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Tilting at Windmills

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April 24, 2007
By: Kevin Drum

HOUSING UPDATE....More bad news in the housing market. Blamed on the weather, natch. Feel free to believe that or not depending on your own personal mood.

Kevin Drum 12:07 PM Permalink | Trackbacks | Comments (43)

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Using zillow.com as an indicator, it is amazing to see the precipitous drop in home values (especially when it's your own!) Never forget the simple market tenet that supply and demand is a fundamental; in this case, increased supply with less demand equals lower value. It is only going to get worse (15% or so) before it bottoms out.

Posted by: ny patriot on April 24, 2007 at 12:27 PM | PERMALINK

Why is a fall in housing prices almost always characterized as "bad news"? I imagine because most of the people writing these articles are homeowners whose net worth (on paper) is important to them. However, a fall in housing prices is very good news for the many people who cannot afford to buy at the current bubble-inflated prices. I am a homeowner and I would like to see prices fall 30% or so to help these folks. I am not planning on selling my house any time soon, or on taking out a home equity loan to buy a new SUV or the latest flat-screen TV, so I don't really care how my paper net worth is affected.

Posted by: paul on April 24, 2007 at 12:36 PM | PERMALINK

My ability to buy a house is directly correlated with whether or it's sunny outside.

Posted by: Old Hat on April 24, 2007 at 12:36 PM | PERMALINK

Why is a fall in housing prices almost always characterized as "bad news"?

The US no longer manufactures much and a good chunk of our consumer spending is based on equity from housing prices. The whole houses-as-credit-cards thing.

Posted by: Old Hat on April 24, 2007 at 12:39 PM | PERMALINK

The Chinese are angry.

Posted by: chairman mao on April 24, 2007 at 12:42 PM | PERMALINK

so I don't really care how my paper net worth is affected.

But most people are, and with a lot it affects them real ways: credit rating, paying consumer debt, having to move unexpectedly.

Then there a larger portion that it will affect their purchasing decisions creating a larger impact on the economy.

Most all significant economic news directly affects only a small portion of the populace. Its the longer term fallout that affects a much broader range of people.

Posted by: Simp on April 24, 2007 at 12:44 PM | PERMALINK
Why is a fall in housing prices almost always characterized as "bad news"?

Because, assuming that it is truly general, its bad news directly for Americans who are homeowners, and because it affects the availability of credit and, and through it the demand for other goods and services, indirectly for Americans who work, more generally.

I imagine because most of the people writing these articles are homeowners whose net worth (on paper) is important to them. However, a fall in housing prices is very good news for the many people who cannot afford to buy at the current bubble-inflated prices.

Sure, if it didn't have any indirect effects, that would be true. Unfortunately, that's not the case.

Posted by: cmdicely on April 24, 2007 at 12:45 PM | PERMALINK

Why not report the good news? People are losing houses who never even had houses before! Bankruptcy was something they never could even aspire to! Every such ruined life is a success story, an American dream!

Posted by: Davis X. Machina on April 24, 2007 at 12:47 PM | PERMALINK

Lenders have tightened standards with the rising delinquencies in mortgages especially in the subprime market, where borrowers with weak credit histories obtained their loans.

Ins't that just typical. They're blaming it on poor people!

Posted by: mabel on April 24, 2007 at 12:48 PM | PERMALINK
Why is a fall in housing prices almost always characterized as "bad news"?

Because, assuming that it is truly general, its bad news directly for Americans who are homeowners, and because it affects the availability of credit and, and through it the demand for other goods and services, indirectly for Americans who work, more generally.

I imagine because most of the people writing these articles are homeowners whose net worth (on paper) is important to them. However, a fall in housing prices is very good news for the many people who cannot afford to buy at the current bubble-inflated prices.

Sure, if it didn't have any indirect effects, that would be true. Unfortunately, that's not the case.

Posted by: cmdicely on April 24, 2007 at 12:49 PM | PERMALINK

My ability to buy a house is directly correlated with whether or it's sunny outside.

a paradox, a paradox!

He does his house hunting in the rain and snow!

Posted by: mabel on April 24, 2007 at 12:50 PM | PERMALINK

The "bad weather" rationalization was from David Lereah. Lereah, of course, is the NAR's Chief Propagandist, uhm I mean Liar-in-Chief.

Posted by: Anonymous on April 24, 2007 at 12:51 PM | PERMALINK

Come to the San Francisco Bay Area to see housing prices that are not going down!

Houses in where I live, Santa Rosa area, go for around 500,000.00. Schools are losing students because people can't afford to live up here.

Posted by: Percy on April 24, 2007 at 12:53 PM | PERMALINK

Davis X. Machina

I guess it will be considered a status symbol to be able to claim you have filed bankruptcy? After all, as the thinking goes, not everyone was important enough to have the need to have filed bankruptcy?

It will be like telling fishing stories, but instead of who had caught the bigger fish, the challenge will be to see who can tell the biggest tale about who filed the biggest bankruptcy.

Posted by: Anonymous on April 24, 2007 at 12:59 PM | PERMALINK

There is a growing inventory of homes for sale in locations that are not especially desirable. Many people bought new build homes in outlying areas that they cannot sell and are now falling in value.

The bad news implicit in falling home prices is that many people owe more than their homes are now worth. This causes foreclosures and bankruptcies.

Posted by: Brojo on April 24, 2007 at 1:00 PM | PERMALINK

"Why is a fall in housing prices almost always characterized as "bad news"?"

Because a certain segment of society gets to frame the terms of any debate and lazy and stupid journalists go along with them.
Same reason that our newspapers obsess over GNP growth, but care only marginally about GNP/capita, and care fsckall about gini indices. GNP growth is of great interest to stockholders, whereas GNP/capita and gini indices only matter to the little people.

Posted by: Maynard Handley on April 24, 2007 at 1:10 PM | PERMALINK

I'm shocked that Kevin isn't all over the NYPost interview with Cho's prostitute....

Posted by: Disputo on April 24, 2007 at 1:15 PM | PERMALINK

Which eventually leads to a systemic banking crisis, and that's when the proverbial fan gets hit. What is different this time around is that it comes in conjunction with rising energy prices. That makes $5-7 trillion of the US housing stock poorly situated and in need of retrofitting. Expect infilling in some areas and abandoning of the longest-commute tract housing.

Posted by: kostya on April 24, 2007 at 1:18 PM | PERMALINK

Houses in where I live, Santa Rosa area, go for around 500,000.00

Big deal. Come to Chicago. Where I live the *condos* go for 500k.

Posted by: Disputo on April 24, 2007 at 1:19 PM | PERMALINK

> Because, assuming that it is truly
> general, its bad news directly for
> Americans who are homeowners, a

I am not convinced it is "good" for homeowners (not to mention those who are not homeowners) for them to think that a few hundred square feet of land and a pile of sticks in the parched, roadlocked desert between Ontario and Riverside is worth $400,000. Or that a 2.5 bedroom ranch in Lamont IL is worth $900,000, walk to the train or no.

Admittedly, the fact that we have been using the process of building McMansions for one another to disguise the moving of our economic infrastructure to China, and when that scam collapses we are in real trouble. But that doesn't justify keeping the scam going.

Cranky

Posted by: Cranky Observer on April 24, 2007 at 1:21 PM | PERMALINK

"Houses in where I live, Santa Rosa area, go for around 500,000.00

Big deal. Come to Chicago. Where I live the *condos* go for 500k."

Feh. Zillow's giving the median price of homes in Chicago as ~$250k. In SF, it's $800k, i.e. Two of ours for a six-pack of yours.

Posted by: No Longer a Urinated State of America on April 24, 2007 at 1:40 PM | PERMALINK

New pet peeve: people who use "natch" in writing or speech.

Posted by: sunship on April 24, 2007 at 1:50 PM | PERMALINK

Bad news for the United States is good news for liberal Democrats.

Thanks for admitting that Republican governance results in bad news for the United States, mhr.

The realization that your party is a bunch of crooks, liars, and losers is sinking in, isn't it?

Posted by: Gregory on April 24, 2007 at 2:10 PM | PERMALINK

Maybe you'll get lucky and we'll have a depression.

Bush created a psychological depression across society many years ago, now it is time for him to inflict an economic depression before he leaves office.

Posted by: Anonymous on April 24, 2007 at 2:18 PM | PERMALINK

Shorter mhr: Why say something useful or at least relevant when you can launch a drive-by insult?

Posted by: Ron Byers on April 24, 2007 at 2:25 PM | PERMALINK

And when the oil runs out, and we yet haven't thought of an alternative to the car, every house in the suburbs will be worth $0. And every house downtown or near a rail line will be worth $kazillion.

Posted by: absent observer on April 24, 2007 at 2:46 PM | PERMALINK

With the Rapture imminent why would any good Christian bother to buy a house? Once we the Godly are taken up to join the Lord in Heaven there'll be plenty of vacancies for you atheist liberals to hold your sex and dope parties in.

Posted by: American Honk on April 24, 2007 at 3:08 PM | PERMALINK

Diputo,

I mean the houses start at $500,000. A nice house is a cool million.

Posted by: Percy on April 24, 2007 at 3:30 PM | PERMALINK

Since 99.999% of current homeowners have no need or plans to sell this information is not really that significant. It only affects a small slice of the very tiny minority of people who bought homes in the last year or so. The vast majority the homeowners still have plenty of equity, and as long as they have a job a decline in prices is irrelevant.

Some areas are better than others. Here in Southern California the house prices, as reported by the median home price at the time of sale. are still going up, just slower than before. I hear that places like Florida and Texas are seeing price decreases. But real estate has always been a local market so looking at it on a nationwide basis is pretty meaningless.

Posted by: ken on April 24, 2007 at 3:34 PM | PERMALINK

Since 99.999% of current homeowners have no need or plans to sell this information is not really that significant. It only affects a small slice of the very tiny minority of people who bought homes in the last year or so.

As someone involved in both real estate and relocation I can tell your that one of the reasons home values are dropping so precipitously is precisely because such a significant number of people want or need to sell their homes for any number of reasons - job loss, job change, financial hardship, divorce, et al - leading to a glut of homes on the market.

Also, because people sucked so much equity of their homes in the refi boom, declining home values often leave them upside down in their mortgages and unable to sell when they need to, leading then to foreclosure, or needing to bring significant amounts of money to the closely table to pay off their loans, hurting them financially.

While it's true that there is no nationwide market condition per se, local markets are leading indicators of national trends.

Posted by: trex on April 24, 2007 at 4:01 PM | PERMALINK

trex, home prices may be have dropped sharply in some areas because of the reasons you listed but that is because those local markets do not have enough people really eager to live in those areas. In the more desirable parts of the country home prices are still going up. Its all depends on the location.

That said, anyone making a decision to buy or to sell by giving more weight to national averages instead of local market conditions is being foolish to an extreme. How many people really care that home prices in areas they do not want to live are down from last year, or even last month? Not many, I would guess.

Posted by: ken on April 24, 2007 at 5:03 PM | PERMALINK

I agree with Ken. The media is really bad at taking a very local issue and making it national. This happened during the housing boom and now the slowdown. I always love it when they focus on very specialized markets, such as Naples Florida or Manhattan, as if they reflect what is happening across the country.


I personally haven't seen any decent analysis on the subprime situation in the media. I saw one chart that showed foreclosures are now at the level of 2001, which isn't good, but its not 1929. I also haven't seen any discussion of the history of redlining and the political support for subprime mortgages in minority communities. I haven't seen any discussion of the new federal bankruptcy law and how that will impact people who lose their house.

Posted by: objective dem on April 24, 2007 at 5:44 PM | PERMALINK

But, they say the drop in average (or, median?) house price from same time last year is only 0.3% - so, what does it really mean?

Posted by: Neil B. on April 24, 2007 at 5:50 PM | PERMALINK

My question is, which is worse, rising housing prices or falling housing prices? Fluctuating housing prices? Don't ordinary people, middle class people, benefit if housing prices decline?

Posted by: mabel on April 24, 2007 at 6:01 PM | PERMALINK
I am not convinced it is "good" for homeowners (not to mention those who are not homeowners) for them to think that a few hundred square feet of land and a pile of sticks in the parched, roadlocked desert between Ontario and Riverside is worth $400,000. Or that a 2.5 bedroom ranch in Lamont IL is worth $900,000, walk to the train or no.

Its not good the for the homeowner themself to believe that.

OTOH, it is good for them if everyone else believes that.

Admittedly, the fact that we have been using the process of building McMansions for one another to disguise the moving of our economic infrastructure to China, and when that scam collapses we are in real trouble. But that doesn't justify keeping the scam going.

"Justification" isn't the issue. Actual material impacts are the issue.

Posted by: cmdicely on April 24, 2007 at 6:50 PM | PERMALINK

It's still largely the case, I believe, that there's not really a national housing market, but rather, lots of local housing markets within the nation.

Here in Boston, which was one of the first areas to suffer price declines (and was likewise one of the frothiest areas during the boom), the market looks like it may have already stabilized, and may indeed be headed back up. Developers here, hemmed in by land scarcity and anti-growth sentiment, couldn't produce the oversupply in the first place that has so adversely affected house prices in other locales. So there wasn't all that much excess inventory to soak up when the market turned south a couple of years back. Supply has therefore tightened with the passage of time, and, although there's not much in the way of domestic population growth hereabouts, the area still attracts its share of foreign immigration. Moreover, the post dotcom bust is now well behind us, and wage growth has resumed. In short, houses in some parts of the metro area are creeping back up. It could turn out to be short-lived, and apparently we're seeing (like California) record numbers of foreclosures, which will likely increase supply and exert downward pressure on prices. But my sense is there's a significant degree of pent-up demand here, because a lot of folks had been priced out of the market, and Eastern Massachusetts has some of the lowest owner-occupancy rates in the country.

Posted by: Jasper on April 24, 2007 at 8:26 PM | PERMALINK

Houses in where I live, Santa Rosa area, go for around 500,000.00. Schools are losing students because people can't afford to live up here.

I live in Santa Rosa, and home prices have fallen about 10% in the last six months, my house included. Every day I see more 'for sale' signs spring up, not only in my neighborhood but all over the county.

In the last ten years, beginning in President Clinton's second term, building went berserk here. Overbuilding. Prices were high. Those buying weren't necessarily first time buyers or buying for themselves. They were buying for investment, to be rented out.

That's what we're seeing now. It's those homes on the market because between the crackdown on illegal immigration and
the bad economy, the owners aren't able to rent them out and they can't pay the mortgage out of their own pockets.

The other homes hitting the market are split between those who moved to the county for work and now the companies are downsizing or outsourcing, and retirees trying to cash out their cash cow, their houses, and move to cheaper retirement states.

We have hospitals shutting down, going bankrupt here (Sutter, Palm Dr.), all kinds of long time businesses shutting down (like RS Basso), so I don't what you're looking at. I think we'll do ok, but we're in for rough times.

The weather has really gotten wierd here, too. Between that and the loss of illegal labor, it isn't helping the agricultural (wine, boutique crops) base. It's not going to help the local economy. Tourism is down, not hugely, but you can walk into restaurants and get a table that you used to need at least a day's notice for.

Posted by: Jack on April 24, 2007 at 9:16 PM | PERMALINK

See http://thehousingbubbleblog.com for lots more on this topic. Summary: the next two years will see the resetting of ARM terms to the point of mass foreclosures all over the US, dragging down average housing prices. Did the real estate developers do their bit to feed the monster? Ask the owners of luxury-priced condos in downtown Duluth.

Posted by: JamesI on April 25, 2007 at 7:23 AM | PERMALINK

Here's another 'little problem':


Falling Remittances from the U.S. to Latin America as Evidence of the Housing Slump
Nouriel Roubini | Apr 23, 2007

Last week this blog interpreted the mystery of the apparent lack of fall of housing jobs in the official US statistics - in spite of a fall in housing starts of over 30% - as being partly due to layoffs of undocumented and illegal workers in the housing sector.

As reported today in the Wall Street Journal there is now evidence - coming from research by Walter Molano at BCP Securities - that remittances to Latin America from the U.S. are significantly falling signaling that documented and undocumented workers with families in Latin America are now suffering because of the housing slump. As reported by Molano:
Housing bubble

The rapid slowdown of the U.S. housing sector could have dangerous implications for Latin America and the other emerging market countries that depend on remittances for their balance of payment needs.

Remittances became important a few years ago, when they began to eclipse other forms of capital flows, such as foreign direct investment, multilateral assistance and loans. In 2005, the World Bank estimated that the total level of money sent home by immigrants from emerging market countries was $223 billion. In 2006, Latin America received $62 billion in remittances, of which 75% was from the U.S. The multilaterals and Latin American governments were ecstatic about the increase in remitted funds. They attributed the inflows to changes in regulatory framework, the proliferation of financial transfer networks and a reduction in transfer costs. Some Central American governments issued long-term bonds, modeling their balance of payments on the steady increase in remitted funds. However, few people bothered to realize that much of the generated money was a result of the large increase in U.S. home construction and associated services. A jaunt around most U.S. construction sites revealed a cacophony of Spanish and Portuguese accents, along with a sea of Latino food vending cars. Latin American electricians, masons, painters, carpenters, plumbers and landscapers thrived as North American homeowners used second mortgages to modernize their dwellings. Unfortunately, everything that goes up must come down—and the decline in the U.S. housing market has dangerous implications for some emerging market countries.

A look at the remittance data and U.S. housing starts reveals a worrisome correlation. Regressing panel data provided by the IMF on annual remittances to Latin America against annual U.S. housing starts shows a high degree of correlation between 1997and 2005. The panel data consists of 15 countries, and the correlation was higher than 90% in 12 of the cases. The outlier was Paraguay, which had a negative correlation of .03%. This was not too surprising, given that most Paraguayan immigrants head off to Argentina. Unfortunately, Argentina suffered a severe crisis during the sample years, explaining the massive decline in Paraguayan remittances. Although the conclusions were fascinating, the sample sets had a small N (number of observations). Therefore, we decided to examine another sample set. Banco de Mexico has monthly remittance data through February 2007, and the fit was remarkable. Monthly remittances peaked in May 2006, at the same time that housing starts reached their zenith. However, the decline in remittances is occurring at a faster pace than the drop in housing starts, falling 26% from the peak. This is logical, given that Mexican immigrants will harbor their savings as they see job opportunities evaporate. The implication of these results is that some Latin American countries could see pressure on their current account balances, despite the increase in commodity prices. The contraction in remittances will dampen domestic consumption and hamper GDP growth rates. Countries which are extremely dependent on remittances, such as Mexico, Colombia and the Central American states, could see weaker exchange rates as transfers decline. The problems in the U.S. housing sector could have dire implications for home construction activity in Europe and the Middle East. This could affect emerging market countries in North Africa, as well as Pakistan and the Philippines, which also depend on remittances to cover their balance of payment requirements.

http://www.rgemonitor.com/blog/roubini/190912/

Posted by: MsNThrope on April 25, 2007 at 10:23 AM | PERMALINK

Bad news for the United States is good news for liberal Democrats. Maybe you'll get lucky and we'll have a depression.
Posted by: mhr

Liberals aren't 'betting on a depression' but Wall Street is. All they care about is the Fed lowering interest rates to keep their credit bubble inflated enough to get then through the next bonus season.

The you've got that idiot Samuelson (the other,/i> one, not the Paul the Nobel Laureate) taking as a his subject that 'Hey, what's so bad about recessions?' as though John Kenneth Galbraith had not pointed out as a paradox of prosperity that many people do benefit when recessions cause widespread job losses 'cause it holds down inflation.

Of course it's rather too bad and all about millions of people suffering becoming, through no fault of their own' 'involuntarily enrolled inflation fighters', as Lester C. Thurow pointed out way back in 1980 in 'The Zero Sum Society - Distribution and the Possibilities for Economic Change'.

This particular Samuelson does not, of course, mention that he's wholesale ripping off other economists' thoughts and passing them off as his own. Lazy sod. Lazy and dishonest to the core.

Posted by: MsNThrope on April 25, 2007 at 10:35 AM | PERMALINK

Sorry for failure to close my italics tag.

Two demerits and I'll stay after class and clean the erasers.

Posted by: MsNThrope on April 25, 2007 at 10:54 AM | PERMALINK

check out the chart here:

http://themessthatgreenspanmade.blogspot.com/2007/04/
sources-and-uses-of-free-cash.html

Posted by: MsNThrope on April 25, 2007 at 11:03 AM | PERMALINK

Published on The Smirking Chimp (http://www.smirkingchimp.com)
Housing Bubble Boondoggle: “Is it too late to get out”?
By Mike Whitney
Created Apr 25 2007 - 11:28pm

Treasury Secretary Henry Paulson delivered an upbeat assessment of the slumping real estate market on Friday saying, "All the signs I look at" show "the housing market is at or near the bottom.”

Baloney.

Paulson added that the meltdown in subprime mortgages was not a “serious problem. I think it’s going to be largely contained.”

Wrong again.

[snip]

Heebner: “The Greatest Price Decline in Housing since the Great Depression” (Bloomberg News interview)

“The real wave of pain and foreclosures is just beginning….subprimes and Alt-A are both in trouble. A lot of these will go into default. The reason is, that the people who took these out never really intended to fully service the mortgage---they were counting on rising home prices so they could sign on the dotted line without showing what their income was and then 2 years later flip into another junk mortgage and get a big profit out of the house with putting anything down…

[snip]

Heebner: “They’re going to dwarf those losses because the losses could easily approach $1 trillion---that dwarfs anything that has ever happened. Enron was $100 billion---this will be far greater than that…..The good news is that most of these loans are owned by Hedge Funds…You hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit And the hedge fund you are running, the manager is going to get 20% of the gain---so even if it’s a year before you go broke; you get rich until the fund is shut down”.

Heebner added this instructive comment: “The brokerage firms created “securitization” they know the products are toxic. I don’t think they are going to suffer losses; they simply passed them on to everyone else. The only impact this will have is the profits that flow from it will get less….But it is less than 3% of revenues in even the most exposed brokerage firm so THEY’RE NOT GOING TO GET CAUGHT.”

Although Heebner believes the brokerage houses will do fine; the same is not true for the small investor. Nearly 70% of subprimes have been securitized. That means that the vast number of shoddy “no down payment, no document, interest-only” loans (that are headed for default) have been transformed into securities and sold to hedge funds. As the housing market continues to falter, these funds will plummet at an inverse rate to the amount of leverage that has been applied. That may explain why, (according to Bloomberg Markets) the “wealthiest Americans have been bailing out” of hedge funds at an alarming rate.

[snip]

In Henry C K Liu’s “Why the Subprime Bust will Spread” (Asia Times) the author states that the bursting housing bubble will trigger a major pension crisis. After all, who are the “institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages”. (Liu)

[snip]

The housing decline is further complicated by Wall Street innovations in derivatives trading which has generated trillions of dollars in “virtual” wealth and is affecting the Feds ability to control inflation through interest rate manipulation. As Kenneth Heebner said, “You have hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit.”

In other words, low interest foreign capital has flooded US markets and contributed to distortions in housing prices.

[snip]

As Berg says, “Derivatives numbers are staggering. The Bank for International Settlements estimates that the notional amount of derivatives traded on regulated exchanges topped a quadrillion dollars last year and that the outstanding unregulated off-exchange (called over-the-counter – OTC) amount stood at $370 trillion in June 2006. Because the OTC market is composed of endless strings of bilateral transactions – the systemic risk is unknown.”

[snip]

Geither’s right. The markets now operate as unregulated banks generating mountains of credit through massively leveraged debt instruments---a monster credit bubble larger than anything in the history of capitalism.

[snip]

Just dandy, huh?

Posted by: MsNThrope on April 26, 2007 at 7:57 AM | PERMALINK




 

 

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