Our North American Housing Price Index registered a modest 1.67% increase from December, supported by a rise at the bottom of the market. The drop from May - when we started the Index - is now 14.46%, representing a massive fall in the North American housing markets, and likely correlated by a similar drop in the valuation of bank mortgage portfolios. On an annualised basis the Index suggests the market is down 21.69%, a truly stunning loss.
In the United States, IRS requirements have made claiming the house purchase tax credit rather arduous. This will put a damper on the 'no-money-down' schemes that were being used to have the tax credit stand in for a down payment. Apparently government-backed loans are now about 90% of the market in the US and essentially all in Canada (where many borrowers are having the nasty surprise of balloon notes coming due without any means to refinance them).
The cumbersome tax credit, along with the spectre of interest rate hikes in the future - thus influencing the interest rate on mortgages - will likely collude to continue depressing house prices across the continent. Simply put, the North American housing market is now stuck wheezing in the cold, heavy iron-lung of the state. The crash may be very prolonged, with Governments desperately attempted to prop up prices which should be falling.
Showing posts with label falling house prices. Show all posts
Showing posts with label falling house prices. Show all posts
Friday, January 22, 2010
Wednesday, December 16, 2009
Housing Price Report for December
Our North American Housing Price Index registered a 6.46% drop from November, which likely would have been much deeper if we had not seen a sharp uptick on the top of the housing market. The drop from May - when we started the Index - is now 15.86%, representing a massive fall in the North American housing markets, and likely correlated by a similar drop in the valuation of bank mortgage portfolios. On an annualised basis the Index suggests the market is down 27.18%, a truly staggering loss.
That 27.18% drop strongly suggests the stimulus effect of the US Government's tax credit has worn off. Record low rates for conventional mortgages seem to be little help as few applicants qualify for the new, stringent requirements. All in all, we declare that the housing crash appears to have resumed.
Given the huge shadow inventory of foreclosed houses, the impending wave of Alt-A defaults, high unemployment, and falling income across the board, there is essentially no hope the housing market will find 'a bottom' any time in the foreseeable future. Additionally, the 8.9% rise in housing starts reported by Forbes will only add to the pain of existing housing stock, as new - and difficult to move - houses come into the market and further drive down already distressed property.
We expect the bottom, when it comes, will be shockingly low. We boldly predict a real price decline somewhere in the neighbourhood of 90% on average, peak to trough. In some places, such as Las Vegas, we expect a decline of 100% as the whole urban field there becomes indefensible. Attractive urban centres will fare the best, but it will be grim consolation.
Price declines may be obfuscated by inflation, if that should arrive. Given the devastation banking elites would suffer in a true deflation, we suspect the 'powers-that-be' will attempt to engineer a burst of high inflation to save the banks. On the other hand, such efforts may be unsuccessful, as it would be exceedingly difficult to discern the optimum amount of money-printing. As powerful as banking elites are, they may be sacrificed on the altar of the Almighty Dollar.
That 27.18% drop strongly suggests the stimulus effect of the US Government's tax credit has worn off. Record low rates for conventional mortgages seem to be little help as few applicants qualify for the new, stringent requirements. All in all, we declare that the housing crash appears to have resumed.
Given the huge shadow inventory of foreclosed houses, the impending wave of Alt-A defaults, high unemployment, and falling income across the board, there is essentially no hope the housing market will find 'a bottom' any time in the foreseeable future. Additionally, the 8.9% rise in housing starts reported by Forbes will only add to the pain of existing housing stock, as new - and difficult to move - houses come into the market and further drive down already distressed property.
We expect the bottom, when it comes, will be shockingly low. We boldly predict a real price decline somewhere in the neighbourhood of 90% on average, peak to trough. In some places, such as Las Vegas, we expect a decline of 100% as the whole urban field there becomes indefensible. Attractive urban centres will fare the best, but it will be grim consolation.
Price declines may be obfuscated by inflation, if that should arrive. Given the devastation banking elites would suffer in a true deflation, we suspect the 'powers-that-be' will attempt to engineer a burst of high inflation to save the banks. On the other hand, such efforts may be unsuccessful, as it would be exceedingly difficult to discern the optimum amount of money-printing. As powerful as banking elites are, they may be sacrificed on the altar of the Almighty Dollar.
Wednesday, November 25, 2009
House Prices, Property Taxes, and Rent
Today we present a case study of a sleepy little town on the Pacific Coast of North America somewhere between Powell River and Portland. We have changed the name to Prosperity Harbour to protect the innocent. This town is fairly average; its heyday being some decades in the past.
Being an older place, the houses tend to be on the small side with plenty of cottages, each having less than 1000 square feet of floor space. As of today, the asking price on these little, older cottages ranges from $90,000 to $180,000. Prices have only sagged a bit since the onset of the Depression thanks to generous mortgage programmes from the Government.
Property taxes here are modest, averaging about 1% annually of the market value of the houses. Rents in Prosperity Harbour are low for a place on the West Coast. A typical two bedroom house rents for $600 per month.
The gross rental yields tend to range from 5 to 6%. After allowing 1% for taxes, 2.5% for maintenance, and .5% for insurance the net yield works out to only 1 to 2%.
Until recently, landlords were banking on appreciation to make up for the lack of yield. The last two years have been disappointing in that department, to say the least. Furthermore, there is no hope of raising rents or even maintaining them anytime in the foreseeable future. A great wave of rental construction completions has been hitting the market: luxury duplexes; low-income projects; warehouse district renovations; and everything in between - all begun at the peak of the recent housing mania. The major property management companies have even entered a price war as their efforts to whittle down their swelling rental listing portfolios become desperate. Even with asking rents down 1/3 or more from their peak two years ago, vacancies go begging.
Prosperity Harbor is not losing population. What is shrinking is the number of households. Or put differently, the increase in household formation - a fact of life in North America since the European settlement began - has gone into reverse, here as elsewhere. Unemployed and underemployed persons are doubling up and making do with more cramped conditions.
What hope is there for Prosperity Harbor's landlords? None. As long as incomes continue to fall, there will be less and less money available for rent. Property taxes will not fall. As assessed property values decline, rates will rise in order to maintain public expenditures. Even if a frenzy of cutting the public sector hits Prosperity Harbor's voters, it will only serve to shrink the incomes of the local public servants - furthering the vicious cycle of declining incomes.
In a word, Prosperity Harbor's landlords are f****d. This goes for the landlords who rent to themselves as well, a.k.a. homeowners. Housing here is a terrible, terrible investment and will be remain so until prices come in line to a sane multiple of rents - meaning those old cottages need to be selling for something like $9,000 to $18,000 - a mere one tenth the current prices!
Being an older place, the houses tend to be on the small side with plenty of cottages, each having less than 1000 square feet of floor space. As of today, the asking price on these little, older cottages ranges from $90,000 to $180,000. Prices have only sagged a bit since the onset of the Depression thanks to generous mortgage programmes from the Government.
Property taxes here are modest, averaging about 1% annually of the market value of the houses. Rents in Prosperity Harbour are low for a place on the West Coast. A typical two bedroom house rents for $600 per month.
The gross rental yields tend to range from 5 to 6%. After allowing 1% for taxes, 2.5% for maintenance, and .5% for insurance the net yield works out to only 1 to 2%.
Until recently, landlords were banking on appreciation to make up for the lack of yield. The last two years have been disappointing in that department, to say the least. Furthermore, there is no hope of raising rents or even maintaining them anytime in the foreseeable future. A great wave of rental construction completions has been hitting the market: luxury duplexes; low-income projects; warehouse district renovations; and everything in between - all begun at the peak of the recent housing mania. The major property management companies have even entered a price war as their efforts to whittle down their swelling rental listing portfolios become desperate. Even with asking rents down 1/3 or more from their peak two years ago, vacancies go begging.
Prosperity Harbor is not losing population. What is shrinking is the number of households. Or put differently, the increase in household formation - a fact of life in North America since the European settlement began - has gone into reverse, here as elsewhere. Unemployed and underemployed persons are doubling up and making do with more cramped conditions.
What hope is there for Prosperity Harbor's landlords? None. As long as incomes continue to fall, there will be less and less money available for rent. Property taxes will not fall. As assessed property values decline, rates will rise in order to maintain public expenditures. Even if a frenzy of cutting the public sector hits Prosperity Harbor's voters, it will only serve to shrink the incomes of the local public servants - furthering the vicious cycle of declining incomes.
In a word, Prosperity Harbor's landlords are f****d. This goes for the landlords who rent to themselves as well, a.k.a. homeowners. Housing here is a terrible, terrible investment and will be remain so until prices come in line to a sane multiple of rents - meaning those old cottages need to be selling for something like $9,000 to $18,000 - a mere one tenth the current prices!
Monday, November 16, 2009
Housing Price Report for November
Our result for the first six months of our North American Housing Price Index is a drop of 10.45%. This is a very serious drop, and has implication for more than just the house owners who need the value of their houses to say up. It also means that, on average: the housing collateral on bank balance sheets is impaired by around 10%; any and all securities of bundled mortgages have seen their value reduced by 10%; any house owners relying on the value of their house to keep up appearances have seen their appearances reduced by 10%.
Prices are showing some sign of improvement in the USA, which is to be expected thanks to the Federal Government's herculean efforts to prop up the industry.The 10% US Federal income tax credit has been extended, and all things being equal, this will tend to keep prices in the USA 10% higher than they otherwise would be. We'll be watching for a sudden fall when the program ends, if ever.
Interestingly enough, though, we are seeing some weakness in the Canadian housing market. This strikes us as rather odd, as the credit available to Canadian Citizens is still growing at a respectable clip. Additionally, the Federal Government has a very direct hand in guaranteeing mortgages in Canada, whereas the U.S. Federal Government only proves a wishy-washy guarantee to bail out banks.
Frankly, it seems that the animal spirits are friskier in the United States than Canada, undoubtedly supported by the U.S. Federal Government's housing tax credit. It is also possible U.S. Citizenry is a bit more credulous of the 'recession is over' propaganda than are the Canadians; it's time for Americans to do their patriotic duty and spend, spend, spend!
Prices are showing some sign of improvement in the USA, which is to be expected thanks to the Federal Government's herculean efforts to prop up the industry.The 10% US Federal income tax credit has been extended, and all things being equal, this will tend to keep prices in the USA 10% higher than they otherwise would be. We'll be watching for a sudden fall when the program ends, if ever.
Interestingly enough, though, we are seeing some weakness in the Canadian housing market. This strikes us as rather odd, as the credit available to Canadian Citizens is still growing at a respectable clip. Additionally, the Federal Government has a very direct hand in guaranteeing mortgages in Canada, whereas the U.S. Federal Government only proves a wishy-washy guarantee to bail out banks.
Frankly, it seems that the animal spirits are friskier in the United States than Canada, undoubtedly supported by the U.S. Federal Government's housing tax credit. It is also possible U.S. Citizenry is a bit more credulous of the 'recession is over' propaganda than are the Canadians; it's time for Americans to do their patriotic duty and spend, spend, spend!
Thursday, October 15, 2009
Housing Price Report for October
Our result for the first five months of our North American Housing Price Index is a drop of 11.64%. As previously mentioned, we attempted to make an adjustment to not skew the data by the 'higher end' of the market. Because of recent strength in the 'lower end' of the market, the overall index is showing signs of stability.
Is this a sign of the 'bottom' in the housing market? We think not. Sales have been boosted by the much-trumpeted 10% US Federal income tax credit. Just as auto sales 'crashed' after the cash-for-clunkers plan was suspended, so too will housing sales wilt as the tax credit is wound down.
Is this a sign of the 'bottom' in the housing market? We think not. Sales have been boosted by the much-trumpeted 10% US Federal income tax credit. Just as auto sales 'crashed' after the cash-for-clunkers plan was suspended, so too will housing sales wilt as the tax credit is wound down.
Thursday, July 16, 2009
Housing Price Report for July
Our result for the first two months of our North American Housing Price Index is a drop of 1.36%. We've gotten a bit of month-to-month volatility, but hopefully that will smooth out as we go along.
We're noticing more properties coming to market in some locales. It will be telling to see if the market can absorb the supply, or if it will have - as we expect - a depressing effect on prices.
Tune in next month for our update.
We're noticing more properties coming to market in some locales. It will be telling to see if the market can absorb the supply, or if it will have - as we expect - a depressing effect on prices.
Tune in next month for our update.
Wednesday, June 17, 2009
Coming Soon to Sprawl Near You
The demise of Detroit is the most striking example of the self-destruction of most US cities. We call it self-destruction because it was not by accident, but the result of unintended consequences of a series of decisions.
The common thread of these decisions was to abandon the thousands-of-years-old tradition of building cities around the scale of human self-propulsion. In the USA, this tradition was abandoned in favour of building the urban field - a better name for what resulted than city - around the needs of the motor vehicle.
Even most of those few remaining cities which have lively and livable downtowns are surrounded by a ring of strip malls, big box stores, and industrial and office 'parks'.
Now that the US has seen peak automobiles, and the age of the motor vehicle is drawing to a close, the USA will find itself very much in trouble. It has constructed a type of city - this urban field - which will find itself soon utterly obsolete and mostly useless.
Steps could be taken to correct this: allowing mixed-use zoning; promoting 'infill' and small lot redevelopment. But communities which allow this are few and far between. The norm is strict segregation of land use, and new development on big lots with copious parking. People will be living with the unhappy consequences of this ongoing, bad planning for decades.
Detroit is the city most molded by the automobile - right down to its broad, highway-like streets and its too-long-to-walk blocks. The average house in Detroit now sells for $6,000. You can say that it is the crime, or the unemployment, but we call it a failure of urban form.
This same failure of form exists in the suburbs of Detroit and the suburbs of every American city (as well as most of the cities), and the same decay and economic ruin that afflicts the rustbelt cities will spread to them. Expect to see $6,000 houses more the rule than the exception in the years ahead.
The common thread of these decisions was to abandon the thousands-of-years-old tradition of building cities around the scale of human self-propulsion. In the USA, this tradition was abandoned in favour of building the urban field - a better name for what resulted than city - around the needs of the motor vehicle.
Even most of those few remaining cities which have lively and livable downtowns are surrounded by a ring of strip malls, big box stores, and industrial and office 'parks'.
Now that the US has seen peak automobiles, and the age of the motor vehicle is drawing to a close, the USA will find itself very much in trouble. It has constructed a type of city - this urban field - which will find itself soon utterly obsolete and mostly useless.
Steps could be taken to correct this: allowing mixed-use zoning; promoting 'infill' and small lot redevelopment. But communities which allow this are few and far between. The norm is strict segregation of land use, and new development on big lots with copious parking. People will be living with the unhappy consequences of this ongoing, bad planning for decades.
Detroit is the city most molded by the automobile - right down to its broad, highway-like streets and its too-long-to-walk blocks. The average house in Detroit now sells for $6,000. You can say that it is the crime, or the unemployment, but we call it a failure of urban form.
This same failure of form exists in the suburbs of Detroit and the suburbs of every American city (as well as most of the cities), and the same decay and economic ruin that afflicts the rustbelt cities will spread to them. Expect to see $6,000 houses more the rule than the exception in the years ahead.
Friday, June 12, 2009
Incredible Shrinking Home Equity
Among other horrors, the Federal Reserve reported today, first quarter homeowners' equity is down to 41.4% of home value.
As we have stated repeatedly, about one-third of homeowners own their houses free-and-clear. This means that the 58.6% of aggregate house value that covers all mortgages falls to the two-thirds with mortgages. Running through a bit of algebra, we get to the point that homeowners with mortgages only have 12% equity.
In a world of crashing real-estate 12% is not a lot to fall further from the end of March. Given that prices are falling in something like a 20% annual pace, 12% is just a matter of months.
So, we hereby predict, by the end of 2009 - give or take a few months - homeowners with mortgages will be, in the aggregate, underwater - owing more than their houses are worth. Naturally, because of regional variations and the amount of mortgage debt people carry, many homeowners will be very, very underwater, though some won't be at all.
We further predict that most of the homeowners who are very, very underwater will default one way or another, as will quite a few of those who are merely very underwater. Among the many consequences of this will be the holders of the mortgages will lose most of their investment. This will be very bad for banks, especially the government-owned behemoths, Fannie Mae and Freddie Mac.
Bank losses will begin to mushroom to the tune of hundreds of billions, if not trillions. Another stock market crash will likely be part of the picture as the reality of this situation sinks in to the investing public. This all beginning in months, if we have our sums right.
As we have stated repeatedly, about one-third of homeowners own their houses free-and-clear. This means that the 58.6% of aggregate house value that covers all mortgages falls to the two-thirds with mortgages. Running through a bit of algebra, we get to the point that homeowners with mortgages only have 12% equity.
In a world of crashing real-estate 12% is not a lot to fall further from the end of March. Given that prices are falling in something like a 20% annual pace, 12% is just a matter of months.
So, we hereby predict, by the end of 2009 - give or take a few months - homeowners with mortgages will be, in the aggregate, underwater - owing more than their houses are worth. Naturally, because of regional variations and the amount of mortgage debt people carry, many homeowners will be very, very underwater, though some won't be at all.
We further predict that most of the homeowners who are very, very underwater will default one way or another, as will quite a few of those who are merely very underwater. Among the many consequences of this will be the holders of the mortgages will lose most of their investment. This will be very bad for banks, especially the government-owned behemoths, Fannie Mae and Freddie Mac.
Bank losses will begin to mushroom to the tune of hundreds of billions, if not trillions. Another stock market crash will likely be part of the picture as the reality of this situation sinks in to the investing public. This all beginning in months, if we have our sums right.
Sunday, May 17, 2009
Correcting a Misconception about Home Equity
Note: We had hoped to deliver a FDIC Bank Closure Report today, but no banks were closed since last Friday.
We have been hammering on the shocking lack of home equity that most owners with mortgages in the USA actually have. This short article explains the situation mostly very well (and has a nifty chart to boot), but overlooks one critical point: about one-third of homeowners own their homes free-and-clear, that is, having no mortgage. We will explain why this is so important.
First, a brief quote from the article (bold added):
"When value falls and debt stays the same, equity gets crushed (See The Problem With Debt). If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater."
This is not correct. If homeowner equity drops more than 70%, virtually every mortgage holder will be underwater. Using figures from the article, at present the value of all houses is about $18 trillion and the amount of mortgages is $11 trillion, which leaves $7 trillion of equity. If you take into account that about one-third of homeowners do not have a mortgage, this means that about $6 trillion of houses is owned free and clear, and $11 trillion of mortgages is on $12 trillion of houses.
All that it would take to put the group of homeowners with a mortgage under water is just another drop of $1 trillion, or a little over 5% of the current value. Of course some would be very underwater, and some not at all, but the overall situation is quite precarious. This is very bad for the homeowners who can't sell if they want to, and can't refinance because there isn't enough equity.
It is even worse for the banks, and the Federal Government. Once that 5% additional drop happens, even prime mortgage portfolios are truly junk investments since the collateral no longer covers the principal amounts. A peak to trough 40% devaluation as suggested by the quoted article will bring many trillions in losses to the Federal Government, and ultimately the taxpayer. Underwater homeowners - either unable to make mortgage payments, or having little incentive to do so even if they can afford them - will 'walk away' en masse.
We have been hammering on the shocking lack of home equity that most owners with mortgages in the USA actually have. This short article explains the situation mostly very well (and has a nifty chart to boot), but overlooks one critical point: about one-third of homeowners own their homes free-and-clear, that is, having no mortgage. We will explain why this is so important.
First, a brief quote from the article (bold added):
"When value falls and debt stays the same, equity gets crushed (See The Problem With Debt). If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater."
This is not correct. If homeowner equity drops more than 70%, virtually every mortgage holder will be underwater. Using figures from the article, at present the value of all houses is about $18 trillion and the amount of mortgages is $11 trillion, which leaves $7 trillion of equity. If you take into account that about one-third of homeowners do not have a mortgage, this means that about $6 trillion of houses is owned free and clear, and $11 trillion of mortgages is on $12 trillion of houses.
All that it would take to put the group of homeowners with a mortgage under water is just another drop of $1 trillion, or a little over 5% of the current value. Of course some would be very underwater, and some not at all, but the overall situation is quite precarious. This is very bad for the homeowners who can't sell if they want to, and can't refinance because there isn't enough equity.
It is even worse for the banks, and the Federal Government. Once that 5% additional drop happens, even prime mortgage portfolios are truly junk investments since the collateral no longer covers the principal amounts. A peak to trough 40% devaluation as suggested by the quoted article will bring many trillions in losses to the Federal Government, and ultimately the taxpayer. Underwater homeowners - either unable to make mortgage payments, or having little incentive to do so even if they can afford them - will 'walk away' en masse.
Friday, May 8, 2009
Las Vegas, NV: Bellweather of Doom
Our co-writer made a post a while back, laying out a brief case for the collapse of present valuations of American housing stock. He forecasted (and still forecasts) an estimated 87% drop in value for desirable, non-redundant living space, along with almost every mortgaged houseowner ending up 'under water.'
According to the basic number we've seen bandied about, approximately two-thirds of all houseowners have mortgages. We can surmise, without too much imagination required, that if house prices do indeed plummet 87% or so, almost all of these mortgaged houseowners will be 'under water,' and will likely default on their debt. This will of course create an enormous glut on the real estate market, and devastate the debt-addicted banking system of the United States, and indeed the world.
Our co-writer is now partly vindicated, by the original Icon of Sin: Las Vegas, Nevada. In a recent Wall Street Journal article, a study shows that 67.2% of all homes in Las Vegas have "negative equity;" or, in the common tongue, the owners owe more on their mortgage than the house is presently valued. We point out that 67.2% is right around two-thirds of all houses (and thus virtually every owner with a mortgage is 'under water'); Las Vegas is now the bellweather of the United States housing collapse.
It is difficult - if not impossible - to put a time-frame on this collapse, but we are confident that said collapse is both in progress, and cannot be halted in real terms. However, the Federal Reserve's attempts to rekindle inflation will likely succeed, and when that day comes some of these 'under water' houseowners will at least have the succor of having their nominal property values resume an upwards march. That will be a phyrric victory, but we suspect that realisation will take some time to dawn on the average American citizen.
According to the basic number we've seen bandied about, approximately two-thirds of all houseowners have mortgages. We can surmise, without too much imagination required, that if house prices do indeed plummet 87% or so, almost all of these mortgaged houseowners will be 'under water,' and will likely default on their debt. This will of course create an enormous glut on the real estate market, and devastate the debt-addicted banking system of the United States, and indeed the world.
Our co-writer is now partly vindicated, by the original Icon of Sin: Las Vegas, Nevada. In a recent Wall Street Journal article, a study shows that 67.2% of all homes in Las Vegas have "negative equity;" or, in the common tongue, the owners owe more on their mortgage than the house is presently valued. We point out that 67.2% is right around two-thirds of all houses (and thus virtually every owner with a mortgage is 'under water'); Las Vegas is now the bellweather of the United States housing collapse.
It is difficult - if not impossible - to put a time-frame on this collapse, but we are confident that said collapse is both in progress, and cannot be halted in real terms. However, the Federal Reserve's attempts to rekindle inflation will likely succeed, and when that day comes some of these 'under water' houseowners will at least have the succor of having their nominal property values resume an upwards march. That will be a phyrric victory, but we suspect that realisation will take some time to dawn on the average American citizen.
Tuesday, April 21, 2009
What is the Significance of $1,000 Houses?
There was a recent report on CNN about how there are lots of listings for low-priced houses in places such as Cleveland, Detroit, and Indianapolis. The report admitted that these houses need work - say $20,000 worth - to make them livable, but they represent a golden opportunity to acquire real estate on the cheap.
Markets are generally pretty adept at conveying information. The first thing that comes to mind is that livable houses in these places aren't worth $21,000. If they were, the cheap houses would have all been snapped up.
One of the houses is mentioned as last having been sold at $70,000. Put another way, this means the value has declined from $70,000 to less than $20,000, or down about 70%. We believe that this is not an exceptional decline, but a fairly representative one.
The official numbers don't show this pervasive catastrophe yet because most owners who don't have an urgent need to sell, aren't selling. They are holding out for price recovery, and in their minds maintaining an inflated valuation.
There is a large, yet difficult-to-measure, overhang of houses whose owners imagine themselves patient, yet are probably just living in the past. Unable to let go of perceptual wealth, they can't sell the buildings for 'less than they are worth'.
This capital immobility is hurting the economy in at least two ways. First, it is keeping people stuck in place. Household mobility in the USA is at an all-time low. This hampers people's ability to relocate to better opportunities. Second, it is tying up capital in non-productive assets. Empty houses contribute very little to an economy. If sold, they could be inhabited, and thus a source of income - either landlord's rent, or owner's equivalent rent.
In time, most of the overhang will come to market and clear at the new equilibrium level. The rest will slowly rot in place, their deluded owners basking in their pride of ownership of an asset that is too valuable to sell at the market price.
Markets are generally pretty adept at conveying information. The first thing that comes to mind is that livable houses in these places aren't worth $21,000. If they were, the cheap houses would have all been snapped up.
One of the houses is mentioned as last having been sold at $70,000. Put another way, this means the value has declined from $70,000 to less than $20,000, or down about 70%. We believe that this is not an exceptional decline, but a fairly representative one.
The official numbers don't show this pervasive catastrophe yet because most owners who don't have an urgent need to sell, aren't selling. They are holding out for price recovery, and in their minds maintaining an inflated valuation.
There is a large, yet difficult-to-measure, overhang of houses whose owners imagine themselves patient, yet are probably just living in the past. Unable to let go of perceptual wealth, they can't sell the buildings for 'less than they are worth'.
This capital immobility is hurting the economy in at least two ways. First, it is keeping people stuck in place. Household mobility in the USA is at an all-time low. This hampers people's ability to relocate to better opportunities. Second, it is tying up capital in non-productive assets. Empty houses contribute very little to an economy. If sold, they could be inhabited, and thus a source of income - either landlord's rent, or owner's equivalent rent.
In time, most of the overhang will come to market and clear at the new equilibrium level. The rest will slowly rot in place, their deluded owners basking in their pride of ownership of an asset that is too valuable to sell at the market price.
Monday, March 2, 2009
Ireland Blows Out
This article from the Telegraph speaks volumes. A few highlights: at one point during the boom, 1/5 of all workers were in construction; Ireland now has 350,000 empty houses (for a population of 4.2 million); house prices are expected to fall by 80%; there are 16,000 taxis in Dublin - a city of 500,000.
In high relief for all the world to see, Ireland's mania has gone completely to bust. The former tiger of the Eurozone is now a basket-case. If ever there were a case of classical economics at work, it is here: the Depression is a natural consequence of the mania that proceeded it; and the greater the mania, the greater the depression.
Just as the harlots enter the Kingdom of Heaven as the avant-garde, so Ireland will lead the nations that relied too much upon the FIRE (Finance, Insurance and Real Estate) Economy straight to economic Hell. In her train are the United Kingdom, and the United States. Perhaps Australia and Canada will escape the worst because they actually still produce things that people want - though this is looking increasing less likely since the world seems to be entering an 'all-fall-down' depression.
In high relief for all the world to see, Ireland's mania has gone completely to bust. The former tiger of the Eurozone is now a basket-case. If ever there were a case of classical economics at work, it is here: the Depression is a natural consequence of the mania that proceeded it; and the greater the mania, the greater the depression.
Just as the harlots enter the Kingdom of Heaven as the avant-garde, so Ireland will lead the nations that relied too much upon the FIRE (Finance, Insurance and Real Estate) Economy straight to economic Hell. In her train are the United Kingdom, and the United States. Perhaps Australia and Canada will escape the worst because they actually still produce things that people want - though this is looking increasing less likely since the world seems to be entering an 'all-fall-down' depression.
Saturday, February 14, 2009
Don't Take the Bait
The bait we are referring to is the 'improved' tax credit for house buyers that was included as part of the USA stimulus program. Look at it like a different shade of lipstick on a pig. Almost everyone who used previous versions of this credit is underwater on their mortgages, or at least looking at some pretty serious depreciation on their house value - much greater than the value of the tax credit. As a rule, taxpayers who attempt to take advantage of this credit will suffer the same fate.
Apparently a lot of people are buying houses - though not nearly so many as a couple years ago. They must think they are getting a good price. While a few of them may be, most are not. Housing prices in general have a long way to fall yet. The only thing that will arrest the decline will be runaway inflation.
Even after the inflation hits, house prices will probably not rise as fast as most goods and services. If you can find a house you like that is priced to be cheaper than renting after you factor in all the costs, then go for it, if you can pay cash or lock in a long-term fixed rate mortgage. That should be your only criteria, tax credits notwithstanding.
Apparently a lot of people are buying houses - though not nearly so many as a couple years ago. They must think they are getting a good price. While a few of them may be, most are not. Housing prices in general have a long way to fall yet. The only thing that will arrest the decline will be runaway inflation.
Even after the inflation hits, house prices will probably not rise as fast as most goods and services. If you can find a house you like that is priced to be cheaper than renting after you factor in all the costs, then go for it, if you can pay cash or lock in a long-term fixed rate mortgage. That should be your only criteria, tax credits notwithstanding.
Wednesday, November 26, 2008
Two Macro Trends of the 2008 Depression
We have been careful to avoid detailed or specific predictions of what is going to happen during the 2008 Depression. Certain symptoms, like the housing price and tax receipt collapses, are 'baked into the cake.' In this post, we will look at some macro-scaled trends of this Depression, and what shapes they may take in coming years.
The first trend is a monetary crisis. This Depression, like every other, involves economic contraction. This was brought about by too many people and organisations assuming more debt than they could feasibly service. As these debtors inevitably began to default, the world economy began to contract. This process will continue until all untenable debt world-wide has defaulted or been renegotiated.
This unstoppable contraction is putting considerable pressure on all monetary systems. The world-wide paper money experiment is unable to cope in its present form with this force, and is in a state of crisis. Central bankers are aligning their respective policies to inflate the money supply in an attempt to combat the economic contraction. They may succeed in creating consumer price inflation, but they will not be successful in arresting the ongoing contraction.
This phase of the 2008 Depression does not necessarily spell the end of the paper money experiment, but it guarantees at least one large and unpredictable shift in policy. Whether this will cause rising consumer prices or falling consumer prices is unimportant to the macro trend. Suffice it to say that money as it is known today will be rapidly changing in the near future.
The second trend, which will serve to reinforce the contraction of the world economy, is that of increasing energy scarcity. Peak oil, long considered a crackpot theory, is indeed a reality: production of light sweet crude oil, the most potent and versatile natural energy source, peaked in 2004 and has begun an irreversible decline. There is no way to reverse this trend... but we will save more detailed discussion for a later post.
As energy becomes increasingly scarce, the world economy will increasingly contract. What energy is available will be increasingly diverted towards high-value-added processes. The world economy has hit the wall of falling energy availability, and will be forced to adapt to the new energy reality.
These two macro trends -- monetary crisis and energy scarcity -- are ones to be very aware of in the coming years. The 2008 Depression will make working against these trends ruinous. It would be wise to avoid institutions and investments which ignore these trends, or simply assume these trends will be managed without ill effect. If one recognises these trends are not temporary, one can plan more effectively for the future.
The first trend is a monetary crisis. This Depression, like every other, involves economic contraction. This was brought about by too many people and organisations assuming more debt than they could feasibly service. As these debtors inevitably began to default, the world economy began to contract. This process will continue until all untenable debt world-wide has defaulted or been renegotiated.
This unstoppable contraction is putting considerable pressure on all monetary systems. The world-wide paper money experiment is unable to cope in its present form with this force, and is in a state of crisis. Central bankers are aligning their respective policies to inflate the money supply in an attempt to combat the economic contraction. They may succeed in creating consumer price inflation, but they will not be successful in arresting the ongoing contraction.
This phase of the 2008 Depression does not necessarily spell the end of the paper money experiment, but it guarantees at least one large and unpredictable shift in policy. Whether this will cause rising consumer prices or falling consumer prices is unimportant to the macro trend. Suffice it to say that money as it is known today will be rapidly changing in the near future.
The second trend, which will serve to reinforce the contraction of the world economy, is that of increasing energy scarcity. Peak oil, long considered a crackpot theory, is indeed a reality: production of light sweet crude oil, the most potent and versatile natural energy source, peaked in 2004 and has begun an irreversible decline. There is no way to reverse this trend... but we will save more detailed discussion for a later post.
As energy becomes increasingly scarce, the world economy will increasingly contract. What energy is available will be increasingly diverted towards high-value-added processes. The world economy has hit the wall of falling energy availability, and will be forced to adapt to the new energy reality.
These two macro trends -- monetary crisis and energy scarcity -- are ones to be very aware of in the coming years. The 2008 Depression will make working against these trends ruinous. It would be wise to avoid institutions and investments which ignore these trends, or simply assume these trends will be managed without ill effect. If one recognises these trends are not temporary, one can plan more effectively for the future.
Sunday, November 23, 2008
A Grim Prognosis for House Values
As you all know, the prices of houses has been falling in most of the "developed" world, but how much further are they going to fall? We are going to propose a simple model to estimate approximately what the prices will be at the end of the current Depression.
Let's say houses were twice times too expensive on an affordability basis (that is, the ratio of house prices to incomes was twice too high) at the peak of the mania, and let's say incomes will fall on average by half. So if housing then becomes appropriately priced based on affordability, the prices will fall by 75%.
Furthermore, if people decide they want to be more frugal, as they most likely will, they will probably opt to live in smaller quarters, or share larger houses with more people. Let's say the desire for space is reduced by half. Over a rather short period then, perhaps nearly half of the housing stock will become redundant. The prices on most of those units will likely fall to zero.
The price shock will likely cause the more attractive, non-redundant units to become "cheap" relative to income, and the 75% fall mentioned above is too little. Perhaps 87% would be a good guess. In summary a house that cost $400,000 in 2006 may end up going for between $0 and $52,000.
Furthermore, if people decide they want to be more frugal, as they most likely will, they will probably opt to live in smaller quarters, or share larger houses with more people. Let's say the desire for space is reduced by half. Over a rather short period then, perhaps nearly half of the housing stock will become redundant. The prices on most of those units will likely fall to zero.
The price shock will likely cause the more attractive, non-redundant units to become "cheap" relative to income, and the 75% fall mentioned above is too little. Perhaps 87% would be a good guess. In summary a house that cost $400,000 in 2006 may end up going for between $0 and $52,000.
Given this extreme drop, just about everyone with any significant mortgage balance is going to end up 'under water,' and very tempted to 'walk away.' The implications of this are severe. The entire global banking system, including central banks such as the U.S. Federal Reserve System, will probably collapse - not that it is doing so hot at the moment.
Even if money is 'printed' with abandon, too many houses will loose too much value due to redundancy to save the value of mortgages, values upon which banks must rely to stay in business. Homeowners must be prepared for the possibility of a shocking decline in value, though if you live in a reasonably prosperous town where housing has been and continues to be affordable for most of the population, then you are probably safe from the worst.
Even if money is 'printed' with abandon, too many houses will loose too much value due to redundancy to save the value of mortgages, values upon which banks must rely to stay in business. Homeowners must be prepared for the possibility of a shocking decline in value, though if you live in a reasonably prosperous town where housing has been and continues to be affordable for most of the population, then you are probably safe from the worst.
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