Real Estate: Fundamentals
- Thread starter The Kin
- Start date
Some interesting real estate comments I have seen in the last few days (and I mean just the last few days)...OWP
"David Rosenberg, Merrill Lynchâs chief North American economist, "We get nervous when we see things move parabolically north, because no asset class at any time ever failed to mean-revert after such an upside move."
"Paul Kasriel, chief economist at Northern Trust Corporation, "constructed a price-to-earnings ratio for housing. In 2004, that P/E ratio 'the highest since 1952, when the time series starts.' And we all know what happens when P/E ratios reach 50-year highs."
"'Fifteen percent price appreciation is too much, even for me,' David Lereah, chief economist at the National Association of Realtors. 'The real estate market is taking on a life of its own right now and we need to get a handle on it.'"
"I do agree with (Federal Reserve Chairman Alan) Greenspan there's some froth now in the market."
Yale University economist Robert Shiller, "'I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history,' he said in a telephone interview yesterday (May 23rd)."
"Mark Zandi, chief economist with Economy.com, said he's worried about the vulnerability of the mortgage-backed securities industry, where hedge funds and other investors have made huge bets. That derivative industry funds many mortgages for home buyers, particularly for low-equity loans. Problems in the mortgage-backed securities market could result in a credit crunch for would-be home buyers."
Even Robert Freed of KB Homes, who has pocketed a few million recently, used the 'B' word. "It's not the bubble in housing. It's the bubble in underwriting."
It's all good for Steve Kalmbach of Pulte Homes. "You'd be surprised how far people are willing to drive to have their American dream."
"'If things continue on as they are for another year or even six months, the potential for price declines is that much greater and the risk to the economy is much more significant,' Zandi said."
Atlanta Federal Reserve Bank President Jack Guynn added to the housing bubble debate with these comments. "'There are some local markets, especially in coastal Florida, where I've heard stories for more than a year about behavior that's got to be characterized as nothing other than speculation,' Guynn said it response to questions after his speech."
"'It makes me very uncomfortable. Some buyers, some builders, some lenders are going to get burned, could very likely get burned, in some of those local markets,' he said."
"The U.S. Federal Reserve is not yet done raising interest rates, but the central bank will watch economic data closely in an uncertain time for monetary policy. 'Given the current outlook for the economy, my personal view is that we've not yet reached a neutral policy stance,' Guynn noted."
The insider selling continues at Countrywide Financial, where the executives have liquidated 72% of their position. A scan of the individual transactions reveals the sell-off has accelerated.
"Rob McNelis, president of the California Association of Mortgage Brokers' San Diego chapter said, 'We've all known this rapid price appreciation is unsustainable. Historically, the real rate of home price appreciation is around 3 to 3.5 percent; not a bad day at the races when you realize it's free money.'"
"David Rosenberg, Merrill Lynchâs chief North American economist, "We get nervous when we see things move parabolically north, because no asset class at any time ever failed to mean-revert after such an upside move."
"Paul Kasriel, chief economist at Northern Trust Corporation, "constructed a price-to-earnings ratio for housing. In 2004, that P/E ratio 'the highest since 1952, when the time series starts.' And we all know what happens when P/E ratios reach 50-year highs."
"'Fifteen percent price appreciation is too much, even for me,' David Lereah, chief economist at the National Association of Realtors. 'The real estate market is taking on a life of its own right now and we need to get a handle on it.'"
"I do agree with (Federal Reserve Chairman Alan) Greenspan there's some froth now in the market."
Yale University economist Robert Shiller, "'I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history,' he said in a telephone interview yesterday (May 23rd)."
"Mark Zandi, chief economist with Economy.com, said he's worried about the vulnerability of the mortgage-backed securities industry, where hedge funds and other investors have made huge bets. That derivative industry funds many mortgages for home buyers, particularly for low-equity loans. Problems in the mortgage-backed securities market could result in a credit crunch for would-be home buyers."
Even Robert Freed of KB Homes, who has pocketed a few million recently, used the 'B' word. "It's not the bubble in housing. It's the bubble in underwriting."
It's all good for Steve Kalmbach of Pulte Homes. "You'd be surprised how far people are willing to drive to have their American dream."
"'If things continue on as they are for another year or even six months, the potential for price declines is that much greater and the risk to the economy is much more significant,' Zandi said."
Atlanta Federal Reserve Bank President Jack Guynn added to the housing bubble debate with these comments. "'There are some local markets, especially in coastal Florida, where I've heard stories for more than a year about behavior that's got to be characterized as nothing other than speculation,' Guynn said it response to questions after his speech."
"'It makes me very uncomfortable. Some buyers, some builders, some lenders are going to get burned, could very likely get burned, in some of those local markets,' he said."
"The U.S. Federal Reserve is not yet done raising interest rates, but the central bank will watch economic data closely in an uncertain time for monetary policy. 'Given the current outlook for the economy, my personal view is that we've not yet reached a neutral policy stance,' Guynn noted."
The insider selling continues at Countrywide Financial, where the executives have liquidated 72% of their position. A scan of the individual transactions reveals the sell-off has accelerated.
"Rob McNelis, president of the California Association of Mortgage Brokers' San Diego chapter said, 'We've all known this rapid price appreciation is unsustainable. Historically, the real rate of home price appreciation is around 3 to 3.5 percent; not a bad day at the races when you realize it's free money.'"
I thought this article's point, that "excess gearing" might contribute to "financial instability", was a good one. OWP
http://www.ajc.com/search/content/auto/epaper/editions/sunday/business_2409111fb2f7a1091022.html
Expect a price collapse in housing market
Donald Ratajczak - For the Journal-Constitution
Sunday, May 22, 2005
Donald Ratajczak is a regents professor of economics emeritus at Georgia State University.
In a real estate seminar in January, I stated that housing price increases reflected underlying conditions of reduced costs to finance homes.
About 47 percent of all households nationwide can afford the median home selling nationwide for $190,000.
To be sure, some pockets of excess exist. In San Francisco, only 19 percent of households can afford $490,000 to buy the median home there. Arizona, Nevada, the Northeast, Florida and second home havens in the Appalachians and along the coasts also have houses selling well above affordable levels.
Nevertheless, I was not too worried that a housing price bubble would be followed by a housing bust.
Now, I am certain that a housing bubble has developed that could lead to serious housing price contraction and possible financial problems in the future.
Certainly, the fact that 66 of the 138 reporting housing markets in the United States experienced double-digit price increases in the first quarter contributed to my growing concern. Discussions with builders who are selling out their condominium projects before the first spade is turned also raised my eyebrows. Houses that have been sold two or three times before anyone occupied them also cannot be ignored.
All these observations are consistent with a hot housing market that is seeking a higher price point because of increased demand. The fact that more people want more of their assets in housing than in bonds or stocks does not mean, by itself, that a housing bubble exists.
What has changed my thinking about the housing bubble is what is happening in the financing of housing.
Economist Hyman Minsky developed a theory of financial instability based on what he called the "excess gearing" of asset financing. What he meant is that when asset values increase, lenders become more willing to offer easy terms to finance those assets.
Remember 1988, when the standard amount of real estate loans increased from 80 percent of asset value to 100 percent and, in some cases, even more than 100 percent? Those who lived through the subsequent recession certainly remember the aftermath of that "excess gearing."
Initially, additional financing adds to the surge in asset values. Past bubbles --- the South Sea bubble, tulip mania, the utility holding company bubble that preceded the stock market crash of 1929 and many more --- benefited from rising loan-to-asset values as asset prices soared. When the asset prices finally stalled (as they must when they become so far out of line with alternative values of wealth), those loans turned sour. The subsequent collapse exceeded any gains created by the initial surge in asset prices.
Minsky's claim that financial markets are inherently unstable has not been endorsed by many other economists, but his theories certainly help explain the bubbles.
So, is there any evidence that "excess gearing" is happening in the financing of housing?
Can we say "interest-only loans" and explain the rising percentage of variable-rate mortgages?
The percentage of new mortgages that are now based on short-term interest rates has tripled in the past two years.
Yet short-term rates have been rising while long-term rates have remained relatively stable. In other words, the "smart" house financing would be to lock in a fixed mortgage rate.
Are home buyers not being smart? No. Lenders are being foolish.
Some lenders believe that rising housing prices will soon justify whatever loan they offer the home buyer. If the buyer defaults, the lender will foreclose and sell the appreciated asset.
In isolation, a foreclosed house in a market of appreciating housing values is not a bad loan. However, if a lot of foreclosures develop, houses sold by lenders will undermine values. A lot of home loans then will go bad very quickly.
So why are home buyers taking interest-only loans and variable-rate mortgages? Lenders are qualifying home buyers based on ability to service loans in the short run.
Variable rates remain lower than fixed rates, if only barely. Interest-only loans use even less of the monthly paycheck at the beginning of the loan than traditional loans.
Low initial monthly payments allow buyers to purchase those houses at inflated prices. But short-term rates probably will continue rising.
Soon, buyers will not be able to purchase the median home even with the variable-rate mortgage or the interest-only loan.
I do not know when lenders will begin reducing the number of households qualifying for the median-priced house, but it will be soon.
We know from experience that the subsequent price collapse will be felt financially and in the housing market.
--- Donald Ratajczak is a regents professor of economics emeritus at Georgia State University.
http://www.ajc.com/search/content/auto/epaper/editions/sunday/business_2409111fb2f7a1091022.html
Expect a price collapse in housing market
Donald Ratajczak - For the Journal-Constitution
Sunday, May 22, 2005
Donald Ratajczak is a regents professor of economics emeritus at Georgia State University.
In a real estate seminar in January, I stated that housing price increases reflected underlying conditions of reduced costs to finance homes.
About 47 percent of all households nationwide can afford the median home selling nationwide for $190,000.
To be sure, some pockets of excess exist. In San Francisco, only 19 percent of households can afford $490,000 to buy the median home there. Arizona, Nevada, the Northeast, Florida and second home havens in the Appalachians and along the coasts also have houses selling well above affordable levels.
Nevertheless, I was not too worried that a housing price bubble would be followed by a housing bust.
Now, I am certain that a housing bubble has developed that could lead to serious housing price contraction and possible financial problems in the future.
Certainly, the fact that 66 of the 138 reporting housing markets in the United States experienced double-digit price increases in the first quarter contributed to my growing concern. Discussions with builders who are selling out their condominium projects before the first spade is turned also raised my eyebrows. Houses that have been sold two or three times before anyone occupied them also cannot be ignored.
All these observations are consistent with a hot housing market that is seeking a higher price point because of increased demand. The fact that more people want more of their assets in housing than in bonds or stocks does not mean, by itself, that a housing bubble exists.
What has changed my thinking about the housing bubble is what is happening in the financing of housing.
Economist Hyman Minsky developed a theory of financial instability based on what he called the "excess gearing" of asset financing. What he meant is that when asset values increase, lenders become more willing to offer easy terms to finance those assets.
Remember 1988, when the standard amount of real estate loans increased from 80 percent of asset value to 100 percent and, in some cases, even more than 100 percent? Those who lived through the subsequent recession certainly remember the aftermath of that "excess gearing."
Initially, additional financing adds to the surge in asset values. Past bubbles --- the South Sea bubble, tulip mania, the utility holding company bubble that preceded the stock market crash of 1929 and many more --- benefited from rising loan-to-asset values as asset prices soared. When the asset prices finally stalled (as they must when they become so far out of line with alternative values of wealth), those loans turned sour. The subsequent collapse exceeded any gains created by the initial surge in asset prices.
Minsky's claim that financial markets are inherently unstable has not been endorsed by many other economists, but his theories certainly help explain the bubbles.
So, is there any evidence that "excess gearing" is happening in the financing of housing?
Can we say "interest-only loans" and explain the rising percentage of variable-rate mortgages?
The percentage of new mortgages that are now based on short-term interest rates has tripled in the past two years.
Yet short-term rates have been rising while long-term rates have remained relatively stable. In other words, the "smart" house financing would be to lock in a fixed mortgage rate.
Are home buyers not being smart? No. Lenders are being foolish.
Some lenders believe that rising housing prices will soon justify whatever loan they offer the home buyer. If the buyer defaults, the lender will foreclose and sell the appreciated asset.
In isolation, a foreclosed house in a market of appreciating housing values is not a bad loan. However, if a lot of foreclosures develop, houses sold by lenders will undermine values. A lot of home loans then will go bad very quickly.
So why are home buyers taking interest-only loans and variable-rate mortgages? Lenders are qualifying home buyers based on ability to service loans in the short run.
Variable rates remain lower than fixed rates, if only barely. Interest-only loans use even less of the monthly paycheck at the beginning of the loan than traditional loans.
Low initial monthly payments allow buyers to purchase those houses at inflated prices. But short-term rates probably will continue rising.
Soon, buyers will not be able to purchase the median home even with the variable-rate mortgage or the interest-only loan.
I do not know when lenders will begin reducing the number of households qualifying for the median-priced house, but it will be soon.
We know from experience that the subsequent price collapse will be felt financially and in the housing market.
--- Donald Ratajczak is a regents professor of economics emeritus at Georgia State University.
A Morningstar analyst looks at real estate valuation from an accounting perspective:
http://news.morningstar.com/doc/article/0,,135312,00.html
Particularly interesting is the Federal Reserve Board study it refers to on price to rent ratios, showing price/rent ratio in a parabolic increase since 1998, reaching record levels today.
http://www.frbsf.org/publications/economics/letter/2004/el2004-27.pdf
I'm gratified to see all the points I've made in this thread collected in one place.
Martin
http://news.morningstar.com/doc/article/0,,135312,00.html
Particularly interesting is the Federal Reserve Board study it refers to on price to rent ratios, showing price/rent ratio in a parabolic increase since 1998, reaching record levels today.
http://www.frbsf.org/publications/economics/letter/2004/el2004-27.pdf
I'm gratified to see all the points I've made in this thread collected in one place.
Martin
Looks like Bruce Toll is quietly selling off a "little" more of his stock while the exit door is big enough to fit through. Perhaps the kids need braces or the garage needs paint?
http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=3503803
http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=3503803
-Homeowners Reap $1 Trillion in Home Equity Since 2000, CBIA Study Finds; Huge Increase in Home Equity Helps Fuel California Economy -
http://home.businesswire.com/portal...ewsLang=en&beanID=1153550781&viewID=news_view
http://home.businesswire.com/portal...ewsLang=en&beanID=1153550781&viewID=news_view
I'm no real estate bull, but how possible is it that everyone keeps saying it's over and just about everybody believes it has to end sometime but it just won't end and the trend is intact.
Even Toll himself can't understand the continuation? Perhaps he doesn't want to blow it even though this directly indicates he's talking out both sides of his face every time he or anyone of his ilk is giving an opinion. (planned stocksale my arse)
Here is something interesting;
On wednesday there were two big real estate sales by real estate moguls who got decimated in 1991. Are they by nervous experience getting out at the top ?
Olympia and York sold their jewel in Toronto for $2 billion.
Trump sells his landmark apartments for $1.8 billion. The highest price for new york real estate.
On wednesday there were two big real estate sales by real estate moguls who got decimated in 1991. Are they by nervous experience getting out at the top ?
Olympia and York sold their jewel in Toronto for $2 billion.
Trump sells his landmark apartments for $1.8 billion. The highest price for new york real estate.
All this was true in 1990-1995, and 1995-2000, and 2000-2005. Since prices changed significantly during those periods, your comments do not in any way explain price changes.
If you are correct and rental rates have no correlation to purchase prices, then one would expect rental yields to have been extremely volatile. Why can't you rent $1 million penthouses for $100 per month? Why haven't there been periods when $200k houses rented for $10k a month? Clearly there is a relationship between prices and rents - look back at the historical relationship, compare it to bond yields, and you will find a pretty stable correlation. To claim that there is *no* link between rents and prices is to reveal a complete and utter ignorance of every single real estate market that has ever existed in human history. There has *never* been any real estate market where yields were all over the place.