Housing Bubble Deflation?

[unlawflcombatnt]

June's "Housing Starts" number was unchanged from May's 2.004 million annual rate. Again, May's number was downwardly revised from the previously posted number of 2.009 million to 2.004, which makes it look as though housing starts didn't decline over the previous month. The housing starts number came in well below Briefing.com's estimate of 2.075 million. Growth in housing starts has completely stopped. The number of housing starts is now below the level it started at this year, and is well below its February peak of 2.228 million per year. This marks a -10% change since the February 2005 peak. This slowdown implies builders are anticipating a slowdown in new home sales. The following graph depicts this decline:



Building permits for June were 2.111 million. This was an increase over May's 2.062 million, but a decline over April's 2.148 million. June's building permits have dropped down to the peak levels they achieved during the last half of 2004. This is depicted by the blue line in the above graph.

The growth in new home prices has also declined. May's 2.5% increase is less than April's 4.5%, March's 7.5%, and Feruary's 8.1% price increase. If this downward trend in price increases continues it will be in the negative category within a few months. The following is a graph of new home price increases:


The entire Briefing.com section on home sales can be found at:
http://www.briefing.com/Silver/Calendars/EconomicReleases/newhom.htm


Given that mortgage rates have been increasing since the beginning of July, and that more prime rate increases are likely, it appears slowing in the rate of home price appreciation is almost guaranteed. The following is a link to a graph of mortgage interest rates:
http://www.bankrate.com/usergraph/WebForm1.aspx?tf=31&ct=Line&prods=1&gs=400,220&st=zz&c3d=False&web=brm&cc=1&web=brm


It appears the Housing Bubble may be starting to deflate. If Greenspan continues to raise interest rates, it's even more likely that some "deflation" will occur.

[DrFunkenstein]

1. Nothing Too Troubling

Everyone expects mild deflation, the bubbles are relatively isolated to coastal cities and major urban areas. Risk has been pretty well spread out, delinquency rates are going really well, and homeownership is at fairly incredible levels. Some people are going to get screwed by predatory lenders (or even just lenders not fully preparing them for their risky ARM loans), but there's not much indicating that this is anything resembling an oncoming national crisis.

[PsycheCC]

2. A Pretty Remarkable Slowing of New Home Price Growth

Thanks for the stats, charts, and links! A lot of people are going to be rudely awakened when their inflated home values start dropping, interest rates rise, and they can't make their "creatively financed" mortgage payments.

[unlawflcombatnt]

3. Home Purchasing Declined 2 Straight Weeks

The Mortgage Bankers Association reported a decline in home purchasing for the week ending July 15th. The MBA's purchase index, which is a measure of loan applications for homes, declined 0.1% to 488.7, after dropping 6.1% the previous week.

Fixed 30-year mortgage rates increased 10 points from the previous week to 5.72%, from the previous week's 5.62%.

Optimism by U.S. home builders also declined in July. The National Associatin of Home Builders/Wells fargo Housing Market index dropped 2 points to 70 in July, from June's 72.

The link for this Yahoo News article is:

http://news.yahoo.com/s/nm/20050720/bs_nm/economy_mortgages_dc;_ylt=Ag58nfwMo0TO9dEP99awszyyBhIF;_ylu=X3oDMTBiMW04NW9mBHNlYwMlJVRPUCUl

Nationwide construction of new homes has declined in the Northeast, Midwest, and West. The Northeast showed 0.5% decrease in June. The Midwest was down 12.1%. New home construction in the West declined a whopping 10.4% in June.

Single family home construction declined 2.5% in June.

The link for this article can be found at:
http://www.nahb.org/news_details.aspx?newsID=1546

Though housing "permits" increased, they are poorly representative of future housing demand. More are obtained currently due to increase in local regulations, causing builders to obtain more in advance than in the past. In addition, "permits" require little financial commitment, unlike actual housing "starts."

Today's releases, combined with yesterday's reporting of 0.0% increase in Housing Starts, indicates further slow-down in housing market growth. The housing bubble appears to be losing some steam. With further prime rate increases on the horizon, and the implementation of the new bankruptcy bill in October, further deflation appears likely.

[unlawflcombatnt]

4. Housing Bubble Deflation

Today Paul Krugman commented on the Housing Bubble. It appears he has joined the long list of economists who now believe there is a bubble. In his most recent column he states that "Low interest rates have helped generate a housing bubble that has lifted real estate prices to ludicrous heights in major parts of the country." The article is actually on a different subject, and is titled "The Dropout Puzzle." It is a discussion of labor force participation and how unemployment is calculated. (I will commment on this later.) The link is:
http://www.nytimes.com/2005/07/18/opinion/18krugman.html?n=Top%2fOpinion%2fEditorials%20and%20Op%2dEd%2fOp%2dEd%2fColumnists%2fPaul%20Krugman

[PsycheCC]

5. Glad to Hear Krugman Agrees there's a Bubble. I'll be GLAD, frankly

when it pops. In southern California, where I live, housing speculators who purchase two to several homes and then quickly turn them to make a profit, are keeping MANY of us from affording a home. Depending on the source, between 10% and 17% of Californians can afford a median priced home.

I accept that real estate is always going to be expensive here, but these speculators drive up those already high prices. Homes are not stocks. It's time people started talking about the harm done by treating them as such.

[applegrove]

6. The bubble deflation is balanced out by the increase in the cost of

war. The wage reduction due to job losses balance out the inflation that would happen due to the cost of oil. See - the market keeps booming along and rich day-traders never miss a day of great trades - due to inflation.

It all works out perfectly.

All we had to do was give up the goal of somewhat full employment. And seeing as how employment is pretty much tied to health care in the U.S. - that got thrown into the pot too. All expendable.

I'm not saying the government should not be watching inflation. I'm not saying the stock market people should never have a bull run. I'm just saying that war shouldn't be a tool to keep the stock market going artificially. War is war. It is always a bad thing. Just cause the Brits did it in the 19th century doesn't mean we have to follow that policy today.



That's what I am saying.

[unlawflcombatnt]

7. Wars and the Economy

Applegrove,

You're right that wars tend to help the economy. They increase government spending and provide the production demand that may be lacking from consumer spending. Many believe that World War II brought us out of the Depression, due to the massive increase in government spending.

But the housing bubble is leaking only slightly at present. When long-term interest rates start rising, there's going to be a much bigger slowdown in home appreciation. Again, estimates are that home equity extraction is contributing $300-400 billion to consumer spending per year. That's 2.5% to 3.3% of our GDP. Loss of that source of consumer spending is going to cause a major problem for our economy.

unlawflcombatnt

[applegrove]

8. I worry for the young families who spent so much on homes - and

assume the inflation would have been as it was in the 20th Century. That is what I worry about the most.

[unlawflcombatnt]

9. Young Families

I share your concern. The best outcome for the housing bubble is for it to start deflating immediately. The sooner it starts deflating, the less economic damage it will do. The longer prices rise, the worse it will be if it bursts. There is little doubt that there will be slowing in home appreciation. A decrease in home prices is likely as well. When this will happen, and how much it will be, are the big variables. No one really knows.

The new "creative" financing schemes are also helping perpetuate the housing bubble. Banks are making extremely risky loans, with the assurance that the federal government will bail them out. This bail out will cost taxpayers a lot of money. It's unfortunate that taxpayers may have to pay for the excessive risks taken by banks due to their unbridled greed. Taxpayers should not have to foot the bill for the poor judgement of bank loan officers.

I wouldn't recommend ANY young couple buy a house at present, unless they are living in a "non-bubble" region. Nationwide rents are comparatively cheap, and are not rising like home prices. At present it's better to take advantage of comparatively low rents, and wait for the inevitable "correction" before buying a home.

[PsycheCC]

10. Good Advice. Waiting is hard, but it's better than buying an

overvalued home. I read an article about a man who said it took him nine years to regain the value he lost in the first couple of years after buying his home in the last big boom. Ouch! :spank:

[applegrove]

11. We assume that inflation will be like it was in the 20th Century. With

wages falling and falling due to civil goods and service jobs being outsourced - this may be a fallacy. The WH likes the 19th Century World economy as a model. It faced deflation on and off like we have never seen since 1940.

It is possible that some 'bubble' buyers will loose value in their homes. And never make up the difference. That is what 2% deflation will do. Your house doesn't catch up - it just slowly looses value. And with so many of these homes being build in suburbs or rural developments - the price of heating or air conditioning the monsters (3 story foyer) and the cost of gas in the future may bring those markets down permanently.

Remember in the heady times of Victorian booms - when electricity came on line and made seemingly vast amounts of wealth rich people built huge homes. Within a generation it was too expensive to keep them going as they were build based on a whole underclass of household staff to keep them up - and than assumption went caput as people moved into the middle class and a wage for a gardener or a maid stopped being pennies a day. (Thank god).

[unlawflcombatnt]

12. Homes Built Increasing Faster Than the Population

There is an interesting link that someone sent to me about U.S. Census data on the relative increase in home construction over population growth. It shows that the increase in homes in most metropolitan areas is increasing faster than the population. Here is the link:

http://www.housingbubblebust.com/MajorMetroNStatesPopHsgRate.html

If home prices are increasing faster than the population, and faster than wages, there will have to be a decline in the future. The income and the number of new buyers is not keeping pace with home construction. The increasing supply will ultimately drop prices. In my opinion, a large part of the increasing demand, and the resultant price increase, is due to investment buyers. In other words, from people buying more than one home. These investment buyers will have to sell these homes to residential buyers at some point. When it becomes apparent that the number of buyers with sufficient income is declining, investment buyers will start dumping those homes. When this happens, prices are going to decline. Or crash.

unlawflcombatnt