by Calculated Risk on 5/29/2005 02:20:00 AM

This weekend has seen a plethora of articles on housing. I posted some links earlier, and you can always check Patrick's site for housing related links.

UPDATE2: A Bane Amid The Housing Boom: Rising Foreclosures

"Philadelphia, its suburbs and indeed much of Pennsylvania have experienced a foreclosure epidemic as low-income homeowners take on mortgage debt they cannot afford. In 2000, the Philadelphia sheriff auctioned 300 to 400 foreclosed properties a month; now he handles more than 1,000 a month. Allegheny County, which includes Pittsburgh, had record auctions of foreclosed homes, and officials speak of a "Depression-era" problem."

UPDATE: See General Glut's comments on another NY Times housing article.

Here are four more:

University of Michigan: Back to the future

Home sales have again reached new peaks as consumers have seamlessly shifted from the irresistible enticement of record low mortgage rates to the equally irresistible temptation of purchasing in advance of rising mortgage rates and home prices. More consumers favored buying homes in advance of anticipated increases in mortgage rates and prices in the May survey than at any other time in the last decade. "Attitudes toward home buying conditions have recently displayed nearly all of the characteristics of earlier bouts of advance buying, a reaction that has typically generated an economic bust following an extended boom," Curtin said. The last time the survey recorded a comparable number of references to advance buying was in 1988-89, more than two years before home prices began to decline in some areas of the country.

LA Times: It's Not a Bubble Until It Bursts

The chief economist for the Mortgage Bankers Assn. is worried enough about the torrid housing market to get out of it.

"I'm going to rent for a while," said Douglas Duncan, who expects "significant reversals" in regions that have enjoyed strong home price appreciation, including Washington, D.C., Florida and California. He plans to sell his suburban Washington home, which has tripled in value since he bought it a dozen years ago, and move into an apartment.

And more:

A widely followed University of Michigan consumer survey, released Friday, showed that 24% of respondents nationwide said it was a good time to buy a home because prices would rise. That was the highest percentage since 1988 — right before prices peaked in the previous real estate cycle.

"These are powerful engines creating a boom in home sales, and all booms end the same way," Richard Curtin, director of the survey, said in a statement.

WaPo: The Interest-Only Trap

There's another group of home buyers opting for interest-only loans -- people looking for the lowest mortgage payment possible who probably wouldn't qualify for the house they want with a loan payment that included the interest and principal.

It's that last group of people that worries me the most -- home buyers who are just barely squeezing into a house with an interest-only loan.

"I am not sure that any loan which enables someone to dig their financial grave is good, and I wish that underwriters would realize that," Armstrong said.

Boston Herald: Bank on a bust, not longer boom

The problem: The dynamic of "advance buying" - that rush to buy homes before spiking prices and interest rates make it too late.

It's a tell-tale sign of a coming collapse, Curtin (director of the University of Michigan's Survey of Consumers) says.

"Attitudes toward home-buying conditions have recently displayed nearly all the characteristics of earlier bouts of advance buying,'' Curtin said in a press release Friday, calling it a reaction that has ``typically generated an economic bust."

by Calculated Risk on 5/28/2005 11:35:00 PM

Earlier, on Angry Bear, I tried to quantify the impacts of a housing slowdown on the general economy (See: After the Housing Boom: Impact on the Economy). This NYTimes article asks the same question:

"[W]ould a real estate crash really matter to the country as a whole?

In a word, yes. To understand why, first look at how pervasive the effects of real estate are throughout the economy."

Then the article does an excellent job of discussing some of the impacts of declining prices: declining wealth effect, end of equity withdrawal, and much more ...

"But that's not all. The housing sector has even broader effects on the economy, by some estimates accounting for 25 percent of all activity. A decline in property values would most likely lead to declines in other industries, like construction, brokerage, banking and insurance. And these are important for future growth. Construction, for example, amounts to 4 percent to 5 percent of the economy, according to the Bureau of Economic Analysis.

Then there's banking. Because of the leverage associated with real estate, a fall in values would affect banks and other lenders. It would probably lead to tightened credit standards, less lending and higher interest rates. If lenders begin to suffer steep losses, there is always the danger of financial contagion, in which problems at one institution ripple out to others it does business with.

And there's a new wild card for the economy. In 2004, adjustable-rate mortgages made up a third of new mortgage originations. No one knows what the effect of the widespread use of A.R.M.'s would be in a down market. A climb in interest rates, of course, would put downward pressure on real estate prices, but A.R.M. borrowers would feel the pinch rapidly. If those borrowers started to default, lenders would be hurt."

For these reasons I'm concerned about the impact of the coming housing bust on the general economy.

by Calculated Risk on 5/27/2005 07:03:00 PM

"In a scenario of collapse, the damage to balance sheets and private wealth could go as far as undermining the soundness of the financial system and threatening stability of the real economy." Federal Reserve Vice-Chairman Roger Ferguson, May 27, 2005

Federal Reserve Vice-Chairman Roger Ferguson made several comments on housing in prepared remarks to a conference sponsored by the Bundesbank in Berlin. A few excerpts:

"A particular phenomenon that touches on all these issues is the movement of asset prices, especially the prices of equities and residential real estate. Because these assets are the most widely held by the general public, price changes, even when not exceptional, can significantly affect the macroeconomy. Rising asset prices support household consumption, whereas falling asset prices damp consumption. In a scenario of collapse, the damage to balance sheets and private wealth could go as far as undermining the soundness of the financial system and threatening stability of the real economy." ...

"For housing, rent-to-price ratios and income-to-price ratios are commonly used measures to assess valuation. Over the past several years, both measures have decreased sharply in many countries, and they currently are well outside historical ranges in some countries. In 2004, U.S. home prices increased 11.2 percent, their fastest pace since 1979, and right now, housing prices in many markets in the United States are relatively high when judged by conventional valuation measures"

See Speech for more.

And UPDATE: a few articles on the housing market:

Economists Wary of Interest-Only Loans

Is Your House Overvalued?

Is There a Bubble In Florida Waiting to Burst?

Is U.S. housing market a 'bubble' waiting to burst?

by Calculated Risk on 5/26/2005 11:00:00 PM

UPDATE: Recommended reading: Running Out of Bubbles by Paul Krugman, NYTimes.

Original post:

The first paragraph is priceless:

Watching the housing market is sort of like a game of Clue before the murder. The victim is still alive and well, but we know he's going down. After the housing market is cold, it should be easy to finger the perpetrator. But for now, we're left to guess (Colonel Greenspan in the conservatory with the lead pipe?), and the perp might not be whom we expect.

The last line is a reminder of the difficulty in calling a top:

The Wall Street Journal, March 6, 2000:

"... for now, the frothy buying conditions in some of the nation's biggest housing markets, especially for high-end-homes, worry economists, who remember how the housing market crashed in the late 1980s after some markets overheated."

I wasn't concerned about housing in 2000; there was little or no speculation. I am concerned today.

by Calculated Risk on 5/26/2005 10:33:00 PM

The Telegraph reports that Barclays warned "of soaring bad debt on cards":

Barclays yesterday became the first major bank since the recession of the early 1990s to issue a warning that bad debts are growing sharply.

As the biggest provider of credit cards in the country, with nine million Barclaycard customers, it told the City that provisions for bad debts "rose significantly" in the first quarter of the year.

Earlier I commented that the UK might be a leading indicator for the US. See also comments by Kash and General Glut.

The good news is that financial stress indicators are still low.

The number of people in serious financial difficulties is still low compared with the last recession. Personal insolvencies have jumped by a third in a year but that can be explained in part by a relaxation in the rules, allowing bankrupts to be discharged after one year instead of five.

Analysts say that a better indicator of financial duress is the repossession of houses by mortgage lenders. Only 6,320 houses were repossessed last year, compared with 78,000 in 1991.

However, the number of people in arrears with their mortgages is rising for the first time since 1998. The latest figures show that nearly 54,000 households are three to six months in arrears, a rise of 5,000 on a year ago.

But it appears the writing is on the wall.