I kinda disagree with the premise of Floyd Norris’ column yesterday (although how can I not love the chart?).
click for larger chart
We already made the case back in August that real estate was cooling.
What Abrams does not show is the long term history of mortgage rates; Rates at half century lows are why the Bom has lasted so long lasting; Indeed, even after 11 rate hikes, mortgages are only at 6.1% — lower than anytime prior to this boom going back to 1971 . (I found data on the Freddie Mac site).
In 1971, the 30-Year Fixed-Rate Mortgage was about 7.5%. Mortgages then climbed into double digits by the end of 1978, peaking at 16.32% in April of 1980. After peaking, they gradually starting coming down, and have been in single digits ever since 1990. (If any one has historical data going back further than 1971, or even better, a spreadsheet and chart, please let me know).
Here’s the NYT excerpt:
"Housing has been in a prolonged boom. The total number of housing starts is not unprecedented; it is in fact lower than the peak reached in late 1972, when a boom was nearing an end that would be worsened by a totally unexpected rise in oil prices. But what is unprecedented is the mild nature of booms and busts in the housing market.
It used to be common to see start volume rise and fall by huge percentages. In the spring of 1975, with a deep recession ending, the number of houses started over the previous 12 months was off 37 percent from the figure of a year earlier. In the fall of 1983, as the economy emerged from recession, housing starts were 66 percent above where they had been a year earlier. But in the last decade, the annual gains or losses in housing starts have never exceeded 14 percent.
What is different now? One factor is the way houses are financed. It used to be that banks and savings and loan associations made mortgage loans, and they would be cut off when the Fed pushed up interest rates above the levels the banks could pay on savings. But those rules are long gone, and the Fed cannot turn the housing market on or off.
Indeed, as the current boom shows, the Fed has some trouble even slowing a boom. Long-term interest rates have not risen with the short-term rates the Fed does control, and the financial system has responded with creative mortgages that let homebuyers hold down monthly payments even as the purchase price rises."
If the Fed really wants to cool housing, three 50 point basis hikes in a row will do it. Of course, that will cool everything else off pretty quickly, too.
Source:
Unending Housing Boom Tosses Aside Rate Increases and the Old Rules
By FLOYD NORRIS
NYT, October 22, 2005
http://www.nytimes.com/2005/10/22/business/22charts.html
Do not forget reg Q. Prior to 1980 this caused the flow of financing to stop , period. So housing was rationed by nonprice factors. Now, it is just pricing. So the impact of higher rates just depends on rates. And as we have discovered the elasticity of demand is such that it takes much larger rate increases then people expect to stop housing.
Seems to me the housing boom depends on long term rates more than short term rates, and no one really knows for sure what is keeping long term rates low. If it really is Asian central banks and oil exporters buying treasuries, then this boom could go on for quite awhile.
Actually I don’t think the boom will continue – I think it will stall, due to the fundamental that housing prices have overshot consumer income, even with low long term rates. If long term rates stay low – by historic standards – the boom will stall. If long term rates go up, the bubble will pop, but a lot of other bad things will happen too.
Great blog, btw.
I know this isn’t exactly what your looking for but it gives a good historical perspective….
All those “A” borrowers who got home equity lines in 2003 @ Prime -.50 are now facing much steeper payments…
It’s not the 30 year but its a good indicator…
Monthly Prime rates from the mid 1940’s to Present….
http://www.federalreserve.gov/releases/h15/data/m/prime.txt
Look, it’s not higher rates or higher prices or Asia or 30-year mortgages or Prime Rate or the Fed or Inflation or gas or rising housing prices or “Bubble Cities” or Interest only loans or NASDAQ or idiot historical analysis or Daily Bubble Talk or OIL or HELOCS.
IT IS THE ONGOING EASY ACCESS TO CAPITAL BY LENDERS, ESPECIALLY IN THE SUB-PRIME MARKET. WHEN A BANK OFFERS SOMEONE A 100% or 125% LOAN TO BUY (or refinance) THEY DON’T CARE ABOUT THE RATE. THEY TAKE IT JUST BEING HAPPY THAT THEY GOT THE MONEY TO BUY A HOUSE.
As I have stated before, The Fed created a Credit Bubble (not housing) and until the money tightens up, housing will continue on.
PLEASE READ PAGE 58 OF THE OCTOBER MONEY MAGAZINE. It reinforces my long-standing position about some so called “Bubble Cities”
Dave Singer: “All those “A” borrowers who got home equity lines in 2003 @ Prime -.50 are now facing much steeper payments…”
SO WHAT?
Norris fails to mention either ARMs or IO loans to otherwise unqualified borrowers. As well as the impact of speculators on the market.
Also, in discussing any asset class you must take into consideration the perceived future appreciation by the buyer.
The current bubble includes buyers who think their property will continue to see growth of 10% to 20% per year.
With out including these things, Norris is only telling half of the story.
edhopper: DEFINE “speculator”, because everyone who buys stocks is speculating. The % of speculators is not high enough (according to PMI) to even bring up.
“The current bubble includes buyers who think their property will continue to see growth of 10% to 20% per year.” — THAT’S NOT TRUE.
We don’t know how many people lied on their loan applications. However, I admit that people (and banks) use Stated Income applicants who generally puff. Therefore, how can they possibly underwrite properly? It’s like they look the other way. But, the vast majority of loans an Fannie Mae (or VA) conforming. So, no biggie.
Btw, you can’t use the word “bubble”, unless you mean to predict that one is coming. ARE YOU? And, would you please ring the bell when it comes…..
Housings Booming Lack Of Volatility
The housing market seems to be out of the controlling grasp of the Fed these days. In a Floyd Norris column this weekend Unending Housing Boom Tosses Aside Rate Increases and the Old Rules [NYT] he makes the following observations:
T…
Housings Booming Lack Of Volatility
The housing market seems to be out of the controlling grasp of the Fed these days. In a Floyd Norris column this weekend Unending Housing Boom Tosses Aside Rate Increases and the Old Rules [NYT] he makes the following observations:
T…
I want to give buyers something to talk about by investing their resources into getting their home into its best condition. This is time and money well spent but you’ll need to concentrate on the areas that will bring you the most return.
Focus on the areas that buyers notice and value – bathrooms, kitchens, and curb appeal. Make sure your rooms are spotlessly clean and free of clutter. A fresh coat of paint in a neutral color is one of the least costly investments that can go a long way towards making a good impression. De-personalize your rooms by packing away your nick-knacks and dust catchers. If possible. put extra furniture or belongings into storage so that your home appears open and spacious. Clean your windows so they sparkle – and don’t forget the window sills.
Trim your trees and hedges and keep the lawn mowed. Plant some colorful flowers in the garden. Drive by your home and try to look at it from an objective viewpoint. What’s the first thing you notice? Does your front door say, “Welcome”? If not, maybe a fresh coat of paint – or perhaps even a new front door – and some potted plants could help.
The way your house looks should not be your only concern. Is there a pet odor or other potentially offensive smell in the air? Be sure any odor producing agents are removed or controlled to keep your home fresh smelling at all times. When you live in a home you can become used to certain odors and they are easy to overlook. Be sure to ask others if your home passes the “sniff” test.
Be aware that certain investments you made for the personal enjoyment of your home will not necessarily raise the value of your home to prospective buyers. Don’t expect to add on to the price of your home all the money you paid to improve it.
In fact, some things, like swimming pools, can frequently be viewed as a liability. Generally, painting and improving your kitchen and bathrooms will be a good investment. The kitchen is viewed as the heart of a home – most family activities take place here so improving your kitchen can facilitate the sale of your home. Adding a bathroom usually generates a good return as well as adding decking outside.
The best return for your home improvement dollar comes from bathroom remodeling (80%), bathroom addition (81%), minor kitchen remodeling (87%), major kitchen remodeling (80%), and a second storyaddition (83%). The least profitable investments are a home office (54%), reroofing (60%), a sun room (60%), replacing windows (68%), and refinishing your basement (69%). In a slower market, it’s essential to pay attention to the presentation of your home. With so many homes on the market to choose from, you want to be sure you outshine the competition. You may even want to consider hiring a professional home stager to help you.