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Boom Bubble Bust

What Else is New? Existing-Home Sales Hit Records, But…

August 17, 2005 | 8:40 am | |

The recurring theme across the US is an increase in the number of sales and sales prices. NAR’s existing home sale report saw a record pace in the number of sales. West Virginia drew top honors with the largest gain in sales activity over the past year.

In addition to volume, housing prices have been rising nationwide. Condos seem to be leading the way in Massachusetts [Note: Subscription].

Around the country housing prices and exist-home sales are setting records or near record levels but the rate of appreciation seems to be easing across the country.

Regional articles: Wisconsin
Minneapolis
California
Southern California
Wisconsin
Upstate New York


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Bond Market Likes Core Inflation Stats

August 17, 2005 | 7:49 am |

The US Labor Department released their CPI report which indicated that U.S. CPI was up 0.5% in July, largely on energy costs. CPI (Inflation) is up 3.2% over the past year, as compared to 2.5% over the prior year. Still historically low but a cause for concern. Housing accounts for 40% of overall CPI.

CPI7-05

It is interesting to note that the previous [table from the BLS.gov site] the year over year change in CPI was actually much higher in February through March.

bankrate8-05

Core inflation, which excludes food and energy costs however, was virtually flat at 0.1%. With core inflation rates so low, the bond market now seems to view rising energy costs as predictive of softer future spending, and less of a red flag for inflation.

This may influence long-term mortgage rates to stay at low levels since bond investors still don’t appear to be overly concerned about inflation at this point. Mortgage rates have actually trended down since the end of the first week of August.

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From Rubble to Rubles

August 16, 2005 | 10:07 pm | |

There is a housing boom in Russia where prices in an exclusive area of Moscow known as Ostozhenka, housing exceeds $10,000 per square meter. That translates to just under $1,000 per square foot. After New York, Moscow has the highest concentration of billionaires.

Mortgage financing is a relatively new concept in Russia and is helping fuel the boom. Lack of supply, is also fueling the boom, but as little as 6 months ago, the government was saying there was no housing boom.

Like Russia, China and Korea are seeing lack of supply and ready credit is very similar to the US situation. The housing boom pattern seems to be similar around the globe, however, the disparity between the entry and luxury segments as well as investor speculation in China, Korea and Russia are at a higher level than seen in the US.


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Will Oil Grease The Inflation Wheel?

August 16, 2005 | 9:31 pm |

The Mortgage Bankers Association’s chief economist, Douglas Duncan said that the trigger for price declines is always the loss of jobs and doesn’t see a slowdown in employment, “not until 2006.” He predicts that 2005 will set records “and only an unexpected roadblock of monumental size will slow its pace”

Well, we may have a potential roadblock, sort of. Oil Prices have often been a trigger for inflation and higher long term rates such as mortgages.

Then why isn’t it happening now?

Well, here’s a thought…after adjusting for inflation, we are still well below inflation-adjusted oil prices that peaked at $94 per share in 1980. Core inflation is still within the Fed’s confort zone but energy prices are rising.


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Residential Mortgage Standards Hold; Non-Traditional Mortgage Use Increases

August 16, 2005 | 2:03 pm | |

There has been a lot written about how lending standards have eased which has help promote the rise in housing prices with non-traditional loans. The Federal Reserve released a report that said US banks eased terms for commercial and industrial loans while residential loans remain unchanged. [Note: Subscription] 20% of domestic banks saw increased demand for mortgages.

The good news is that restrained lending requirements, especial on investor properties, will help keep price growth in check. However, The Fed report seems to contradict the recently released report by the Mortgage Bankers Association [Note: Subscription] which said that lending standards continued to slide.

The Fed Report also said that use of non-traditional mortgages continues to rise.
[Matrix] piggyback loans

Nontraditional mortgage products include adjustable rate mortgages with multiple payment options and interest-only mortgages.

Interestingly, the lenders reported that less than 15% of the mortgages were non-traditional, which is less than the impression given in the media right now. Still, its of concern because highly leverage buyers are less able to weather a market downturn if one were to occur.


Its Still the Wild West; Kansas on the Cheap

August 15, 2005 | 3:36 pm |

NAR: Housing Affordability Index Down in Second Quarter, Still Favorable

Affordability was largely favorable in the second quarter but higher home prices and mortgage rates more than offset the increase in family income. The West Region shows both higher prices and more highly leveraged transactions. Kansas had the highest affordability for home ownership.

NOTE: This table shows the approximate home price a family earning the specified income could afford making a 20 percent downpayment, with no more that 25 percent of gross income for principal and interest payments. Variables include the type of loan and interest rate.

While the national median sales price of a US home was reported to be $218,900 in June 2005, there was great disparity in the 4 regions covered: Northeast, Midwest, South and West.

  • Northeast $247,500 (21.8%)
  • Midwest $174,500 (16.2%
  • South $190,900 (20.6%)
  • West $322,200 (30.9%)

The West saw an 85% higher median sales price in June than the Midwest did. Not only does the West region have the highest housing prices, but has the highest payment level as a percentage of income, roughly 50% more than the other regions.

A urban development think tank ranked housing affordability by state using median sales price and median household income for 1970 and 2000. They contend that denser urban areas that control growth generally have higher prices.

Kansas was the most affordable place to own a home in the US. Hawaii was the least affordable, nearly 2.7 times that of Kansas.


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Piggyback Loans Pose Higher Risks to Certain Markets

August 14, 2005 | 4:41 pm |

A study by PMI Mortgage Insurance Co. found that piggyback loans may pose risk to the mortgage system; especially vunerable are high priced housing markets. The borrower can use a second mortgage to “finance” a portion of the down payment. This creative financing technique has allowed more purchasers to be more highly leveraged. The study suggests that higher priced housing markets, where the gap between affordability and price is wider, are seeing more of this type of financing and are therefore subject to greater risk in a housing downturn.

USA Today put together the results of the PMI study in the following table.

housingrisktable8-2005

The PMI Risk Index predicts the risk of home-price declines over the next two years using local economic forecasts.

Piggyback loans — so called because a second mortgage is piggybacked on to a first to compensate for a smaller down payment — have become common in recent years as housing prices have appreciated. Approximately 42 percent of home purchase mortgage loan dollars involved piggyback loans during the first half of 2004, up from 20 percent in 2001.

Here is the PMI Report [Note: PDF]

Local media coverage based on risk:


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Supersized Housing With More Amenties

August 14, 2005 | 4:39 pm | |

According to the US Census, the average size of a house in the US is 2,349 square feet, up almost 300 square feet from 1990. We are seeing larger homes coming into neighborhoods called Faux Chateaus [Note: Subscription] or McMansions [Note: Paid Subscription].

Its not just the size thats increasing in new construction, more amenities are being added.

This trend tends to overshadow pricing in the housing market. Larger housing skews the overall market statistics, both median sales price and average sales price, so the rise in prices would be overstated.


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A Bear in a China Shop?

August 13, 2005 | 12:38 am |

Apparently, the Chinese government (The National Development and Reform Commission)was concerned about housing prices back in 2004 which rose 7.7% nationwide last year. In addition, values increased 25% over the period 1998 to 2003 with a 16% market share of investment properties.

The article also said that “The commission Tuesday also said the government’s housing supply is not as balanced because common commercial apartments are not available in large enough numbers, while there is an oversupply of luxury apartments and high-end villas.”

Is it just me, or does this sound familiar? But wait a minute…this is China…”oversupply of luxury apartments and high-end villas?”

Fast forward to the current real estate market in China…

Housing prices in 20 cities fall in July but the average nationwide increase in 70 cities increased 6.4% annually. China, like us has localized markets with different housing trends. 20 out of 70 cities saw falling prices, yet the overall average saw an increase.

Shanghai has observed soaring housing prices in recent years. Its commercial housing prices topped 5,118 yuan (US$617) per square metre last year, about 24.2 per cent or 1,000 yuan, up from the previous year.

Does that sound familiar?

Note: By my conversion calculations, Shanghai averages $6,641 per square foot! Please help me out on this…did I do the conversion correctly? Thats 30% higher than the highest sales in Manhattan on a per square foot (Rupert Murdoch’s $44M penthouse purchase was just north of $5,000 per square foot).


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Yield Curve Enters Kitchen Table Talk

August 12, 2005 | 11:57 pm |

According to Investopedia.com a yield curve is a “graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the two- or five-year Treasury with the 30-year Treasury.”



Yield curves have loudly entered the economic discussions. If you grab the red line [Note: Java] in the yield chart, you can see how short term and long term rates have changed in relationship to one another over time.

The traditional economic model for banks is being turned on its head. Banks typically borrow at lower short term rates and lend at higher long term rates, capturing the spread. Since the yield curve is flattening, there is little difference between both rates creating bottom line pressures for lenders.

However, in a recent article in American Banker [Note: Paid Subscription] suggests that the yield curve, when inverted, could actually spell lower mortgage rates next year.

John Herrmann, chief economist at Cantor Viewpoint, a unit of Cantor Fitzgerald …Mr. Herrmann’s outlook is somewhat contrarian. Most economists expect rates to rise as the economy strengthens. But Mr. Herrmann told MSN that mortgage rates could be headed lower – perhaps to 5.25% by the end of the year and eventually “grinding down to 5%” next year.

A deceleration of economic growth, competitive pressure in the mortgage industry, and a trend toward tying 30-year mortgage rates and hybrid loan rates closer to the five-year Treasury rate than the 10-year are all contributing factors, he said.

His reasoning? Without housing, economic growth is way below potential.

More on yield curves to come…


Phew! No Housing Bubble In Canada.

August 12, 2005 | 11:56 pm |

Canadian housing prices are on the rise, but the underlying conditions do not suggest the threat of a bubble similar to that of the late 1980s, according to the Bank of Montreal.

I would hope Bank of Montreal (BOM) learned their lesson from the late 1980’s when they were active construction lenders in the New York market with what appeared to be loose underwriting standards.

BOM says the same things that economists are generally saying in the US: a modest rise in mortgage rates will temper demand but there are concerns about affordability.

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Making Sense of High Housing Prices

August 10, 2005 | 11:11 pm |

Here is an article written by an independent thinktank on public policy initiatives called oddly enough, The Independent Institute

“Making Sense of High Housing Prices” discusses the fact that once governments started adopting land use and urban growth controls, prices began to climb.

Economists Edward Glaser of Harvard and Joseph Gyourko of the University of Pennsylvania studied the effect government restrictions have on housing prices in a number of markets around the country. They found that 90 percent of the difference between physical construction cost and the price of new homes could be attributed to government restrictions on building. Only 10 percent of the difference was due to intrinsically scarce land.

In fact, Glaser & Co. did a study on Manhattan housing that asked the question “Why is Manhattan so expensive? (it also refers to a Miller Samuel / NYU research paper).

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