Is there a housing bubble?
A few facts taken from Puplava's latest long-winded report:
- Credit expansion in the U.S. is now running at an annual rate of $2 trillion or 20 percent of GDP.
- Fed reporting that consumer and business debt expanded at the fastest rate in over a decade.
- Non-financial debt grew by 7.8 percent during the second quarter, a jump from the 4.8 percent rate in the first quarter.
- Nationwide, the median price of a home is now $162,800 up 7.3 percent from a year ago.
- Average home prices are now 2.8 times average annual disposable income.
- Unemployment rate is 5.7 percent versus 4.5 percent a year ago.
- Current FHA delinquencies are now over 11.81 percent.
- Delinquencies for all mortgages are at 4.77 percent.
- More homeowners are having trouble meeting monthly mortgage payments.
- Help Wanted Index and job layoffs announced by companies this quarter are rising again
- Credit card debt rose from $173 billion in 1990 to $608 billion in 2001. It is still growing at an annual rate of 8%
- Average credit card debt grew from $2,985 in 1990 to $8,367
- Home equity lending rose from $461 billion in 1990 to $1 trillion in 2001.
- Household debt burdens rose from 12.47% of disposable income to 14.05%.
- Foreclosures have reached the highest level in over 30 years.
- Bankruptcies keep hitting record highs, with 1.5 million filings in the last 12 months ending in March, and they are still climbing.
- Credit card delinquencies have risen 30% in the last year, with close to 4% of all credit cards past due.
- Homeowner equity has fallen from 67% to 55% as homeowners have extracted more equity out of their homes to keep up consumption.
- Savings rates have plummeted from 8% at the beginning of the Greenspan Chairmanship to almost zero today.
- Debt service payments, including mortgages and all consumer debt now are at record levels.
- A record number of $30, $40 and $50 million dollar mansions are flooding the market.
- The easy days of the stock market bubble that created instant millionaires and billionaires are over.
- Annual Median Price Change 2Q2002:
Nassau/Suffolk, NY 29.6%
Bergen/Passaic, NJ 24.7%
NY/NJ/Long Island Area 22.3%
San Diego 21.3%
Monmouth/Ocean, NJ 21.0%
Washington, DC/MD/VA 20.8%
Providence, RI 20.7%
Los Angeles Area 18.0%
Miami/Hialeah, FL 17.0%
Anaheim/Santa Ana, CA 16.6%
- Bond market continues to deflate.
- Mortgage rates continue to come down.
- Rates on 30-year fixed mortgages fell during the latest week from 6.18 % to 6.05%.
- New home construction fell by 2.2% in August, the third consecutive month in a row.
- Executives in the housing industry have been big sellers of their stock recently.
- Wall Street still recommends them as a strong buys.
>>Housing bulls are apt to cite that delinquency and unemployment numbers are lagging economic indicators. However, a consumer-led recession has yet to begin. The first recession was led by business. The American consumer never retrenched during the business downturn that is still with us. Instead, the consumer ramped up his borrowing and spending, helping to moderate the softness in business. However, as businesses continue to try and control costs, unemployment will accelerate. This will eventually bring the mortgage and consumer-spending binge to an end. It will be the combination of a falling dollar, rising interest rates, and rising unemployment that will usher in the next phase of this recession. This next phase will be led by households and consumers with the greatest impact upon the financial sector. The charts of Fannie, Freddie, MGIC Investment Corp & J.P. Morgan Chase are a portent of the future.<<
>>Like the stock market bubble that preceded it, many self-interested parties defend the current bubble in real estate. Various statistics are used to defend the jump in real estate prices with lower interest rates being one of them. Others such as creative financing and the creative way in which statistics are manipulated have been used to defend the latest in a long line of bubbles created by Mr. Greenspan. For example, the rise in mortgage debt is dismissed by the rise in real estate prices. This argument holds up only as long as prices remain afloat. The minute prices start to deflate, those large debt balances will look more ominous. Another argument that is used is that there isn’t a huge overhang of housing inventory. That may be true as long as the real estate market holds up. The overhang in supply will come from bankruptcies and defaults from marginal buyers as they lose their jobs.
>>In addition to rising interest rates, which could come as result of a falling dollar or a foreign exodus out of our financial markets, there are other factors that don’t bode well for the housing bubble. One is rising prices may eventually make housing unaffordable. Rising expectations of a never-ending price appreciation may fail to materialize as all bubbles eventually end with disappointment. A return of higher interest rates will also have a devastating impact on ARMs and limited-term fixed rate mortgages. The limited-term mortgages will have to be refinanced at higher rates. while monthly payments will go up on ARMs. This will severely strain the monthly budgets of plentiful and marginal borrowers. One characteristic of this housing and mortgage bubble is that credit standards have been reduced across the board. Lenders no longer bear the responsibility of their loans with so much of today’s lending whether it is mortgage debt, installment debt or credit card debt being offloaded on to the financial markets through the securitization of loans.
The combination of credit-related asset deflation in the stock and real estate markets, combined with rising interest rates, will have a lethal effect on debt-strapped households. The housing bubble will deflate gradually. It will take time, maybe years, for it to unwind. Fortunately for homeowners, the price of their homes doesn’t appear as a ticker tape across a computer screen nor is it listed in the newspapers each day. The only visible sign of distress will be the increase in for sale signs in the neighborhood. Judging by what happened in the last recession, housing prices peaked several years after the recession and would take close to a decade to recover and rebuild pricing momentum. Right now homeowners, like stock investors, are in a state of denial preferring to act like ostriches rather than face reality. What could trigger the unwinding of the housing bubble? Several events could burst the bubble - a dollar crisis, the unwinding of the bond market bubble, and the second capitulation phase of a bear market in stocks.<<
BUBBLE TROUBLES PART II
Yes, Virginia, There IS a Housing Bubble!
by Jim Puplava
financialsense.com |
