest of the economy.The 5.3 percent drop in new orders last month reflected declines across a wide swath of industry from commercial aircraft and autos to heavy machinery and computers.A growing number of analysts believe the economy will slip into a recession this quarter although they expect the downturn to be short and mild, thanks to aggressive interest rate cuts from the Federal Reserve and a $168 billion economic stimulus package passed by Congress earlier this month. Millions of households will begin seeing rebate checks in May that should give the economy a boost starting this summer.The overall economy skidded to a barely discernible growth rate of 0.6 percent in the final three months of last year and many analysts believe that the gross domestic product may turn negative in the current quarter and the second quarter this year, meeting the classic definition of a recession as consumers, whose confidence levels have plunged to the lowest levels in five years, cut back on spending.The 5.3 percent decline in durable goods for January was the first setback since October and was the biggest decline since a similar 5.3 percent drop last August.The weakness was led by a 13.4 percent decrease in orders for transportation equipment, which reflected a 30.5 percent plunge in demand for commercial aircraft, a very volatile category, and a 0.8 percent fall in demand for motor vehicles and parts. It was the second straight drop in autos and underscored the problems facing domestic automakers as they struggle with weak demand in the face of surging gasoline prices and plunging consumer confidence.The new durable goods report showed that a key indicator of business investment dropped in January by the largest amount in three months. Orders for non-defense capital goods excluding aircraft, considered a good proxy for business investment, fell by 1.4 percent last month.
Showing posts with label housing market decline. Show all posts
Showing posts with label housing market decline. Show all posts
Wednesday, February 27, 2008
Thursday, October 18, 2007
US Housing Crash Continues - Why It is a Terrible Time to Buy
US Housing Crash Continues It's A Terrible Time To Buy (a terrific post from patrick.net, echoes my last post)
Why? Prices still disconnected from fundamentals. House prices are still far beyond any historically known relationship to rents or salaries. In extreme bubble areas like California, yearly rents are 3% of purchase price. Mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does simply to rent an equivalent house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Salaries cannot cover mortgages and loans are harder to get nationally. Anyone who buys now will suffer losses immediately, and for the next several years at least.
Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and senators are talking about taking your money to pay for your neighbor's McMansion.
Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the risk onto Fannie Mae (ultimately taxpayers) or onto buyers of mortgage backed securities. Now that it has become clear that a trillion dollars in mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage backed securities. This means that the money available for mortgages is falling, and house prices will keep falling, probably for 5 years or more. This is not just a subprime problem. All mortgages will be harder to get. A return to traditional lending standards means a return to traditional prices, which are far below current prices.
Interest rates increases. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go. For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428. Even if the Fed does not raise rates any more, all those adjustable mortgages will go up anyway, because they will adjust upward from the low initial rate to the current rate.
Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world. It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
Shortage of first-time buyers. The percentage of San Francisco Bay Area households who could afford a median-price house in the region plunged from 20 percent in July 2003 to under 10 percent in 2006.
Surplus of speculators. Nationally, 25% of houses bought in 2005 were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
Fraud. It has become common for speculators take out a loan for up to 50% more than the price of the house he intends to buy. The appraiser goes along with the inflated price, or he does not ever get called back to do another appraisal. The speculator then pays the seller his asking price (much less than the loan amount), and uses the extra money to make mortgage payments on the unreasonably large mortgage until he can find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn't work at all, unless the speculator simply skips town with the extra money.
Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 61. The only money they have is equity in a house, so they must sell.
Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse. The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken."
Why? Prices still disconnected from fundamentals. House prices are still far beyond any historically known relationship to rents or salaries. In extreme bubble areas like California, yearly rents are 3% of purchase price. Mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does simply to rent an equivalent house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Salaries cannot cover mortgages and loans are harder to get nationally. Anyone who buys now will suffer losses immediately, and for the next several years at least.
Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and senators are talking about taking your money to pay for your neighbor's McMansion.
Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the risk onto Fannie Mae (ultimately taxpayers) or onto buyers of mortgage backed securities. Now that it has become clear that a trillion dollars in mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage backed securities. This means that the money available for mortgages is falling, and house prices will keep falling, probably for 5 years or more. This is not just a subprime problem. All mortgages will be harder to get. A return to traditional lending standards means a return to traditional prices, which are far below current prices.
Interest rates increases. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go. For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428. Even if the Fed does not raise rates any more, all those adjustable mortgages will go up anyway, because they will adjust upward from the low initial rate to the current rate.
Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world. It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
Shortage of first-time buyers. The percentage of San Francisco Bay Area households who could afford a median-price house in the region plunged from 20 percent in July 2003 to under 10 percent in 2006.
Surplus of speculators. Nationally, 25% of houses bought in 2005 were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
Fraud. It has become common for speculators take out a loan for up to 50% more than the price of the house he intends to buy. The appraiser goes along with the inflated price, or he does not ever get called back to do another appraisal. The speculator then pays the seller his asking price (much less than the loan amount), and uses the extra money to make mortgage payments on the unreasonably large mortgage until he can find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn't work at all, unless the speculator simply skips town with the extra money.
Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 61. The only money they have is equity in a house, so they must sell.
Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse. The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken."
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