by Calculated Risk on 8/17/2005 11:32:00 AM

The WSJ covers housing today:

How Will Home Boom End? Even If Prices Don't Collapse, Some Owners Will Feel Pain; Big Mortgages, Little Equity

Near nation's capital, a hot market cools

The Energy in Real Estate, By John Makin, Wall Street Journal Editorial Excerpts can be found at EconomistView. (Thanks to Dr. Thoma)

by Calculated Risk on 8/17/2005 12:00:00 AM

Dr. Leamer, economist and UCLA Anderson Forecast Director, said today:

"It's going to take several more months of information before we know whether this month was the turning point, but it sure smells like it,"

I agree. I'd like to see an increase in inventories, a drop in sales and the flattening of prices over several months before I call the top - but it sure "smells like it" right now.

Leamer said he suspects the affordability crunch is putting the brakes on San Diego's market, where the annual price appreciation has tumbled from the 30 percent range last year to 5 percent this year.

"Rising interest rates are making it just a little less affordable for certain home buyers, and when you pull out that fraction of buyers in a fragile market, that might be enough to turn the thing around," Leamer said

Columnist Bonnie Erge expressed my view succinctly in Waiting for the Bubble to Burst:

It's bubble-bursting time, if you ask me.

by Calculated Risk on 8/16/2005 10:25:00 PM

The online world receives another treat today as Dr. Altig of Macroblog discusses the labor market with MaxSpeak's Max Sawicky and Tom Walker. Check out the WSJ Econoblog: Debating Job-Market 'Slack'.

I'd like to make my own small mundane contribution. In January I cut Mr. Bush some slack with regards to job creation during his first term. Bush's first term, with a net loss of 759K private sector jobs (a gain of 119K total jobs), has to be considered disappointing. However there were some reasons for the poor net job creation, the most compelling being that the economy was clearly overheated when Bush took office.

Looking forward there are no clear reasons why the US economy shouldn't see more normal job growth during Bush's 2nd term. With the economy adding 1.7 million working age people per year (according to the Census Bureau), the US economy should expect a minimum of 6.8 million net jobs created during Bush's 2nd term.

On the upside, the participation rate could increase and the economy could add close to 10 million net jobs. This is a realistic upside; the economy added 10.8 million jobs in Reagan's 2nd term and over 10 million jobs during each of Clinton's terms in office. The economy is larger today, so as a percentage gain, 10 million jobs would be less than for the Reagan or Clinton presidencies.

So for Bush's 2nd term, anything less than 6.8 Million net jobs will have to be considered poor. And anything above 10 million net jobs as excellent. Of course, in additional to the number of jobs, the quality of the jobs and real wage increases are also important measures.

For the quantity of jobs, the following graph provides a measurement tool for job growth during Bush's 2nd term.


Click on graph for larger image.

The blue line is for 10 million jobs created during Bush's 2nd term; the purple line for 6.8 million jobs. The insert shows net job creation for the first 6 months of the 2nd term - currently just below the blue line.

I will update the graph each month.

by Calculated Risk on 8/16/2005 02:41:00 PM

For those that need more housing stories, I recommend the following sites:

UPDATE: Also REOWire Stories and commentary. "insight for the default servicing industry"

Patrick's Housing Crash Blog (story links)

Housebubble.com (story links)

Ben Jones' The Housing Bubble 2 (Commentary)

Prof. Pigginton's Econo-Almanac Based in San Diego.

And writing of San Diego, here are two articles on San Diego housing:

As housing slowdown takes hold in San Diego, experts differ on depth

Home inventory soars as buyers take their time

by Calculated Risk on 8/16/2005 12:20:00 AM

Amid stories of record home prices are signs of caution. Like these comments:

"Up until two weeks ago, the overwhelming number of professional articles and opinions rendered was that there is no housing bubble. Now more and more people are starting to refute the evidence that there isn't a bubble," DeSalvo [commercial broker with Premier Properties] said. "That is not to say that the market is going to crash but that it is going to slow down."

"The immediate danger in that is with rising interest rates, mortgage rates are going to pick up and it is going to create a different kind of real estate environment," he said. "Those that got the adjustable mortgages and the interest-only mortgages will be the first ones to tumble when that happens."

DeSalvo said another danger is that people getting high-risk loans now are going to try to sell as soon as the market starts to level off to get their money out.

"Everybody was doing it in the stock market, now everyone is doing it in real estate," DeSalvo said. "If they are lucky they will get away with their skin."

And from National Association of Realtors spokesman Walter Molony:

Perhaps the most interesting aspect of the current market is the high amount of residential speculation, he said. People are getting equity lines on their existing homes because of the appreciation and investing it in another house or property.

"The immediate danger in that is with rising interest rates, mortgage rates are going to pick up and it is going to create a different kind of real estate environment," he said. "Those that got the adjustable mortgages and the interest-only mortgages will be the first ones to tumble when that happens."

Real estate has traditionally been a long-term investment market and it should remain that way, Molony said. Instead, real estate has become the new stock market — the place for everyone to look to make a quick buck, even if that means taking out a high-risk loan, he said.

"That is very risky behavior. You cannot count on an abnormal market indefinitely," Molony said. "People are getting excited about buying homes in a hot market and there are loan officers out there who do not have a historical perspective and have never experienced a market with increasing rates and declining rates."

And from Economy.com's Analyst Gus Faucher:

"We're worried about a bubble in the housing market," said Economy.com's Faucher. But he does not envision the sort of splat that flattened stocks after the dotcom collapse.

"We expect that (increases in) house prices could slow or even turn negative on the coasts because those have seen the biggest run," he said.

And finally from Edward Edward Leamer of UCLA's Anderson Forecast:

He thinks that correction is coming and that it will be a doozy. "The situation gets worse and worse," he said, referring to "the elevation of prices beyond their fundamental values."

Leamer said eight of the last 10 housing corrections since World War II have precipitated recessions, the two exceptions being in the early 1950s and early 1960s, when spending on wars in Korea and Vietnam sustained growth.