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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: John Vosilla who wrote (37658)	8/12/2005 12:02:08 AM
From: shades	Respond to of 306849

latest by Krugman SYNOPSIS: I used to live next door to a Russian émigré. One day he asked me to explain something that puzzled him about his new country. "This place seems very rich," he said, "but I never see anyone making anything. How does the country earn its money?" The answer, these days, is that we make a living by selling each other houses. Since December 2000 employment in U.S. manufacturing has fallen 17 percent, but membership in the National Association of Realtors has risen 58 percent. The housing boom has created jobs in two ways. Many jobs have been created, directly and indirectly, by a surge in housing construction. And rising home values have fueled a simultaneous surge in consumer spending. Let's start with home building. Between 1980 and 2000, which was before the housing boom, spending on the construction of new homes averaged 4.25 percent of G.D.P. In the most recent quarter, however, the figure was 5.98 percent. That difference is equivalent to about $200 billion a year in additional spending, generating roughly two million extra jobs. Then there's the jump in house prices. Over the past five years housing prices have grown much faster than the overall cost of living, adding about $5 trillion to the public's wealth. Typical estimates say that each additional dollar of housing wealth adds about 3 cents to annual consumer spending, as families reduce their savings and borrow against their newly valuable homes. So we're talking about an additional $150 billion in spending, and roughly 1.5 million more jobs. Does anything else in the U.S. economy rival housing as a source of job creation? Well, there's also the military buildup. The Economic Policy Institute estimates that increased military spending over the past four years has created 1.3 million private-sector jobs. And, yes, there are the Bush tax cuts, which the administration insists are the source of everything good in the economy. And it's true that some portion of the tax cuts, which amounted to $225 billion this year, must have been spent in ways that created jobs. Given reasonable estimates of the effect of tax cuts on spending, however, they were probably a smaller force for job creation than the military buildup, and dwarfed by the housing boom. So it's an economy driven by real estate. What's wrong with that? One answer is that it has been a pretty disappointing recovery. Two new reports, one from the Center on Budget and Policy Priorities and one from the Congressional Budget Office, compare the current economic expansion with other postwar recoveries. By any measure except corporate profits, which have done very well, this one comes up short. Even the good months would have been considered subpar in the past: the administration hailed last month's job growth as something wondrous to behold, yet there were 68 months during the Clinton years when employment grew faster. Still, the economy is expanding. But because that expansion depends so much on real estate - without the housing boom, the economic picture would look dismal indeed - you have to wonder how much to trust it. I've written before about the reasons to believe that current house prices in much of the country represent a bubble. When that bubble begins to deflate, so will housing-related employment. Beyond that, there's the disturbing point that we're paying for the housing boom (and the military buildup and tax cuts) with money borrowed from foreigners. Now, any economics textbook will tell you that it's fine to borrow from abroad if the money is used to expand the economy's productive capacity. When 19th-century America borrowed from Europe to build railroads, it was also enhancing its ability to repay its debts later. But we aren't borrowing to build productive capacity. As a share of G.D.P., investment other than housing construction is below its average between 1980 and 2000, and way below its level at the end of the 1990's. In other words, a fuller answer to my former neighbor would be that these days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn't seem like a sustainable lifestyle. How solid, then, is America's economic recovery? The British have a phrase that applies: "safe as houses." Our economy is as safe as houses. Unfortunately, given current prices and our dependence on foreign lenders, houses aren't safe at all. Originally published in The New York Times, 8.12.05 However if you read up on the HUNGRY 40's (1840) with the new canals and railroads europe financed - we DID NOT repay the debt - several american STATES like FLA DEFAULTED and this pissed off the british of the day - so bad charles dickens wrote about it in his novel - A Christmas Carol I am about to post a message to Mish on why the Chinese WILL keep the party going - at least according to Mauldin.

To: John Vosilla who wrote (37658)	8/13/2005 12:41:50 AM
From: X Y Zebra	Read Replies (1) \| Respond to of 306849

Reversion to the Mean a mean that seems to be an ever increasinly 'rising mean' so, if one deals with residential (one unit) property, chances are the owner lives in it and so... who really cares. if the individual in question is a speculator, well... he knew of the dangers (or at least he should have known.) commercial real estate, for the most part, is governed by cap rates, which in turn are influenced by the return of other investments and risk exposure. lately, cap rates have been getting lower (in certain class of real estate and markets), primarily because the return in alternatives to RE investing are lousy... but it has also be partially to a perceived increased risk, where the investor demands a better overall return. if you have noticed, cap rates have not necessarily been rising as interest have increased.... this could also be due that lots of available $$ are chasing too few good properties... so... reversion to the mean is all good, i am not, however, so sure it applies fully to commercial real estate as it would apply to much more volatile instruments such as stocks.... houses ? oh well.... yes... but as i said there is a large portion of owner-occupants who may not care, hence react as if it were a different class of investment... With this new price-to-rent ratio, I can now work backward to determine what the new value of my rental house will be assuming that my rent stays the same at $1,900. yeah well... steenking houses is not the entire RE market, there are lots of other classes of RE.... and many other markets where the word bubble has not the same meaning....