Biggest economic bubble in world history ready to collapse
Igor Loving
lovingigor at hotmail.com
Mon Jun 20 18:57:57 EDT 2005
Huh?
Charlie Loving
<br><br><br>>From: "Clark Santos"
<clarksantos at earthlink.net><br>>Reply-To: survivors' reminiscences
about Austin Ghetto Daze in the 60s
<austin-ghetto-list at pairlist.net><br>>To: "Remembrances of
Austin Ghetto"
<GHETTO2 at LISTS.WHATHELPS.COM>,austin-ghetto-list at pairlist.net<br>>Subject:
Re: Biggest economic bubble in world history ready to collapse<br>>Date:
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2005 17:19:59.0765 (UTC) FILETIME=[49848450:01C575BC]<br>><br>>How
well I remember, spent $20,000 and a lot of time on improving a
49K<br>>tax valued rent house, only to have it lowered to 26K value. The
rent<br>>dropped from 425 to 390 and it took six months for Alice
(Rivers)<br>>Whitley's company to rent it. Good thing it was an
unpermited 20K<br>>improvement.<br>><br>>Don't get in a hurry or
string yourself out to thin, that house has rented<br>>for $750 to
$950/month since 1993 and will sell this month for 125K net<br>>before
the bubble breaks. If it doesn't, and the bubble breaks, I'll rent<br>>it
till 12/21/2012 of Maya calendar fame.<br>><br>>Clark<br>>El
Patron<br>><br>><br>> > Texans should remember the fall of
'86-'88. In Austin you couldn't buy a<br>> > house for a few years
because no one could determine the value and the<br>> > banks which
were left solvent would not issue mortgage loans. Lots of<br>> >
people caught it in the teeth. The largest banks in the state went
belly<br>> > up. Remember downtown Austin where building projects were
halted when the<br>> > money ran out? The state bought some of those
buildings for a song and<br>> > converted them into office
space.<br>> ><br>> > I had been consulting with friends on the
inside of the bubble and they<br>> > told me to sell. I did, in '84.
The house I sold was vacant for 2 or 3<br>> > years after the crash. I
used to come to Austin to hang out and drive to<br>> > my old place
and camp overnight in the driveway. Neighbors dogs all knew<br>> > me,
etc.<br>> ><br>> > But Austin recovered and returned to normal
(inflated values) within a few<br>> > years. Those big banks are still
owned by North Carolina interests which<br>> > bought them very
reasonably at the bottom of the bust.<br>> ><br>> > If you own a
house in Austin, hang on! Or sell it soon. This next crash<br>> > will
be nationwide.<br>> > G<br>> ><br>> >> Gee
motherfuckin' willakers! So sell your house now and use a little<br>>
>> of the proceeds to pay rent? Could be. Also, the current high
dollar<br>> >> homes homes tend to be the worst energy guzzlers;
overall energy<br>> >> efficiency will be the new mantra. Which
means small, central city,<br>> >> transit friendly, near job, in a
moderate climate, etc. We're<br>> >> entering Kunstler's "long
emergency". Waves of California homeless? -- R<br>> >><br>>
>> ******************************<br>>
>><br>> >>
http://www.economist.com/finance/displayStory.cfm?story_id=4079027<br>>
>><br>> >> The global housing boom<br>> >><br>>
>> In come the waves<br>> >> Jun 16th 2005<br>> >>
>From The Economist print edition<br>> >><br>> >><br>>
>> <br>> >><br>> >><br>> >> The
worldwide rise in house prices is the biggest bubble in history.<br>>
>> Prepare for the economic pain when it pops<br>> >> NEVER
before have real house prices risen so fast, for so long, in so<br>>
>> many countries. Property markets have been frothing from
America,<br>> >> Britain and Australia to France, Spain and China.
Rising property<br>> >> prices helped to prop up the world economy
after the stockmarket<br>> >> bubble burst in 2000. What if the
housing boom now turns to bust?<br>> >><br>> >> According
to estimates by The Economist, the total value of<br>> >>
residential property in developed economies rose by more than $30<br>>
>> trillion over the past five years, to over $70 trillion, an
increase<br>> >> equivalent to 100% of those countries' combined
GDPs. Not only does<br>> >> this dwarf any previous house-price
boom, it is larger than the<br>> >> global stockmarket bubble in
the late 1990s (an increase over five<br>> >> years of 80% of GDP)
or America's stockmarket bubble in the late<br>> >> 1920s (55% of
GDP). In other words, it looks like the biggest bubble<br>> >> in
history.<br>> >><br>> >><br>> >><br>> >>
<br>> >><br>> >> The global boom in house prices has
been driven by two common<br>> >> factors: historically low
interest rates have encouraged home buyers<br>> >> to borrow more
money; and households have lost faith in equities<br>> >> after
stockmarkets plunged, making property look attractive. Will<br>> >>
prices now fall, or simply flatten off? And in either case, what
will<br>> >> be the consequences for economies around the globe?
The likely<br>> >> answers to all these questions are not
comforting.<br>> >><br>> >> The increasing importance of
house prices in the world economy<br>> >> prompted The Economist to
start publishing a set of global house-<br>> >> price indices in
2002 (see article). These now cover 20 countries,<br>> >> using
data from lending institutions, estate agents and national<br>> >>
statistics. Our latest quarterly update shows that home prices<br>>
>> continue to rise by 10% or more in half of the countries (see
table).<br>> >> America has seen one of the biggest increases in
house-price<br>> >> inflation over the past year, with the average
price of homes jumping<br>> >> by 12.5% in the year to the first
quarter. In California, Florida,<br>> >> Nevada. Hawaii, Maryland
and Washington, DC, they soared by more than<br>> >> 20%.<br>>
>><br>> >> In Europe, prices have long been at dizzy heights
in Ireland and<br>> >> Spain, but over the past year have also
spurted at rates of 9% or<br>> >> more in France, Italy, Belgium,
Denmark and Sweden. Both France (15%)<br>> >> and Spain (15.5%)
have faster house-price inflation than the United<br>> >>
States.<br>> >><br>> >> By contrast, some housing booms
have now fizzled out. In Australia,<br>> >> according to official
figures, the 12-month rate of increase in house<br>> >> prices
slowed sharply to only 0.4% in the first quarter of this year,<br>>
>> down from almost 20% in late 2003. Wishful thinkers call this a
soft<br>> >> landing, but another index, calculated by the
Commonwealth Bank of<br>> >> Australia, which is based on prices
when contracts are agreed rather<br>> >> than at settlement, shows
that average house prices have actually<br>> >> fallen by 7% since
2003; prices in once-hot Sydney have plunged by 16%.<br>>
>><br>> >><br>> >> <br>> >><br>>
>> <br>> >> The danger of a global house-price
collapse<br>> >> Jun 16th 2005<br>> >> Economic slowdown
<br>> >> Jun 9th 2005<br>> >> The frothy housing
market<br>> >> May 26th 2005<br>> >> Global house price
<br>> >> Mar 3rd 2005<br>> >> The Economist's global
house-price index <br>> >> Mar 28th 2002<br>>
>><br>> >><br>> >> <br>> >> America's
economy<br>> >><br>> >> Asian economies<br>>
>><br>> >> Britain's economy<br>> >><br>>
>> Property<br>> >><br>> >><br>> >>
<br>> >> Click to buy from Amazon.com: â??Irrational
Exuberanceâ?? (second<br>> >> edition), by Robert Shiller
(Amazon.co.uk).<br>> >><br>> >> Housepricecrash.co.uk
collates information and statistics on house<br>> >> prices in
Britain. Nationwide and the Royal Institution of Chartered<br>> >>
Surveyors give differing appraisals of Britainâ??s housing market. A<br>>
>> study from America's National Association of Realtors,
summarised<br>> >> here, found that one-quarter of houses bought in
2004 were for<br>> >> investment, not owner-occupation. See also
the Federal Reserve.<br>> >><br>> >><br>> >>
<br>> >><br>> >> <br>> >><br>>
>><br>> >> <br>> >> Britain's housing market has
also cooled rapidly. The Nationwide<br>> >> index, which we use,
rose by 5.5% in the year to May, down from 20%<br>> >> growth in
July 2004. But once again, other surveys offer a gloomier<br>> >>
picture. The Royal Institution of Chartered Surveyors (RICS) reports<br>>
>> that prices have fallen for ten consecutive months, with a
net<br>> >> balance of 49% of surveyors reporting falling prices in
May, the<br>> >> weakest number since 1992 during Britain's
previous house-price bust.<br>> >> The volume of sales has slumped
by one-third compared with a year ago<br>> >> as both sellers and
buyers have lost confidence in house valuations.<br>> >>
House-price inflation has also slowed significantly in Ireland, the<br>>
>> Netherlands and New Zealand over the past year.<br>>
>><br>> >> Since 1997, home prices in most countries have
risen by much more in<br>> >> real terms (ie, after adjusting for
inflation) than during any<br>> >> previous boom. (The glaring
exceptions are Germany and Japan, where<br>> >> prices have been
falling.) American prices have risen by less than<br>> >> those in
Britain, yet this is still by far the biggest boom in<br>> >>
American history, with real gains more than three times bigger than<br>>
>> in previous housing booms in the 1970s or the 1980s.<br>>
>><br>> >> The most compelling evidence that home prices are
over-valued in many<br>> >> countries is the diverging relationship
between house prices and<br>> >> rents. The ratio of prices to
rents is a sort of price/earnings ratio<br>> >> for the housing
market. Just as the price of a share should equal the<br>> >>
discounted present value of future dividends, so the price of a
house<br>> >> should reflect the future benefits of ownership,
either as rental<br>> >> income for an investor or the rent saved
by an owner-occupier.<br>> >><br>> >> Calculations by The
Economist show that house prices have hit record<br>> >> levels in
relation to rents in America, Britain, Australia, New<br>> >>
Zealand, France, Spain, the Netherlands, Ireland and Belgium. This<br>>
>> suggests that homes are even more over-valued than at previous
peaks,<br>> >> from which prices typically fell in real terms.
House prices are also<br>> >> at record levels in relation to
incomes in these nine countries.<br>> >><br>> >><br>>
>><br>> >> <br>> >><br>> >> America's
ratio of prices to rents is 35% above its average level<br>> >>
during 1975-2000 (see chart 1). By the same gauge, property is<br>>
>> â??overvaluedâ?? by 50% or more in Britain, Australia and
Spain.<br>> >> Rental yields have fallen to well below current
mortgage rates,<br>> >> making it impossible for many landlords to
make money.<br>> >><br>> >> To bring the ratio of prices
to rents back to some sort of fair<br>> >> value, either rents must
rise sharply or prices must fall. After many<br>> >> previous
house-price booms most of the adjustment came through<br>> >>
inflation pushing up rents and incomes, while home prices stayed<br>>
>> broadly flat. But today, with inflation much lower, a similar
process<br>> >> would take years. For example, if rents rise by an
annual 2.5%, house<br>> >> prices would need to remain flat for 12
years to bring America's<br>> >> ratio of house prices to rents
back to its long-term norm. Elsewhere<br>> >> it would take even
longer. It seems more likely, then, that prices<br>> >> will
fall.<br>> >><br>> >> A common objection to this analysis
is that low interest rates make<br>> >> buying a home cheaper and
so justify higher prices in relation to<br>> >> rents. But this
argument is incorrectly based on nominal, not real,<br>> >>
interest rates and so ignores the impact of inflation in eroding the<br>>
>> real burden of mortgage debt. If real interest rates are
permanently<br>> >> lower, this could indeed justify higher prices
in relation to rents<br>> >> or income. For example, real rates in
Ireland and Spain were reduced<br>> >> significantly by these
countries' membership of Europe's single<br>> >> currencyâ??though
not by enough to explain all of the surge in house<br>> >> prices.
But in America and Britain, real after-tax interest rates are<br>>
>> not especially low by historical standards.<br>>
>><br>> >><br>> >> Betting the house<br>>
>> America's housing market heated up later than those in
other<br>> >> countries, such as Britain and Australia, but it is
now looking more<br>> >> and more similar. Even the Federal Reserve
is at last starting to<br>> >> fret about what is happening. Prices
are being driven by speculative<br>> >> demand. A study by the
National Association of Realtors (NAR) found<br>> >> that 23% of
all American houses bought in 2004 were for investment,<br>> >> not
owner-occupation. Another 13% were bought as second homes.<br>> >>
Investors are prepared to buy houses they will rent out at a loss,<br>>
>> just because they think prices will keep risingâ??the very
definition<br>> >> of a financial bubble. â??Flippersâ?? buy and
sell new properties even<br>> >> before they are built in the hope
of a large gain. In Miami, as many<br>> >> as half of the original
buyers resell new apartments in this way.<br>> >> Many properties
change hands two or three times before somebody<br>> >> finally
moves in.<br>> >><br>> >> New, riskier forms of mortgage
finance also allow buyers to borrow<br>> >> more. According to the
NAR, 42% of all first-time buyers and 25% of<br>> >> all buyers
made no down-payment on their home purchase last year.<br>> >>
Indeed, homebuyers can get 105% loans to cover buying costs. And,<br>>
>> increasingly, little or no documentation of a borrower's
assets,<br>> >> employment and income is required for a
loan.<br>> >><br>> >> Interest-only mortgages are all the
rage, along with so-called<br>> >> â??negative amortisation
loansâ?? (the buyer pays less than the<br>> >> interest due and the
unpaid principal and interest is added on to the<br>> >> loan).
After an initial period, payments surge as principal repayment<br>>
>> kicks in. In California, over 60% of all new mortgages this year
are<br>> >> interest-only or negative-amortisation, up from 8% in
2002. The<br>> >> national figure is one-third. The new loans are
essentially a gamble<br>> >> that prices will continue to rise
rapidly, allowing the borrower to<br>> >> sell the home at a profit
or refinance before any principal has to be<br>> >> repaid. Such
loans are usually adjustable-rate mortgages (ARMs),<br>> >> which
leave the borrower additionally exposed to higher interest<br>> >>
rates. This year, ARMs have risen to 50% of all mortgages in those<br>>
>> states with the biggest price rises.<br>> >><br>>
>> The rapid house-price inflation of recent years is clearly<br>>
>> unsustainable, yet most economists in most countries (even in
Britain<br>> >> and Australia, where prices are already falling)
still cling to the<br>> >> hope that house prices will flatten
rather than collapse. It is true<br>> >> that, unlike share prices,
house prices tend to be somewhat<br>> >> â??stickyâ?? downwards.
People have to live somewhere and owners are<br>> >> loth to accept
a capital loss. As long as they can afford their<br>> >> mortgage
payments, they will stay put until conditions improve. The<br>> >>
snag is that eventually some owners have to sellâ??because of<br>>
>> relocation, or job lossâ??and they will be forced to accept
lower<br>> >> prices.<br>> >><br>> >> Indeed, a
drop in nominal prices is today more likely than after<br>> >>
previous booms for three reasons: homes are more overvalued;<br>>
>> inflation is much lower; and many more people have been buying
houses<br>> >> as an investment. If house prices stop rising or
start to fall, owner-<br>> >> occupiers will largely stay put, but
over-exposed investors are more<br>> >> likely to sell, especially
if rents do not cover their interest<br>> >> payments. House prices
will not collapse overnight like stockmarketsâ??<br>> >> a slow
puncture is more likely. But over the next five years, several<br>>
>> countries are likely to experience price falls of 20% or
more.<br>> >><br>> >><br>> >><br>> >>
<br>> >><br>> >> While America's housing market is
still red hot, othersâ??in Britain,<br>> >> Australia and the
Netherlandsâ??have already cooled (see chart 2).<br>> >> What
lessons might they offer the United States?<br>> >><br>>
>> The first is that, contrary to conventional wisdom, it does
not<br>> >> require a trigger, such as a big rise in interest rates
or<br>> >> unemployment, for house prices to decline. British home
prices<br>> >> started to fall in the summer of 2004 after the Bank
of England<br>> >> raised rates by a modest one and a quarter
percentage points. Since<br>> >> 2002, the Reserve Bank of
Australia has raised rates by exactly the<br>> >> same amount and
unemployment is at a 30-year low, yet home prices<br>> >> have
fallen. The Federal Reserve's gradual increase in rates by two<br>>
>> percentage-points over the past year has done little to scare
away<br>> >> buyers, because most still have fixed-rate mortgages
and long-term<br>> >> bond yields have remained unusually low. But
as more Americans have<br>> >> been resorting to ARMs, so the
housing market is becoming more<br>> >> vulnerable to rising
rates.<br>> >><br>> >><br>> >> Rung at the
bottom<br>> >> British and Australian prices have stalled mainly
because first-time<br>> >> buyers have been priced out of the
market and demand from buy-to-let<br>> >> investors has slumped.
British first-timers now account for only 29%<br>> >> of buyers,
down from 50% in 1999. And, according to the National<br>> >>
Association of Estate Agents, buy-to-let purchases are running 50%<br>>
>> lower than a year ago. As prices become more and more heady
in<br>> >> America, the same will happen there.<br>>
>><br>> >> British experience also undermines a popular
argument in America that<br>> >> house prices must keeping rising
because there is a limited supply of<br>> >> land and a growing
number of households. As recently as a year ago,<br>> >> it was
similarly argued that the supply of houses in Britain could<br>> >>
not keep up with demand. But as the expectation of rising prices has<br>>
>> faded, demand has slumped. According to RICS, the stock of houses
for<br>> >> sale has increased by one-third over the past year.
America has<br>> >> faster population growth than Britain, but its
supply of housing has<br>> >> also been rising rapidly. Economists
at Goldman Sachs point out that<br>> >> residential investment is
at a 40-year high in America, yet the<br>> >> number of households
is growing at its slowest pace for 40 years.<br>> >> This will
create excess supply.<br>> >><br>> >> Another mantra of
housing bulls in America is that national average<br>> >> house
prices have never fallen for a full year since modern<br>> >>
statistics began. Yet outside America, many countries have at some<br>>
>> time experienced a drop in average house prices, such as Britain
and<br>> >> Sweden in the early 1990s and Japan over the past
decade. So why<br>> >> should America be immune? Alan Greenspan,
chairman of America's<br>> >> Federal Reserve, accepts that there
are some local bubbles, but<br>> >> dismisses the idea of a
national housing bubble that could harm the<br>> >> whole economy
if it bursts. America has in the past seen sharp<br>> >> regional
price declines, for example in Boston, Manhattan and San<br>> >>
Francisco in the early 1990s. This time, with prices looking<br>>
>> overvalued in more states than ever in the past, average
American<br>> >> prices may well fall for the first time since the
Great Depression.<br>> >><br>> >> But even if prices in
America do dip, insist the optimists, they will<br>> >> quickly
resume their rising trend, because real house prices always<br>> >>
rise strongly in the long term. Robert Shiller, a Yale economist,
who<br>> >> has just updated his book â??Irrational Exuberanceâ??
(first published<br>> >> on the eve of the stockmarket collapse in
2000), disagrees. He<br>> >> estimates that house prices in America
rose by an annual average of<br>> >> only 0.4% in real terms
between 1890 and 2004. And if the current<br>> >> boom is stripped
out of the figures, along with the period after the<br>> >> second
world war when the government offered subsidies for returning<br>>
>> soldiers, artificially inflating prices, real house prices have
been<br>> >> flat or falling most of the time. Another sobering
warning is that<br>> >> after British house prices fell in the
early 1990s, it took at least<br>> >> a decade before they returned
to their previous peak, after adjusting<br>> >> for
inflation.<br>> >><br>> >> Another worrying lesson from
abroad for America is that even a mere<br>> >> levelling-off of
house prices can trigger a sharp slowdown in<br>> >> consumer
spending. Take the Netherlands. In the late 1990s, the<br>> >>
booming Dutch economy was heralded as a model of success. At the<br>>
>> time, both house prices and household credit were rising at
double-<br>> >> digit rates. The rate of Dutch house-price
inflation then slowed from<br>> >> 20% in 2000 to nearly zero by
2003. This appeared to be the perfect<br>> >> soft landing: prices
did not drop. Yet consumer spending declined in<br>> >> 2003,
pushing the economy into recession, from which it has still not<br>>
>> recovered. When house prices had been rising, borrowing
against<br>> >> capital gains on homes to finance other spending
had surged. Although<br>> >> house prices did not fall, this
housing-equity withdrawal plunged<br>> >> after 2001, removing a
powerful stimulus to spending.<br>> >><br>> >>
Housing-equity withdrawal has also fallen sharply over the past year<br>>
>> in Britain and Australia, denting household spending. In
Australia,<br>> >> the 12-month rate of growth in retail sales has
slowed from 8% to<br>> >> only 1.8% over the past year; GDP growth
has halved to 1.9%. In<br>> >> Britain, too, a cooling of the
housing market has been accompanied by<br>> >> an abrupt slowdown
in consumer spending. If, as seems likely, home<br>> >> prices
continue to fall in both countries, spending will be further<br>>
>> squeezed.<br>> >><br>> >> Even a modest weakening
of house prices in America would hurt<br>> >> consumer spending,
because homeowners have been cashing out their<br>> >> capital
gains at a record pace. Goldman Sachs estimates that total<br>> >>
housing-equity withdrawal rose to 7.4% of personal disposable income<br>>
>> in 2004. If prices stop rising, this â??incomeâ?? from capital
gains<br>> >> will vanish.<br>> >><br>>
>><br>> >> And after the gold rush?<br>> >> The
housing market has played such a big role in propping up<br>> >>
America's economy that a sharp slowdown in house prices is likely to<br>>
>> have severe consequences. Over the past four years, consumer
spending<br>> >> and residential construction have together
accounted for 90% of the<br>> >> total growth in GDP. And over
two-fifths of all private-sector jobs<br>> >> created since 2001
have been in housing-related sectors, such as<br>> >> construction,
real estate and mortgage broking.<br>> >><br>> >><br>>
>><br>> >> <br>> >><br>> >> One of the
best international studies of how house-price busts can<br>> >>
hurt economies has been done by the International Monetary Fund.<br>>
>> Analysing house prices in 14 countries during 1970-2001, it<br>>
>> identified 20 examples of â??bustsâ??, when real prices fell by
almost<br>> >> 30% on average (the fall in nominal prices was
smaller). All but one<br>> >> of those housing busts led to a
recession, with GDP after three years<br>> >> falling to an average
of 8% below its previous growth trend. America<br>> >> was the only
country to avoid a boom and bust during that period.<br>> >> This
time it looks likely to join the club.<br>> >><br>> >>
Japan provides a nasty warning of what can happen when boom turns to<br>>
>> bust. Japanese property prices have dropped for 14 years in a row,
by<br>> >> 40% from their peak in 1991. Yet the rise in prices in
Japan during<br>> >> the decade before 1991 was less than the
increase over the past ten<br>> >> years in most of the countries
that have experienced housing booms<br>> >> (see chart 3). And it
is surely no coincidence that Japan and<br>> >> Germany, the two
countries where house prices have fallen for most of<br>> >> the
past decade, have had the weakest growth in consumer spending of<br>>
>> all developed economies over that period. Americans who believe
that<br>> >> house prices can only go up and pose no risk to their
economy would<br>> >> be well advised to look overseas.<br>>
>><br>> >><br>> >><br>> >><br>>
><br>><br>><br>><br>><br>
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