Posted on 12/10/2004 9:05:07 PM PST by nanak
OK. This time they mean it, really. Economists in San Diego and around the country are saying the biggest housing boom in the region's history is slowing and may be finished by the end of 2005.
"The phenomenon of doubling your money in three years is over for this cycle," said Jim Teak, a San Diego-based economist with Prudential Realty of California.
A lot of people agree with Teak. The influential UCLA Anderson Forecast says in a report out today that 2005 could be the year that "reality and reason" finally cool off the housing market.
Higher interest rates will keep overall price increases in the single digits, and may force small price drops in the more expensive neighborhoods, the report said.
Although most homeowners will be able to weather the slowdown, it could be bad news for first-time home buyers and speculators who have bought in recent months.
"If you locked into a great long-term rate, then you are OK," Anderson economist Edward Leamer said. "But people who think they are going flip – get in and get out in the next several years – are the people who need to rethink their strategy."
Of course, some economists have been saying the housing market is overpriced for the past year or longer. UCLA's economists said a year ago that they were starting to worry about a housing bubble, but prices have continued to rise.
The median price for existing single-family homes in San Diego County reached $489,000 in October, up nearly $100,000 from a year ago and a 44 percent increase from October 2002.
Leamer said the elevated prices are more the result of easy-to-get financing than robust economic growth. In the end, economic growth is needed to support the prices, he said.
There are indications all over the county that the market is already softening. Houses that in April would have sold in six days are staying on the market for 90 days, Teak said. Owners of higher-priced homes are being told to prepare to have their homes on the market for as long as six months.
"Six months ago, if you had a house at $900,000, you would have gotten it," Teak said. "Now you're lucky to get $850,000."
The housing slowdown won't be limited to Southern California and could shave as much as a half-point off the growth in the country's gross national product in 2005, Leamer and others said.
"Housing will be the one sector driving the anticipated slowdown in economic growth next year," said Bill Strauss, a senior economist with the Federal Reserve Bank of Chicago.
Beyond 2005, economists are concerned about the large number of adjustable-rate mortgages being sold and what would happen if the rates go up. Several are concerned about the growing possibility of a housing-led recession.
Leamer said the only reason a housing bubble didn't burst in the recession of 2001 was aggressive cuts in short-term interest rates by the Federal Reserve.
The Federal Reserve worked to keep mortgage rates low by cutting the federal funds rate from 6 percent to 1 percent from January 2001 to June 2003. Those low interest rates helped push home prices to the point where the ratio of prices to rental rates has reached record highs.
Leamer likens this ratio to the price-to-earnings ratio on a stock. And as anyone who studies the stock market knows, inflated price-to-earnings ratios are often a sign of a coming bust.
"We are in very uncertain times," said Robert Shiller, a Yale economist who studies economic bubbles. "Some of the adjustables (mortgages) people got in a couple years ago are already losing their interest-rate protections."
Shiller sees the possibility of a long, slow slide similar to what happened in Southern California in the 1990s. Los Angeles home prices dropped more than 30 percent from 1991 to 1997, and prices in San Diego dropped nearly 10 percent from 1991 to 1995.
It could get ugly if prices drop and consumers are unable to handle the increased mortgage debt on top of all the installment debt they have piled up in recent years.
"It may well be that the big win for reality and reason will come in 2006," Leamer wrote in his report. "We are talking a recession driven by a plunge in consumer spending on homes and durables."
this had a big effect on house prices
http://www.facstaff.bucknell.edu/pagana/mg312/bank.html
This is interesting. I've been predicting the demise of the nuclear family and return of the extended family for a decade. Guess the housing market served to hasten it along.
It isn't possible for the entire housing market in the USA to crash.And,yet again,I'll reiterate the salient fact you are ignoring...real estate prices go up and they go down. I have lived through this many times over and I am not ancient.Real estate is a commodity,just like pork bellies and gold and soy beans and all kinds of other things. And like them,goes through natural cycles of ups and downs and booms and busts.Actual real estate BUBBLES are really quite rare and more often than not,are area specific.
"...As it became increasingly clear that the nation’s lackluster economy needed a jumpstart, NAHB was the key housing organization in Washington to sign on to President Bush’s plan to create new jobs and boost economic activity by cutting taxes. NAHB lent the White House its support throughout a tough legislative process and led efforts to ensure that providing tax relief on dividends would not inadvertently undermine the effectiveness of the Low Income Housing Tax Credit. The final tax measure provided lower tax rates on capital gains that also applied to dividend income, and it actually created a new incentive for corporations to invest in the housing tax credit.
The Administration’s tax stimulus made effective this year across-the-board rate reductions that were scheduled to occur in 2004 and 2006. In addition to lower capital gain tax rates, which reach 0% in 2008, the package contained more good news for the businesses of NAHB members: an increase in bonus depreciation from 30% to 50% throughout 2004, an increase in small business expensing from $25,000 to $100,000 and an increase in the phase-out threshold from $100,000 to $400,000 through 2005..."
http://www.nbnnews.com/NBN/issues/2004-01-12/President%27s+Message/index.html
If you think S&L was a big scandal, wait and buckle up for coming FANNIE MAE storm.
I agree with you 100% on Ponzi and the cycle thing. However, if interest rates start rising across the country, it will impact prices across the country. Naturally those properties most impacted will be those most over-valued (or with a sales demographic of the fewest potential buyers). Also, I have no idea what happened with banks in the last decade. Banks used to place conservative bets and bankers were cautious. It seems as if they all went a little nuts with their lending practices and home buyers bought into the insanity.
WOW...lots of neat info there!
remember the boomers are hiting 59 and they may go on for quite a while. Some will stay with the kids. If it means another bedroom, no problem if moms brings a retirement and soc sec check.
"That housing boom was lower and middle income class
families buying homes as a result of his tax breaks."
I think you are giving WAY too little credit to low interest rates and loose money.
What that means is that "old timers" and kids who inherit California property can afford that real estate but first time home buyer "outsiders" cannot.
I bought a 3 bedroom San Diego house in a nice neighborhood during residency in the early 1980's for $117,000. (That was considered pricey back then.) That is now our rental property. My in-laws bought their 4 bedroom house on 10 acres in Central California 15 years before for much less.
If the "death tax" goes away and stays away, that means that my kids and everyone else in the same "old real estate" boat will be trading multi-million dollar California properties just like the kid in the old joke that traded his million dollar puppy for two half million dollar cats.
Everyone else will be SOL.
What it will probably mean is that more and more families will be paying the $1400/month rent for houses such as our rental property because they can't afford to buy.
Such price levels are financed by new home-buyers being in debt up to their eyeballs.
What negative social consequences that will bring, only time will tell.
BTW, what's property tax in California? Does prop 13 protect homeowners from ever rising property tax?
Prop 13 protects me. Back in the 1980's, I thought it was terribly unfair since my next door neighbor paid half the property taxes that I did. Now that I pay 1/4 of the taxes that the average new San Diego property owner pays, I think Prop 13 is the greatest thing since sex. :-)
WE'RE DOOOOOOOOOOOOOOOOOOOOOOOOMED!!!!
Here's my new prediction in light of the return to multi-generational family: it will impact divorce rates and the number of divorces will decrease from the current 50%. You'll also see a drop in the nanny business as the grandparents return to traditional role of pinch-hitter care provider.
I didnt mean to exclude that. It all worked together. But I was referencing the article which seemed to point to upper class incomes/housing.
Im pretty sure house prices are in decline in Japan, the population hasnt shrunk, the interest rate is rock bottom, and land space is limited???
anyone know about this?
and many retirees are going for part-time work, something I see boomers doing. I'm out!
take it easy!
The slight stock market recession hurt wealthier people.When Wall Street (used generically to mean ALL equity markets...not just the NYSE!)bonuses were cut severely,everything from real estate to restaurants,to high end department stores/boutiques to art to jewelry stores felt the pinch.The markets are doing well now,there are LOTS of jobs,and so,the doom&gloom crowd needs to stop with the sky is falling stuff.
Banks,like credit card companies( now,unfortunately often one in the same),lost their collective heads decades ago.I don't really know why,except for a quick guess...the lure of easy money,without really factoring in the consequences of giving people easy credit,who never should nor would be given it before.
Here's my new prediction in light of the return to multi-generational family: it will impact divorce rates and the number of divorces will decrease from the current 50%. You'll also see a drop in the nanny business as the grandparents return to traditional role of pinch-hitter care provider.
Happen to know a screaming liberal who was screaming about this same thing seven years ago. What do liberals have against Fannie Mae?
This is just my opinion, but guys are probably less likely to come rolling home drunk at 2 a.m. with lipstick on their box shorts if mom or the mother-in-law is living there.
Also, the extra help with child care will take some of the pressure off the parents, whether both work or not.
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