Archive for May, 2006

Date: May 16th, 2006, Filed under What is a bubble?

I was looking at Realtor.com’s Housing Bubble Prospects Q&A and figured I should make some comments so the average person interested in the housing bubble can compare what I believe is reality versus what I believe is realty (the desire to broker the sale of homes for a commission).

I’ll post the question asked on their site and my answer. You can read their answer from the link provided above.

What is a housing bubble?

A housing bubble, like any market bubble, is an economic situation that affects specific markets. Bubbles are created when investors run up the price of something hoping to get a profit from the speculation. Most market bubbles, including those as far back as that which preceeded the Great Depression, are normally blamed on a central bank printing too much new money that enters the economy, and focuses on a specific market. Those who get the money earliest (the banks and the insiders) can use this money before inflation robs all the money in an economy of value. Housing bubbles happen because the Federal Reserve central bank printed more money than previously existed, and some insiders decided to take advantage of the suckers who would come into the market too little, too late.

Has there ever been a national housing price bubble?

Of course! Just before 1975 we had a housing bubble that ended up in a national housing price decrease. In 1980 we saw another bubble peak and then fall. In 1989 we had one of the worst bubble pops, causing many homeowners to lose their life savings as they bought at the peak and then couldn’t sell for a profit. We are probably now seeing a peak being passed in about 2005. As the Federal Reserve central bank printed more and more money, the bubbles became bigger and bigger.

What is the “normal” rate of home price growth over time?

The growth of home prices is caused by two situations: a real supply shortage, and a money supply increase. In most situations, housing supply shortages only occur in metropolis hubs where property can not be added to the current supply. The usual suspect in seeing a house price going up is the increase of money supply. As the dollar falls in value, more of them are needed to buy a home, so we see this as a price increase. In value terms, though, most houses fall in price. Once you add in the real costs of home owners (property taxes, maintenance, replacement of used home items, etc), almost every house falls in value over any period of time. Bubbles seem to make houses see more valuable, but the dollar is falling faster than the houses are going up in price.

What are the biggest factors that drive home prices?

The biggest factor in rising home prices is the devaluing of the dollar by the central bank. The central bank prints more and more new currency, which makes everyone’s savings worth less and less. This causes home prices to rocket up. Eventually developers see the quick profit to be had, so they build many new homes. Also, homeowners see the “profit” from the charts, so some take speculative action such as buying a second investment home or extracting artificial equity from their home. While the dollar price goes up, though, the real value of the home goes down. Many are hurt by speculative investment in hopes of a real profit value.

What conditions are necessary for home prices to soften or decline?

Generally we see too many developers making too many homes, combined with too many buyers holding too much debt and are unable to afford something different. When homeowners see their mortgages climb while their maintenance costs keep going up, they find themselves unable to sell their homes for more than their mortgage balance is. This is where we see foreclosures rising, and this causes housing prices to soften/decline even more as the supply goes up from bank foreclosures.

Where and when have home prices declined in the past? What were the general market conditions?

As mentioned before, we saw 3 areas that showed dollar price declines. Yet over the entire history of recorded housing sales, the price of homes has not held value once you have factored in the real costs of owning a home. You have to mow lawns, replace carpets, repaint, fix roofs, plug leaks, pay property taxes and make sure the utilities are turned on. These costs, once factored in, will make a home a negative investment. You buy a home to live in it, not to retire with the money made from profiting from the sale.

How long have home prices declined in the past?

Historically, once the previous maintenance and tax costs are paid, almost every home declines in true profit value.

Should we be concerned that home prices are rising faster than family income?

Of course. Home prices have always rose faster than income — this is a factor of the central bank’s inflationary policy. They print more money, which makes people feel richer, but then consumer goods and services prices go up faster than the wage raises do.

What are the prospects of a housing bubble?

Bankruptcy, foreclosures, homelessness, divorces, guilt and shame. Guaranteed.

What is likely to happen with home prices?

I believe that in order to “save” the charts so they continue to go up, the U.S. Federal Reserve will continue printing more and more money. Because this money will circulate into the housing economy at some point, we’ll see prices fall in some areas but stay plateaud or rise in others. While prices might stay solid or go up, the value will go down because all this newly printed money will make life more expensive in every facet.

Discuss this article at the housing bubble forum.

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Date: May 12th, 2006, Filed under Uncategorized

Christianity Today has an interesting article titled The Debt Slayers, covering the varying Christian anti-debt drives that are starting to show up in greater numbers. I’ve been saying for years that the local churches will likely see an influx in new and returning attenders based solely on the number of families who have followed the advice of the experts of finance, but now realize that many of these experts have been wrong. Is it your accountant’s just to solely do your taxes? I always figured out accountant’s responsibility is to give you good financial advice on your overall financial situation — and warn you when you’re overextending your budget or putting yourself in grave danger. How is it that the average accountant doesn’t realize that increases in the prices of houses and stock markets is not a sign that you are gaining value? I’m starting to believe that most of the CPA industry is focused solely on making tougher tax code so that they can focus more on taxes, and less on sound financial management for their clients.

Kirstin Downey from the Washington Post believes that Basics, not luxuries, is to blame for high debt. She says that the cost of health care, housing and education are the biggest problems facing the average American. I believe this is partially true, but I also believe that those costs have skyrocketed as our governments have taken more and more control of all 3 areas in our lives. The more that government moves to regulate a given market or economy, the more red tape we have to go through and the less efficient that market can be. Government grows as it regulates a given market, and when that market fails, it regulates more to try to fix what they broke. When you break your arm riding your bicycle too quickly, do you go out and try to ride it even faster using only your good arm? When both arms are broken, do you go out and buy a motorcycle to break your previous speed record? It seems this is how government operates, and once the power is transfered from the individual to the masses, there is no way to go backwards once the taste of power is passed on to the politicians.

The Oxford Press has an article on Georgia leading the nation in foreclosures. Rather than lay blame on home buyers over-extending themselves and taking on ridiculous financial risks and responsibilities, the article seems to blame employers for not providing disability or unemployment assistant, and it blames the loan industry for taking advantage of the foreclosure system. Why would bank want to loan a homeowner money only to take over the home and be burdened with trying to sell it? The blame lies solely on homeoners not living within their means, and attempting to buy something as an investment that normally depreciates over time. No new laws or regulations will fix this problem until homeowners understand that a big home does not guarantee financial stability or a better life — the happiest people that I know are those who live in homes most of us would consider tiny shacks. Their finances are much more stable without a mortgage, and the costs to maintain a smaller home are much easier to cover during the rough times life brings us.

WLNS News says that it is the economy causing more home foreclosures, but the disregard that the foreclosures are caused by homeowners who don’t consider the long term. People get fired. Markets change. Other countries provide services and products more efficiently than we do. When you put 33% of your gross income on the line for 30-37 years, you’re taking a huge risk in believing that life will always be stable and that your income will always increase. It is always wise to imagine losing your job and your ability to work for 2 years, and set your savings and expenditures to assume this scenario. 2 years of savings, minimum, should be more than enough time to sell your home and rent, while accepting a job well beneath what you used to do. Just as horse-shoers and gaslamp-lighters had to move on to new jobs, so do many Americans every year. Look at your current job and ask yourself if you will be as efficient and as inexpensive as others around the world, and see if your job could be easily replaced by someone working over the Internet. If that is the case, don’t assume you’ll have an increasing income for the rest of your life.

If you look at KGO’s article titled Home Foreclosures Up As Mortgage Rates Climb, we see their reasons for an increase in foreclosures:

# People stretched themselves financially to get into homes using adjustable rate mortgages, interest-only mortgages and more exotic loan products.

People were greedy and egotistical and wanted more than they could handle. These same people will cost me part of my income in order to fix their irresponsibilities.

# Banks relaxed lending standards to make it easier for people to purchase homes; however, for some of those homeowners, once they have an unexpected financial hardship, such as medical bills, a lost job or necessary car repairs, they stop making mortgage payments.

Banks were given a huge influx of cash from the Federal Reserve, with almost no responsibility required in backing up the loans properly. In a 100% gold reserve banking system without an FDIC, banks would look much more closely at loan applications to see if they’re risks or not. Today’s banks have little to worry about, why should we be surprised that they’d accept huge profits today with almost no downside risk tomorrow?

# Many homeowners put little to no money down when they bought their homes and currently have little or even no equity in their home and thus nothing to fall back on. And in some cases, these homeowners then took out home equity loans or lines of credit and now owe even more.

And yet I will have to pay for their lack of responsibility.

# Homeowners have relied on the recent double-digit increases in home prices to build up equity in their home instead of paying down more in principal. As housing prices increase more slowly, many homeowners will not be able to rely on high home values to cover their debt loads.

Houses should not be appreciating investments, especially considering property taxes, maintenance, insurance and increased supply of new homes in the country. Anyone who truly believed their house could make them a profit deserves to reap what they’ve sown. My home is a depreciating consumer good, just like a toaster, a car or clothing. I fully expect it to be worthless in 100 years, maybe even 50.

The good news is that the property bubble is bringing some reality to some buildings. There is a huge amount of old, dilapidated properties that can’t be torn down because some local or state committee has branded it historic. Rather than allow the market to replace these ancient run-down properties, they force the owners to keep them exactly as they were. In one case, owners in foreclosure can’t even sell a historic building, and they wonder what they should do. What they should do is realize that these historic development committes have created a system where a building deemed historic is more of a burden than an investment. I believe if people want to keep an old building around, they should pool their own income to save it rather than passing laws to make the building impossible to maintain and make it impossible to replace. I will not be surprised to see more of these historic buildings enter foreclosure as time goes on.

Discuss this article at the housing bubble forum.

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