Hoarding is exactly what the government is doing right now by filling the SPR, and frankly it's the best thing that could happen. It drives prices up. High prices encourage demand destruction. They also finance new well development. The hoarded oil gives us a buffer to fall back on once shortages become more prevalent. High prices are what we need in order to adapt to what's coming, and the sooner they happen, the better.
It's like living in a parallel universe. Surprising most economists, mortgage rates have gone down in recent weeks rather than up. The housing market, instead of cooling, has stayed hot, with record sales of existing homes in April. And prices are up 15% over a year ago. Even Federal Reserve Chairman Alan Greenspan, who has regularly dismissed the possibility of a housing bubble, is worrying that current trends are "unsustainable."
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But whether prices level out, crash, or even keep going up, the housing boom is already having pernicious economic effects. The real problem: the incredible amount of resources -- workers, materials, and money -- being sucked into home construction and renovation.
EVER UPWARD. Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product. That's the highest level since the late 1940s and early '50s, when an entire generation of returning soldiers was setting up families and expanding into newly built suburbs. This time, Americans are building second homes and enlarging current ones at a record pace.
By comparison, the tech boom of the '90s was at worst a baby bubble. Starting in 1991, business investment in information technology and communications gear began a steady climb, going from 3.1% to a peak of 4.8% in 2000 before collapsing.
Without much fanfare, residential construction basically followed the same path in the 1990s. Starting at 3.4% of GDP in 1991, it rose to 4.6% in 2000. But rather than turn down, as tech did, spending on housing just kept climbing, fueled by low interest rates. Measured by the increase in its share of GDP, the housing boom so far is about 40% larger than the tech boom.
LOW-TECH. Is the housing boom a bubble? As Greenspan has said, it's hard to tell. But what's certain is that housing-driven growth, while creating jobs and lifting wealth, is also distorting the economy, benefiting low-tech commodity sectors rather than the high-tech industries at the heart of America's competitive strength.
New homes are built mainly out of materials, such as wood for the frame and floors, plasterboard for the walls, and fabricated metal parts for plumbing fixtures. High-tech equipment plays a very small role. Even when new homes include cable for broadband -- so-called structured wiring -- the high-tech component accounts for at most 1% or 2% of the entire cost of the home.
Calculations by BusinessWeek show that construction is among the least info-tech-intensive of all industries. In 2003, the latest data available, only 1.6 cents of every construction dollar was used for info-related products and services, such as computer gear, data-processing services, and telecom services. This includes both the tech-related products used in the building process and tech investment by construction companies. Most other industries -- including retailing, manufacturing, education, and health care -- are much heavier users of info tech.
FEELING THE PINCH. Astonishingly, the entire construction industry invested only $1.2 billion in information-processing equipment in 2003, according to new data. Thus, an industry with about 6% of private employment had only 0.7% of private IT investment.
What happens when the housing boom finally slows? The share of GDP going into housing construction will fall sharply, hurting construction workers, architects, and homebuilders. Homeowners will no longer be able to draw on rising home equity. And what about Americans who borrowed heavily to buy properties for investment, expecting prices to keep climbing? Much like the companies who built miles of now-unused fiber-optic cable during the 1990s, they will be in deep trouble.
Yet even if there are temporary disruptions, the end of the housing boom may be good news for the overall economy. The U.S. doesn't need to drive growth with ornate new homes and elaborate kitchens with expensive marble counters. Instead, a shift away from housing could free up hundreds of billions of dollars for other, more productive investments.
This is the biggest rollout of suburban sprawl in history. No problem though, we needed some economic growth, thank you Greenspan and Fannie Mae.
And the OECD dares to lecture central Europe on its lagging growth.
I work in the real estate appraisal and title business. I see dozens and dozens of appraisals on a daily basis.
I’ve said this before … the real estates wealth in the US is astronomical!!!
$700k appraisal … yawn
$1 mil appraisal … borrrrrring
$2 mil appraisal … been there – done that
I saw an appraisal the other day on a $4 mil property and the report had 6 similar sales.
Heck … I’ve seen subdivisions with over 800 homes in it all valued at or over $750k! And this ain’t in Cali either.
$300k - $400k - $500k … SECOND mortgages …… ho hum
The home equity and refi industry will go down in history as the greatest money grab EVER. _________________ If ...'If's' and 'But's' ... were Candy and Nuts ... we would all be happy and fat !
Heck … I’ve seen subdivisions with over 800 homes in it all valued at or over $750k! And this ain’t in Cali either.
$300k - $400k - $500k … SECOND mortgages …… ho hum
How can people afford that? We are earning pretty well and with our shared income we could probably afford a pretty high mortgage, but the banks will not allow us to take out a loan which is more than 5 times our salary. I estimate the percentage of people which are allowed to take out a loan higher than $750k is less than 0.1%.
Are the banks more lenient over there or are the top salaries just so much higher than here?
Are the banks more lenient over there or are the top salaries just so much higher than here?
Yes. This is part of the problem. The banks are lending out way more money than they should be, to people who have no business taking out loans in the first place. _________________ In individuals, insanity is rare; but in groups, parties, nations, and epochs it is the rule. – Nietzsche
Time makes more converts than reason. – Thomas Paine
History is a set of lies agreed upon. – Napoleon Bonaparte
Yes. This is part of the problem. The banks are lending out way more money than they should be, to people who have no business taking out loans in the first place.
The banks don't care about lending since they don't assume the risk. To paraphrase a banker, they don't let the ink dry before selling the mortgage to the street. The street being mortgage wholesalers like Fannie Mae and Freddie Mac, who are unaware of the risk they are assuming and don't wish to be as they then sell the mortgages back as government-grade bonds that investors feel safe buying. It's a giant sleight-of-hand trick that's been played on the international bond market. Even Greenspan is worried about the size of Fannie Mae and Freddy Mac.
I estimate the percentage of people which are allowed to take out a loan higher than $750k is less than 0.1%.
Are the banks more lenient over there or are the top salaries just so much higher than here?
The banks are pretty lenient and there are many creative financing options, such as taking interest only and negative amortization mortgages.
But to be fair a good deal of the folks buying these McMansions are trading up from existing housing, carrying with them a large chunk in equity. They may have done this multiple times during the boom. That's where these large seconds come from. The first on my folk's $850k McMansion is only $300k. But surely people are stretching themselves thinner than ever before, and the guilty first tier buyers are likely to be slaughtered.
It's a giant sleight-of-hand trick that's been played on the international bond market.
Are You Kidding Me???
Governement Grade bonds based on an industry with
loans 25% greater than the assets (125% mortgages)
loans that will never be paid off (Interest only mortgages)
and now loans that just keep on giving (Negative Mortgages)
all this based on assets that are VASTLY inflated in value
I thought things were really badly messed up before, but this is like stepping into a twilight zone episode
Greenspan being worried?? I bet he's about ready to spontaniously combust. _________________ Angry yet?
............The banks don't care about lending since they don't assume the risk. To paraphrase a banker, they don't let the ink dry before selling the mortgage to the street. The street being mortgage wholesalers like Fannie Mae and Freddie Mac, who are unaware of the risk they are assuming and don't wish to be as they then sell the mortgages back as government-grade bonds that investors feel safe buying. It's a giant sleight-of-hand trick that's been played on the international bond market.......
And these "investors" who are buying the bonds are the central banks of Asian nations right?
Once PO hits,
1) Asian nations will stumble (especially China)
2) Uncle Sam won't find enough buyers of bonds
3) US interest rates will have to go thru the roof
4) We'll have the biggest real estate bubble pop that will make the Japanese real estate crash 15 years ago look like a pleasant walk in the park.
Joined: Sep 16, 2004 Posts: 4164 Location: Southwest WI
Posted: Thu May 26, 2005 10:40 pm Post subject:
Its interesting to note how new homes are being built. The quality of materials is nothing compared to houses built years ago. I was in a house costing over 200K and noticed huge cracks across the ceiling among other things. Might as well live in a camper
Its interesting to note how new homes are being built. The quality of materials is nothing compared to houses built years ago. I was in a house costing over 200K and noticed huge cracks across the ceiling among other things. Might as well live in a camper
When I was a field appraiser a few years ago I did a decent number of new construction appraisals for a semi-regional home builder. I was privy to the contract and plans and specs. It was interesting to note how this builder would ratchet up the sales price for minor upgrades (ie … off the self tile and mid grade carpet and mid grade cabinets and counter tops rather than low end items – no custom stuff though). Other than seeing some tile in the bathrooms or kitchen and a more ornate staircase, I could not really tell the difference between the base model and the upgraded one. Sometimes the price difference was over $50,000.
Another ‘local player’ would use the land already owned by the buyer as a down payment to start building the new home. And … the lot value generally did not equate to 20% of the purchase price. Talk about leverage. _________________ If ...'If's' and 'But's' ... were Candy and Nuts ... we would all be happy and fat !
Yes. This is part of the problem. The banks are lending out way more money than they should be, to people who have no business taking out loans in the first place.
The banks don't care about lending since they don't assume the risk. To paraphrase a banker, they don't let the ink dry before selling the mortgage to the street. The street being mortgage wholesalers like Fannie Mae and Freddie Mac, who are unaware of the risk they are assuming and don't wish to be as they then sell the mortgages back as government-grade bonds that investors feel safe buying. It's a giant sleight-of-hand trick that's been played on the international bond market. Even Greenspan is worried about the size of Fannie Mae and Freddy Mac.
Fannie and Freddie are govt grade but they're not govt. guaranteed, are they? If they are govt. guaranteed, then if there's a serious economic problem and the bonds default, you could lose your home AND have to bail out Freddie and Fannie through higher taxes or the crushing burden of trillions in govt. debt.
Fannie and Freddie are govt grade but they're not govt. guaranteed, are they? If they are govt. guaranteed, then if there's a serious economic problem and the bonds default, you could lose your home AND have to bail out Freddie and Fannie through higher taxes or the crushing burden of trillions in govt. debt.
That's actually where the story gets really crazy. Greenspan has been making announcements for a few months that the government DOES NOT guarantee loans made to them, yet investors continue to purchase their bonds at rates under private-sector credit ratings.
That "implicit guarantee" allows Fannie and Freddie to borrow at much lower interest rates than its purely private-sector competitors. Greenspan said the companies exploit that subsidy to build their portfolios and generate profits for shareholders.
And one last thing, Fannie Mae came under scrutiny by the feds this year because of managers cooking the books about losses incurred in derivative trading in 2004.
People are using the increase in value of their homes as disposable income. As the prices of the houses are rising people have more money to spend. And by the looks of it they are spending it on buying more homes, which in turn increases the prices of the houses. Because the housing market keeps on growing the mortgage rates will drop.
That looks to me like a classic inflation paradox, a self-sustained runaway reaction.
Perhaps the housing market will not cool down, but melt down.
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