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Resonate your identity with Naseeb journals. Express your opinions, share your thoughts, post your writings and connect with like minded people through the power of expression.
Is the US housing market going to crash?
Someone posted a vigorous analysis of the 'impending' crash in US housing market on analystforum.com.
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Here are some graphs that a friend of mine put together based upon actual published numbers.
pics.bbzzdd.com
Considering that Shiller's index looks like this...
www.nytimes.com
Now, lets analyze this a bit. We have housing going down, but how much?
Considering that housing increased 4x as much in 10 years than it did in 100 years, according to Shiller's graph, I would say that that is way above average, wouldn't you?
The next question should be, is that sustainable? has there been any fundamental shift to justify those rates?
What would justify the rates?
1. Increased input costs? nope
2. Massive increase in wealth that allows demand? Yes, through leverage (more on this)
3. Massively decreased supply? Nope, we know supply has increased
There are a myriad of other variables, but those are the 3 core factors.
Lets look at wealth. Now, has wealth increased so much that it has tipped the balance of demand to justify the increases? No. So where is the money coming from?
What about loose credit standards and increased velocity through funding pipelines and increased foreign debt ownership? What about loose credit quality penetrating into the lower credit spectrum? What about exotic mortgages that were built for high credit people with variable lifestyles that required them, but which were used as affordability products for down credit mortgages?
The current boom was perpetrated by financing, not by wealth creation. Add in speculation, greed, fear, and the irrational thought that land is rare (considering that our population density is fractions of Europe) you get an artificially increased demand.
Now the chickens are coming home to roost as the financing that artificially boosted the demand is unraveling. Suddenly you have people who only owned 1 or more houses for appreciation, having problems paying. As those people, the sub debt, decline and start to default, mortgage rates go up and prices go down (less demand, more supply).
Furthermore, as the down credits do this, upcredits will be affected. Since they are in ARMs and other mortgages, but can't always afford the resets, they are forced to refi, but since risk has gone up significantly the secondary mortgage market will charge more spread, which is passed onto borrowers. Thus, the impact, not only adjustable, but fixed, is felt.
Lets not forget that unemployment will figure into this somehow, meaning that as people lose jobs they can't pay, dumping more inventory onto the market.
So, what happens if, even at 30yr fixed, somebody can't afford the Refi. If they bought too late they have no cusion, as prices have gone under their mortgage, since many took 100% financing or small down payments.
Now they are underwater. Can't afford to sell, so they foreclose. Eventually this cycle continues until the artificial demand is erased and the prices reach and equalibrium whereby those who CAN afford houses, do. The creative financing loses it's influence upon prices and appreciation returns to it's normal rate of appreciation.
You can assume that prices will go down a little and level off. You can assume they'll go down a lot and level off. But one way or another, they WILL go down and more than likely reach the mean. Deny that if you want, deny that we are just in another boom/bust cycle if you want, I couldn't care less.
But it's sad that people, especially here, still think that everything is all peachy. It's nothing more than another case of how finance people, who don't want to ignore their own role in the problem (nor the continuation of it) will only try to justify their positions by saying everything is OK, while ignoring reality.
That's exactly what happened in 99/00 as analysts were still spinning negative cashflows of .bombs, saying that the "new economy" was here and everybody should be paying 60x PE for it. Toss PE, they said, it doesn't matter now! We are in a new age of financial analysis, we know we can't be wrong. Screw historicals. Screw mean appreciation. Nothing matters except for sock puppets and piss-poor business models!
If the fundamentals don't match the price, throw out the fundamentals? Great idea!
=============================
Here are some graphs that a friend of mine put together based upon actual published numbers.
pics.bbzzdd.com
Considering that Shiller's index looks like this...
www.nytimes.com
Now, lets analyze this a bit. We have housing going down, but how much?
Considering that housing increased 4x as much in 10 years than it did in 100 years, according to Shiller's graph, I would say that that is way above average, wouldn't you?
The next question should be, is that sustainable? has there been any fundamental shift to justify those rates?
What would justify the rates?
1. Increased input costs? nope
2. Massive increase in wealth that allows demand? Yes, through leverage (more on this)
3. Massively decreased supply? Nope, we know supply has increased
There are a myriad of other variables, but those are the 3 core factors.
Lets look at wealth. Now, has wealth increased so much that it has tipped the balance of demand to justify the increases? No. So where is the money coming from?
What about loose credit standards and increased velocity through funding pipelines and increased foreign debt ownership? What about loose credit quality penetrating into the lower credit spectrum? What about exotic mortgages that were built for high credit people with variable lifestyles that required them, but which were used as affordability products for down credit mortgages?
The current boom was perpetrated by financing, not by wealth creation. Add in speculation, greed, fear, and the irrational thought that land is rare (considering that our population density is fractions of Europe) you get an artificially increased demand.
Now the chickens are coming home to roost as the financing that artificially boosted the demand is unraveling. Suddenly you have people who only owned 1 or more houses for appreciation, having problems paying. As those people, the sub debt, decline and start to default, mortgage rates go up and prices go down (less demand, more supply).
Furthermore, as the down credits do this, upcredits will be affected. Since they are in ARMs and other mortgages, but can't always afford the resets, they are forced to refi, but since risk has gone up significantly the secondary mortgage market will charge more spread, which is passed onto borrowers. Thus, the impact, not only adjustable, but fixed, is felt.
Lets not forget that unemployment will figure into this somehow, meaning that as people lose jobs they can't pay, dumping more inventory onto the market.
So, what happens if, even at 30yr fixed, somebody can't afford the Refi. If they bought too late they have no cusion, as prices have gone under their mortgage, since many took 100% financing or small down payments.
Now they are underwater. Can't afford to sell, so they foreclose. Eventually this cycle continues until the artificial demand is erased and the prices reach and equalibrium whereby those who CAN afford houses, do. The creative financing loses it's influence upon prices and appreciation returns to it's normal rate of appreciation.
You can assume that prices will go down a little and level off. You can assume they'll go down a lot and level off. But one way or another, they WILL go down and more than likely reach the mean. Deny that if you want, deny that we are just in another boom/bust cycle if you want, I couldn't care less.
But it's sad that people, especially here, still think that everything is all peachy. It's nothing more than another case of how finance people, who don't want to ignore their own role in the problem (nor the continuation of it) will only try to justify their positions by saying everything is OK, while ignoring reality.
That's exactly what happened in 99/00 as analysts were still spinning negative cashflows of .bombs, saying that the "new economy" was here and everybody should be paying 60x PE for it. Toss PE, they said, it doesn't matter now! We are in a new age of financial analysis, we know we can't be wrong. Screw historicals. Screw mean appreciation. Nothing matters except for sock puppets and piss-poor business models!
If the fundamentals don't match the price, throw out the fundamentals? Great idea!
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