Tuesday, November 30, 2004

Bank warns of slowing economy (UK)


Jane Padgham, Evening Standard

BRITAIN'S economy will slow dramatically next year as consumers rein in their spending and the housing bubble bursts, a top investment bank warns today.

In one of the most bearish forecasts to come out of the City, Dutch bank ABN Amro predicts the economy will expand by just 1.9% in 2005 compared with 3.2% this year. That is lower than the City consensus of 2.5% and well below the 3% to 3.5% predicted by Gordon Brown in the Budget. The Chancellor may be forced to cut his forecast in tomorrow's Pre-Budget Report.

A growth slowdown as ABN Amro predicts would blow a hole in the Chancellor's fiscal arithmetic. Most experts believe Brown is already on course to break his Golden Rule - to borrow only to invest - on the assumption that the economy will expand by 3% next year.

ABN Amro says the UK consumer will falter under the pressure of a heavy debt burden and falling house prices. Estimating that house prices are overvalued by 25%, it believes they will fall by 5% next year and by 15% over the next three years, with a risk they will drop even more sharply.

'In 2004, household gearing increased by over 20%,' the bank says. 'This means it was 20% more expensive to service a new mortgage in 2004 than it was in 2003. The two previous times this happened were in 1979 and 1989. Both occasions were followed by slumps in real house prices. So, unlike the Bank of England, we do not believe recent falls in house prices will prove temporary.'

A slowdown in consumer spending growth from 3.2% to 2% will trigger a rise in unemployment in the building and construction, real estate, financial services and retail sectors, the bank predicts.

British firms will be the worst performing among the major economies, earnings growth dropping from 12% this year to just 0.25% in 2005. Profits will be hit because as the economy slows, wages and employment levels will be slow to adjust.

'Real unit labour costs will rise and margins will be squeezed,' ABN Amro says. 'Companies will only begin to cut costs more aggressively once the slowdown has become more pronounced.'

The financial sector looks particularly exposed, especially banks and building societies involved in mortgage lending, it says. Adding to the gloom will be rising inflation, as a fall in the pound boosts import prices.

House price crash unlikely as mortgage lending slows




Western Mail

FEARS of a housing market crash have calmed after figures from the Bank of England showed an easing rather than a full-scale drop in activity.

Economists said the data suggested an all-out collapse was unlikely and the market was levelling out after an adjustment over the summer.

The number of loans approved for house purchase in October was 83,000, compared with the average of 94,000 in the three months to September, the Bank of England reported.

Total lending to individuals grew by £9.1bn or 0.9% in October, £0.1bn weaker than the increase in September.

Secured lending grew by £7.5bn or 0.9%, in line with the increase in September. Gross advances were £0.8bn weaker at £23.1bn.

The value of all loans approved was £21.1bn, £0.6bn weaker than in September and £1.9bn weaker than the average in the three months to September.

David Page, economist at Investec, said, "Figures for mortgage lending and approvals - which give us a feel for what will happen over the next few months - eased again, but only modestly.

"The housing market has slowed but there is no evidence to suggest a collapse and the adjustment over the summer now appears to have ended. It looks like we are seeing some levelling out and we shouldn't see a collapse - the figures are down, yes, but not significantly so."

Consumer credit growth was also weaker last month, growing by £1.5bn or 0.9% in October, £0.1bn weaker than the increase in September, the Bank of England said.

John Butler, economist at HSBC, said, "The slowdown has been rapid but the level of approvals is only back to that last seen in January 2000.

"The risk is that if the slowdown in activity levels continues at its current pace, house prices are likely to fall sharply.

"However, if they stabilise around current levels, which are in line with the historic average, then house price inflation is likely to slow sharply but it would not be indicative of outright price falls."

"The message is simply that household borrowing is still rising, but just rising at a slower pace than earlier in the year. Total personal borrowing is still 13.6% higher than a year earlier.

"Overall it is clear that mortgage activity is slowing sharply and that raises parallels with the early 1990s period but then again the market has already incorporated that information."

Nationwide predicts house price freeze

Sandra Haurant , The Guardian

House prices across the UK will come to a virtual standstill in 2005, the Nationwide Building Society predicted today.

The lender said that property prices in Britain look set to rise by just 2% across the year, compared to a rise of 13% in 2004.

Alex Bannister, Nationwide's group economist, said: "Following the increase of around 13% in house prices during 2004, we expect price growth in the 12 months to December 2005 to be in the range of 0 to 5%.

"However, the likelihood is that annual price inflation will end next year towards the lower end of this range."

According to Nationwide, house prices rose by 1% in November, cancelling out the 1% fall seen the previous month. The price of the average property is now £153,439, just under £900 lower than at the market's peak in July.

Mr Bannister said: "Despite November's 1% increase in property prices, the recent trend in house price growth remains muted. The price of the average house has risen by an average of just 0.3% per month over the last three months compared with an average of 1% per month over the previous three months."

Commenting on today's figures, Howard Archer, chief UK economist at investment company Global Insight, said: "The 1% month on month rise in house prices reported by Nationwide is a surprise, and will raise hopes that the housing market will slow relatively steadily over the coming months rather than slump.

"However, there are always likely to be fluctuations around the slowing trend, while latest survey evidence - showing further weakness in mortgage lending and approvals, waning buyer interest, more houses on the market, more time needed to sell a house, and agreed selling prices continuing to fall as a percentage of asking prices - clearly points to further price weakness ahead."

The Bank of England announced yesterday that the number of people taking out mortgages to buy property has fallen in October to just 83,000, the lowest level since January 2000.

According to the Nationwide, the north-south divide in house price inflation will continue to narrow in 2005. Monthly price growth has already seen a slowdown in most regions, and a more slow growth in 2005 will mean a sharp reduction in annual price inflation, particularly in those regions that saw phenomenal growth in 2004.

The brakes will be slammed on hardest in the north, north-west, Yorkshire and Humberside and Wales, the building society forecasts. These are the areas that experienced soaring prices in 2004, leaving buyers' ability to afford property severely stretched.

Mr Bannister said: "The change in pace of price growth reflects higher interest rates, subdued real take-home pay, ongoing concerns about affordability and buyers; expectation of future price growth becoming more realistic."

He added that today's economic conditions meant that a collapse in the market might be averted.

"The changing economic backdrop is acting as a drag on the housing market. This contrasts with the early nineties, when the severe economic downturn resulted in a sharp correction in the housing market".

Mr Archer said: "We currently share Nationwide's view that the chances are relatively good for achieving a soft landing in the housing market. However, a crash obviously cannot be ruled out."

Monday, November 29, 2004

Home loans drop to a five-year low

Jane Padgham, Evening Standard

FEARS over the slowing housing market mounted today following news that mortgage demand has slumped to its lowest in nearly five years.

The Bank of England said the number of mortgage approvals - loans agreed but not yet made - fell for the fifth month running to 83,000 in October, the lowest since January 2000.

Economist Malcolm Barr at JP Morgan pointed out that in the weakest 12 months of the early-1990s housing downturn, approvals averaged 73,000 per month. 'The Bank data are approaching that level quite rapidly,' he said.

Mortgage lending eased to £7.5bn, the lowest since March 2003. Consumer credit - borrowing via credit cards, personal loans and overdrafts - fell to £1.5bn, the lowest since April.

The approvals figures support the view that the housing market is slowing sharply, but the jury is still out on whether prices will collapse or stagnate.

Meanwhile, worries that predictions of a housing crash are undermining consumer confidence were soothed by news of increasing optimism.

The GfK Martin Hamblin consumer confidence index registered minus four in November against minus six in October.

Chicagoland Foreclosure Filings Jump 31% in November

Foreclosures.com

SACRAMENTO, Calif.--(BUSINESS WIRE)--Nov. 29, 2004--Northern California based Foreclosures.com, an investment advisory firm specializing in distressed property, reported today that new filings of foreclosure increased by 31% in the first 18 days of November over the total of new cases filed the previous month.

"Our research in the Chicago area reported 3,695 new lis pendens filings in the six county Chicago metro areas as of November 18," said Alexis McGee, president of Foreclosures.com. "In contrast there were a total of 2,536 new cases filed for the full month of October." Ms. McGee added that 2,603 of the November filings were in Cook county, with the balance in the five suburban counties.

Ms. McGee went on to say that Chicago real estate activity was mirroring the much more overheated coastal markets in that sales volume was increasing even as prices were coming down. "The Midwest is a lot less volatile than the coastal markets because the Middle America markets never really got as overheated as those in California, Nevada and in the Northeast. We saw double-digit price appreciation year over year in the coastal markets, and over 52% in Las Vegas. In contrast, Chicagoland prices rose just 7.6% year over year in the third quarter of 2004."

Ms. McGee also noted that the increase in home values for all of Chicagoland was offset by a 4.7% drop in Cook County prices in September from the same month in 2003, and said this weakness, combined with rising interest rates could be a contributing factor in the surge in foreclosure filings. "Over the last twelve years, we've always seen a correlation between rising rates, falling prices, and an increase in foreclosure activity."

Foreclosures.com has been publishing pre and post-foreclosure property data and assisting investors since 1992. The company serves markets in Chicago IL, the state of New Jersey and the metro areas of Phoenix AZ, Las Vegas NV, New York, and eighteen California counties.

"Our mission is to put investors in touch with troubled homeowners so they can help these people quickly sell their way out of foreclosure and conserve some equity for a new start," said Ms. McGee. "That's far better than seeing them lose everything in a Sheriff's Sale on the courthouse steps."

Rapidly Cooling Las Vegas Housing Market May Spark Wave of Mortgage Defaults


Foreclosures.com:

SACRAMENTO, Calif.--(BUSINESS WIRE)--Nov. 29, 2004--California based Foreclosures.com, an investment advisory firm specializing in distressed property reported today that the rapidly cooling Las Vegas housing market could lead to a surge in foreclosure activity in 2005.

"Throughout much of 2004, the Las Vegas market was distorted by out of state speculators buying new homes to flip for fast profits," said Alexis McGee, president of Foreclosures.com. "Sales volume was inflated by houses selling two or three times in a matter of months."

Ms. McGee went on to say that when a major builder like Pulte Homes cuts prices by as much as 25%, that's a clear sign that the party's over. "When you see year over year price appreciation of over 52%, you know that rate is unsustainable. The price correction we're seeing now was inevitable," said Ms. McGee. "The hotter the market, the steeper the price correction will be in order to get back to normal. It looks like the speculators have left town, and the housing supply has jumped from one month's inventory to five." She added that even some builders might face foreclosure of unsold homes.

Ms. McGee said that when interest rates rise, downward pressure on prices will increase and many who bought at the top of the curve with adjustable rate mortgages will find themselves "upside down" in their property (owing more than the house is worth) and facing increasing payments.

"That's when you'll see defaults start to rise," she said. "Homeowners who find themselves in that position and then get in financial trouble will just leave the keys in the door and move out. They may offer to deed the property back to the lender in lieu of foreclosure or just let the bank foreclose."

She pointed out that foreclosure is a lagging indicator of financial problems, and that she didn't expect to see increasing foreclosure activity for several months. Nevertheless, she added, analysts at her firm had always seen a correlation between falling prices, rising interest rates and increasing default levels.

Foreclosures.com has been publishing pre and post-foreclosure property data and assisting investors since 1992. The company serves markets in Chicago IL, the state of New Jersey and the metro areas of Phoenix AZ, Las Vegas NV, New York, and eighteen California counties.

Expect Rise in California Mortgage Defaults by Q2 2005

Foreclosures.com:

SACRAMENTO, Calif.--(BUSINESS WIRE)--Nov. 29, 2004--As mortgage rates move up in response to strong job growth, Foreclosures.com, a northern California based investment advisory firm specializing in distressed property, expects a surge in mortgage defaults by the second quarter of 2005.

"Employment, or the lack thereof, is no longer the primary cause of foreclosure activity," said Alexis McGee, president of Foreclosures.com. "The problem now is that too many households are overloaded with debt." Ms. McGee added that, during a long period of below normal interest rates, consumers continued spending and financed their purchases with adjustable rate home equity credit lines. "You could say," said Ms. McGee, "that homeowners got addicted to a combination of low interest rates and double digit price appreciation every year. Now that combination has reversed itself."

Ms. McGee pointed out that, even before rates started up, the housing market had begun to soften with falling sales volume in many California markets and a slowing rate of price appreciation. "Now, because mortgage rates have begun to rise, we're seeing a year-end surge in buying by so-called fence sitters who want to avoid the higher loan payments they see coming down the road."

Ms. McGee went on to say that this sales activity is pulling the future into the present, and that she expected California markets to experience something of a slump in the first quarter of 2005 and that filings of notices of default would come soon after that.

She added that her company had always seen a correlation between rising interest rates and rising levels of foreclosure activity.

"As the cost of money increases, there will be more downward pressure on prices. The refinance window will be closed to homeowners in distress, and payments on all those adjustable equity lines will increase rapidly, squeezing some budgets to the breaking point," Ms. McGee said.

Foreclosures.com has been publishing pre and post-foreclosure property data and assisting investors since 1992. The company serves markets in Chicago IL, the state of New Jersey and the metro areas of Phoenix AZ, Las Vegas NV, New York, and eighteen California counties.

"Our mission is to help investors locate troubled homeowners so they can help these people conserve some equity for a new start," said Ms. McGee. "That's far better than seeing them lose everything in a Trustee's Sale on the courthouse steps."

Bubble Busting

Bubble Busting
As the head of homebuilder toll bros. Tells it, the housing market is not about to slow down


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Time Magazine, 06 December, 2004 issue
Home prices have shown signs of sluggishness in Las Vegas and a handful of other markets, fueling the debate over whether we are in a dangerous housing bubble. TIME senior writer DANIEL KADLEC talked with Bob Toll, CEO of Toll Bros., one of the nation's largest luxury-home builders, who insists that any talk of a slowdown is premature.

TIME Let's start with the question you must be sick of: Is it a bubble?

BOB TOLL You're right. I am sick of it. No, we're not in a bubble. Prices have gone up because there has been tremendous constriction in supply along with tremendous immigration and increases in income for baby boomers. We're on track to see the cost of housing as a percentage of income come to the same place as it is in the U.K. and much of Europe, where they pay up to 45% of income for housing.

TIME Then how do you square soaring home prices with relatively stagnant personal income?

TOLL You can't square it. The polarization of wealth in the past 20 years has been extreme. The number of families making $100,000 a year has grown six times as fast as the population. The rich are getting richer and buying bigger houses. Meanwhile, as an industry, we're only building the same number of homes each year as 20 years ago, even as the population grows.

TIME But babies don't buy houses.

TOLL No, but immigrants do, especially the kind that Uncle Sam is letting into the country these days. They must have jobs and income. Immigrants are two-thirds of our population growth.

TIME There has been some evidence of a housing bust in Las Vegas. Will the trouble spread?

TOLL Las Vegas still has good margins for us. You're asking me if I've stopped beating my wife. Well, I never started.

TIME No slowdown at all?

TOLL There's been a leveling off. We can't raise prices as rapidly as we had been. But we can still raise them.

TIME Are any markets overbuilt?

TOLL Our cancellation rate is below 5%, where it almost always is. There are some softer markets, like Austin, Dallas, Raleigh, Hilton Head, Columbus. Charlotte was soft but is coming back. But New York, Chicago, Washington and almost every other market we're in are on fire.

TIME If mortgage rates increased 2% in a year, how would it affect the value of my home?

TOLL It depends on the neighborhood and price of the home. If it's in the $200,000 range and not in a particularly fresh neighborhood, you could see a drop of 7% to 10%. Buyers of these houses are on a budget, and higher rates eliminate a lot of buyers. But if you are in a $600,000 home, which is our range at Toll Bros., all you'll witness is cocktail talk.

TIME Homebuilder stocks have doubled in less than two years. But now short interest is on the rise [a bet by hedge funds that builder stocks will fall]. Is it really practical to buy these stocks today?

TOLL The shorts are going to get slaughtered. They are making a huge mistake.

TIME What's the next housing trend?

TOLL In the past couple of years we've begun dense suburban developments, and we're back in the cities with low-, mid- and high-rises. There just isn't enough ground left in the suburbs, and you have a whole new thrust from boomers and young hip-hoppers who want to be back in urban areas. Urban developments are less than 5% of our business, heading to 10%. It's definitely caught on. Look at New York. You could have bought the entire meat-packing district for $4. Now you can't get an apartment there for under $1 million.

Consumers' Wallets Could Close in 2005


By Matthew Goldstein
Senior Writer, The Street.com



With the holiday shopping season officially under way, the nation's retailers are once again counting on consumers to dig ever deeper into their pockets to make the season a happy one. Early indications are that consumers once again won't disappoint. Chicago research outfit ShopperTrak said retail sales on Friday were almost 11% higher than a year ago, while Visa International also reported a double-digit increase in purchases over the weekend. On average, economists are looking for consumer spending to rise by 3% in the fourth quarter, compared with a year ago. The one thing economists have been able to count on the past few years is the unfailing spirit of the U.S. consumer to keep spending. But rising interest rates and energy costs probably will crimp discretionary spending in the coming year. Any pullback by the consumer, of course, would be bad news for retailers, regional banks and credit card companies such as Wal-Mart (WMT:NYSE) , Wells Fargo (WFC:NYSE) and Capital One (COF:NYSE) . In particular, the Federal Reserve's move to raise interest rates will make it increasingly difficult for homeowners to squeeze any more cash out of their biggest asset. Historically low interest rates the past two years prompted homeowners to refinance their mortgages at a record clip and in the process turn their homes into cash-gurgling ATMs. Last year alone, borrowers took $312 billion in cash out of their homes, mainly through so-called cash-out refinancings, according to the Federal Deposit Insurance Corporation. This year, the total is expected to reach $260 billion, with homeowners taking out a greater chunk of that cash through home equity lines of credit. Much of the equity liquidated by homeowners was pumped directly into the economy, as homeowners used the money to refurbish homes, buy cars, purchase stock, pay for vacations and pay down some of their credit card debt. In all, mortgage-related debt accounted for 90% of the $1.7 trillion in consumer debt accumulated during the past two years. Next year, however, the amount of cash homeowners will be able to extract from their homes is expected to fall well below the $260 billion figure, with the refinance market grinding to a halt. Though the home equity market is booming right now, that too is expected to fall off as interest rates continue to rise and the escalation in home prices levels off. "The consumer has been living off of monetary fiscal stimulus for the last few years," says Richard Brown, the FDIC's chief economist for risk analysis. Brown says that with the refinancing boom now over, it's not clear worker salaries will rise fast enough to fill in the gap. Brown says many of the optimistic forecasts for consumer spending next year are banking on a continuing robust home-equity market. But he says those forecasts are assuming the housing prices in most of the country will continue to rise. "If home prices drop a bit or just level off," says Brown, "it will have an impact on the ability of people to tap home-equity lines of credit." A drop in housing prices reduces a homeowner's equity stake in his house and his ability to borrow against it. To be sure, Brown isn't talking about a housing crash or the bursting of the housing bubble that many doomsayers have been predicting for months. All he's talking about is a leveling off of housing prices, something that seems plausible after several years of soaring home values in much of the country. But if consumers are unable to turn to their homes for cash, this could have some tough consequences, particularly for those living on the margins and struggling to make ends meet. No doubt, many consumers will resort to running bigger balances on their credit cards as a way to keep spending. Indeed, there are some early indications that that already may have begun. In the third quarter, revolving consumer debt, credit card debt that isn't paid off each month, rose by $10 billion, after falling by $6 billion in the second quarter, according to the Federal Reserve. Yet with the average household already carrying $7,500 in credit card debt, taking on more debt isn't necessarily a good thing, except for the card companies that can collect higher finance charges. Moreover, rising interest rates mean higher credit card rates, something that also could cause consumers to think twice about buying a big-ticket item with plastic. Brown says he's most worried about consumers who basically are living from paycheck to paycheck and are most likely to have taken out a variable-rate mortgage. The interest rates on these mortgages rise in response to a surge in bond yields, which usually move in sympathy with actions taken by the Federal Reserve. Brown says two-thirds of the so-called subprime mortgage market, mortgages sold to individuals with poor credit histories and lower incomes, are variable-rate mortgages. "These people are very vulnerable to higher interest rates," says Brown. In the worst-case scenario, homeowners on the margins could lose their homes to foreclosure, or file for bankruptcy protection to avoid paying their other debts. At best, a surge in monthly mortgage payments will mean homeowners will rein in their discretionary spending. Either way, there's a good chance Wall Street and Washington won't be able to look to the consumer as the economic savior in 2005.

Sunday, November 28, 2004

Will the house price bubble burst the banks? (UK)

As property values fall, Heather Connon asks if lenders are in debt danger

The Observer


The deputy governor of the Bank of England, economists from Deutsche Bank and Barclays, and research company Hometrack were all queuing up last week to predict that house prices would fall - with 20 per cent providing a rough rule-of-thumb measure of the overvaluation.

The statistics now seem to be bearing that out. The British Bankers Association reported a 35 per cent fall in the number of mortgage approvals in October, compared with the same period last year and house price indices are starting to register declines.

Most of us remember what happened the last time house prices fell: repossessions reached more than 90,000 a year, many more struggled to keep their repayments up and banks and building societies were crippled by bad debts.

Yet this time around, bad debt provisions are at record lows. Lloyds TSB is providing just £7 million against its mortgage loan book of more than £70 billion - 0.01 per cent. Others are a little more extravagant but even the most fully provided - HBOS - set aside just 0.23 per cent of its £176bn balances.

Few analysts expect provisions to rise significantly over the next few years, housing slowdown or not. Is the City simply putting its head in the sand or will it really be different this time around?

There are a few signs that borrowers are under pressure. Repossession actions - the first steps towards repossessions - have been rising for much of the last year, although the number of actual repossessions continues to fall. Personal bankruptcies, too, rose more than 30 per cent in the third quarter of the year and are now 12 per cent above the peak in 1993, at the depths of the last housing market crash.

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While that is likely to be partly because of changes in the regulations which have made it easier to declare yourself bankrupt, it does also suggest that borrowers are starting to feel the pressure.

It would not be surprising if they were. Consumer borrowing has soared to more than £1 trillion, 80 per cent of which is mortgages. Credit cards are freely available to even poor credit risks - at a price - while the more reliable can, and do, take their pick of interest-free offers and generous credit limits.

House prices have risen by 160 per cent over the last seven years and are now up to more than four times income, much higher than during the last bubble in the late 1980s. Deals offering borrowers as much as four or even five times their income are not uncommon. Add in the series of rate rises there have been this year and the pressure on some borrowers will become all too much.

Analysts at JP Morgan think that could happen to more and more of us. As well as highlighting the rise in repossession action and bankruptcies, they have analysed arrears statistics from securitised mortgages - loans packaged up and sold to investors - and conclude that there is a real risk that banks' bad debt provisions will have to rise.

'Given the steep rise in personal debt, we think default rates would prove highly sensitive to even a small rise in unemployment,' says their report. 'The fact that unemployment looks unlikely to return to early 1990s levels offers little comfort in credit quality, in our view.'

They warn that banks' provisions on unsecured lending could have to rise as high as 6.5 per cent of balances and say that they may have to start setting aside as much as 0.15 per cent of mortgage balances a year - last year, the amounts provided were so small as to be negligible. They calculate that could cut more than 11 per cent from earnings at Northern Rock, one of the most aggressive at chasing mortgages recently, and between 4 and 9 per cent at the other banks.

The banks insist there is no sign of any credit problems. Barclays told investors in last week's trading statement that 'arrears performance and warning risk indicators remained stable'; HBOS points out that 95 per cent of its new lending is for mortgages of less than 85 per cent of the purchase price; Abbey National says that, across its portfolio, the average loan is 40 per cent of the value of the property. Prices would, therefore, have to fall far more substantially than predicted to get borrowers into trouble.

Ciaran Barr, co-author of a Deutsche Bank report warning that house prices were as much as 20-30 per cent overvalued, thinks there is one key reason why bad debts are likely to be such an issue this time. 'The Bank of England is in a much better position to deal with it this time round as it can cut interest rates. In previous slumps, they had to keep monetary policy tight because of the high inflation.'

Deutsche predicts that the Bank will be forced to cut interest rates next year to prevent a housing crash.

Most commentators believe that the relatively low level of interest rates - even after this year's increases, they are more than 2 per cent below rates at the start of the Nineties crash, and less than a third of where they peaked - is key to preventing a repeat of that era.

'If inflation and interest rates are this low, indebtedness can be even higher than normal, especially given the increased supply and sophistication of the ways to manage your finances,' said Trevor Williams, chief economist at Lloyds TSB. He points out that, while borrowings have soared, the value of our assets and investments has jumped too - to £6 trillion, or six times the value of our debts.

Of course, the assets and the debts are not necessarily owned by the same people, and there is increasing evidence that financial problems are concentrated in a minority of people who may have overextended themselves to buy a house and been seduced onto the merry-go-round of interest-free periods on offer from credit-card companies.

Surveys suggest that about 10 per cent of consumers find their borrowings a problem - but that means the majority are able and willing to keep paying.

That explains why Martin Cross at Teather & Greenwood puts credit quality third on the list of concerns about banking prospects. Far more serious, he believes, are the lack of revenue growth (partly caused by our need to rein back on our borrowing) and pressure on costs.

Finding a Good Deal in San Francisco

By LISA CHAMBERLAIN, New York Times


FINDING a place to buy in San Francisco is a daunting task for all but the wealthy, as housing prices continue to increase despite a shrinking population and job losses from the bursting of the Internet bubble.

The average price of a single-family home in San Francisco has risen around 16.5 percent in the last year, to $952,715 from $817,976 in 2003, according to the San Francisco Association of Realtors.

Sarah Stangle and her husband, Chris Buck, are both from Connecticut and lived in New York City before moving to San Francisco. Having rented in Manhattan and Brooklyn, they didn't want to move 3,000 miles across the country only to be forced 30 miles outside the city because they couldn't afford to buy anything.

"We didn't want another apartment or loft, which is what we were in before," said Ms. Stangle, 30, who works in advertising. "So we focused on neighborhoods in the city where we could afford an outright house."

Affording a single-family house in San Francisco's more established neighborhoods - like Pacific Heights or Noe Valley - was out of the question for Ms. Stangle and her husband, who works for a nonprofit environmental organization. And with condominium conversions tightly regulated - only 200 units are allowed to convert each year - even if Ms. Stangle and Mr. Buck wanted to go that route, their options would still have been limited and expensive.

To their surprise, single-family homes are available and affordable in San Francisco on the southern side of the city in traditionally working-class neighborhoods where public transportation is less than desirable and the non-Victorian housing stock doesn't make for a "wish you were here" postcard. Neighborhoods like Portola, Excelsior and Bay View don't roll off of most agents' tongues, but increasingly, that's where young professional first-time home buyers are ending up. The latter is where Ms. Stangle and Mr. Buck bought their four-bedroom house with a yard and two-car garage for $449,000 in 2002. Though Bay View is only three miles from downtown, it's still considered a peripheral area by most people who didn't grow up there.

"If someone wants a house, that's where they have to go," said Robin Hubinsky, an agent with Zephyr Real Estate, San Francisco's largest independent real estate agency. "The housing stock that's out there is 90 percent single-family. If you want a house and you want to pay $600,000 or less, you can't go anywhere else. In some of these 'peripheral areas,' it's great to discover that they're really only peripheral in your mind. In reality, they're safe and stable and community-oriented."

While there is a small but growing influx of young professionals into these neighborhoods, they're still a long way from gentrified, Mr. Buck said. In addition to some environmental issues from a closed Navy base, Bay View has a high crime rate.

For the most part, however, the couple feels completely at home. The first weekend they arrived, one neighbor brought over a plateful of food and another neighbor left a bag of apricots on their front porch harvested from her own tree.

Having the space of a house was a great help when Ms. Stangle's mother needed to move in with them because of illness. "We couldn't even have taken her in if we'd purchased a condo in an established neighborhood," Ms. Stangle said. "There just wouldn't have been room." But not only did they have the room, within a year a house across the street came up for sale, which her mother bought for $459,000. "The amazing part about buying both our houses is that we paid asking price. That is unheard of in San Francisco. Houses are routinely priced $100,000 under value to encourage bidding wars, and that is just exhausting."

While houses in these neighborhoods are often sold at asking price, the prices themselves are starting to climb. Single-family homes in District 10, which includes most southern neighborhoods, have increased, on average, by $89,796 in the last year, according to statistics compiled by the San Francisco Association of Realtors.

"Compared to other parts of the city, you can get more house for your money," said Piotr Pawlikowski, another Zephyr real estate agent, who recently sold a house in Excelsior to a single professional woman for $710,000. "Because of that, there is a generational change happening in areas like the Excelsior. But there's no such thing as a bargain in San Francisco."

Stacey Fowler and her husband, Brian Malenfant, both in their early 30's, lived in a one-bedroom rent-controlled apartment for eight years. Then, when Ms. Fowler became pregnant, they knew they had to make a move.

"There's this whole pocket of neighborhoods, all south, near the freeway and heading toward Candlestick Park," Ms. Fowler said. "They're working-class areas, and the houses were built in the 50's and they just kind of got forgotten about. But once we started looking there, it took us less than a month to find a place." They paid $425,000 for a two-bedroom house. Within 18 months, their property, in an area known as the Portola Valley, has appreciated by $100,000, and they're preparing to refinance to take advantage of the increased equity.

"We're right next to McLaren Park," Ms. Fowler said. "Most people don't even know about this park. It has all these rolling hills and trees. When you say where you live, people think it's not a great place, but it's fine. We wanted a diverse neighborhood, and since we moved in, two more families have moved in with babies. So we're very happy."

For first-time buyers who are not inclined to live in those neighborhoods, the only other entry point into the San Francisco real estate market is through a tenancy in common. Stephan Alm and his wife, Sara, teamed up with Vahram Massehian and his wife, Daliah, to purchase a two-unit building as a tenancy in common. They share a $750,000 mortgage and have spent about $45,000 getting the property up to code as required by the condo conversion regulations. Pooling their resources was the only way they could enter the real estate market in Bernal Heights, an established neighborhood that sits on a hill overlooking the Mission District.

"We looked at a few single-family homes in peripheral areas, and it just didn't meet our needs," Mr. Alm said.

While horror stories of failed tenancy-in-common relationships have pushed some buyers into more affordable neighborhoods where they can purchase a single-family house, the arrangement has worked well for the Massehians and Alms. Both couples are now expecting their first child. "We're living parallel lives," Mr. Massehian said. "We'll raise the kids together and share that responsibility as well."

California's prices prompt exit strategies

Chicago Tribune


You know that sound you get when you tilt a shoebox full of marbles?

That's sort of how I picture what's going on in California, where housing prices as so insane that fully one-quarter of the population says it's thinking about relocating to another area, even to another state.

That's according to a nonpartisan think tank in San Francisco, which says that its recent survey of Californians' attitudes about housing is the most comprehensive of its kind in years.

The Public Policy Institute of California also says that within the numbers of potential housing refugees lie an even more worrisome nugget:

About half of those younger than 35 -- the state's prime labor force -- say they're giving thought to moving on to greener pastures.

Apparently they're not the first Californians to get the idea to clear out. Last summer, U-Haul International suspended most truck and trailer rentals for one-way moves out of California between Aug. 2 and Sept. 7 because its equipment was crossing state lines and few newcomers were bringing in replacements; the ban was still in place in some cities in November.

From the relatively comfy vantage point of Illinois, it would be tempting to write off California's housing blues as just another neurosis in a state that seems to revel in them. But the sticker shock is real. In Illinois, the median price (half sold for more, half for less) of a house in September was $187,500; in the Chicago metropolitan area, it was $244,100.

But in California, the median single-family price was a twitch-inducing $465,000, according to the California Association of Realtors, which estimated that just 19 percent of the state's population could afford to buy that house.

Economists have been squabbling for a couple of years about whether America is heading for a "housing bubble," in which prices rise faster than can be justified by the underlying economic conditions. In plainer terms, a bubble occurs when home prices get pumped up so much that buyers just back away, leaving sellers with no choice but to cut, cut, cut their prices, even to the point where they might lose money.

These days, fewer debates are breaking out about whether there will be a price pop in California, or at least in certain parts of the state.

Here's one recent, typical opinion, that of Cambridge, Mass., housing analyst David Stiff, who tracks home-price appreciation around the country for Fiserv CSW. Recently he told me:

"I've been reluctant to label any market as a bubble, but in Southern California, in only the past 12 months, prices have gone up 31 percent. Given how expensive those markets are, I'd characterize it as a bubble.

"People are being irrational about how much they're able to pay."

So the marbles -- er, that is, the people who have been shut out of the market -- are rolling inland, toward areas that promise a palatable price alternative. Problem is, when one marble rolls, it has plenty of company: Some of the highest price run-up, proportionally, has been in those areas that carried an "affordable" label.

So the direction of anxiety appears to be shifting: People aren't worrying out loud so much that the bubble will burst. Now, as one California newspaper recently editorialized, they're starting to worry that it won't.

Saturday, November 27, 2004

Economic Outlook: David Smith: Wobbly house prices cast a long shadow (UK)

The Times



THE DAYS are getting shorter and the house-price forecasts are dropping faster than the last of the autumn leaves. Forecasts of a price crash, which began life as a minority view, are now bang in the middle of the mainstream.

Capital Economics, which got there first, had its 20% price fall starting this year with a 5% drop and continuing for another couple of years. It will be wrong on timing — prices will end this year at least 10% higher than at the start — but it will argue “better late than never”.

Barclays’ chief economist Christopher Smallwood, my predecessor in this job, predicts a 20% fall from present levels. Deutsche Bank, which had been predicting house-price stagnation, has joined the mild-crash school. It now expects prices to drop 10%-15% as a prelude to stagnation. ABN Amro has prices falling 10% next year.

Housing is the story of the moment, and not just at dinner parties. It has hit the financial markets in at least three ways. The housing downturn has changed perceptions about the interest-rate outlook.

One of the most aggressive interest-rate forecasts is from John O’Sullivan at Dresdner Kleinwort Wasserstein. He expects the Bank of England to cut the base rate to 4% by the end of next year in an efforts to limit the house-price drop to 5%.

My view is that the Bank’s monetary policy committee, having worked hard to get rates up from last year’s emergency low level of 3.5% to the present 4.75%, won’t surrender cuts without a fight and would like to keep rates where they are for quite a long time. But these things can change rapidly.

The shift in rate expectations, particularly among City economists, has been dramatic, and it is reflected in the currency markets. The pound has been climbing against the dollar but slipping against the euro. Its rise against the sickly dollar would have been much bigger had it not coincided with the softening of the outlook for rates.

The other impact of housing will be on firms, particularly retailers. The Bank has been working hard to try to prove that housing and consumer spending have “decoupled”, because the final two years of the boom in house prices coincided with a softening of spending growth. But Mervyn King, the governor, is too good an economist to have real confidence in a view based on a short run of data. When the housing market tanked in the past, consumer spending suffered. In the absence of better evidence to the contrary, that has to be the assumption this time.

Charlie Bean, the Bank’s chief economist, repeated the “decoupling” case last week, but admitted there were big uncertainties.

Perhaps the most interesting impact of the new housing climate will be on Gordon Brown, who this weekend is putting the finishing touches on Thursday’s pre-budget report.

Booming house prices were as welcome at the Treasury as flower arrangements at a hay-fever convention. The Treasury could not understand how, having delivered low- inflation economic stability, it had a housing boom as powerful as in the unstable days of the late 1980s. Hence the reviews it commissioned by Kate Barker on housing supply and David Miles on mortgages.

And underlying this quest for understanding has been the fear, certainly for the chancellor and his political advisers, that boom could turn to bust. For a government that promised no return to boom and bust, the excuse that only one part of the economy had turned to bust would cut little ice with voters.

Oliver Letwin, the shadow chancellor, while stressing that he neither wishes for nor expects a housing crash, puts it well. For a while after Brown’s £5 billion annual raid on pension funds, the effect was disguised by a rising stock market but then exposed when share prices fell. For the past few years Labour’s general tax rises have been disguised by the wealth effects of rising house prices. As that stops, people will become more aware of the tax squeeze, and the expectation of hikes to come. The feelgood factor will not be what it was.

The relationship between house prices and election outcomes is not a perfect one. Having slipped in 2000, prices were rising strongly at the time of the 2001 election, which Labour won comfortably. On the other hand, the Tories lost the 1997 election despite a strong housing market, having won in 1992 at a time when prices were falling. Margaret Thatcher’s 1983 and 1987 victories came when prices were soaring.

The change in the housing climate will be a test in another way. In the budget the Treasury factored in a modest slowdown in consumer spending next year, from just over 3% to 2.5%, but within the context of strong overall growth of 3% to 3.5%, with exports and investment taking up the slack.

With the CBI warning last week of the effect on business of high oil prices, as well as the potential damage to world growth of a plunging dollar, official expectations of a “rebalancing” away from consumers in the context of a robust overall economy seem to be optimistic.

That is not just an immediate concern. Even if the prospect is of a long period of stagnation for house prices rather than a crash (my view), something fundamental will have changed. House prices have trebled in the past nine years. We are about to find out how important that was as an engine of economic growth.

Finally, just to put things in perspective, the ratio of house prices to average earnings — the normal valuation measure — is now 5.7, compared with a long-run average of just under 4. I can tell you, courtesy of Davy Stockbrokers in Dublin, that the comparable ratio in Ireland averaged 3.5 in the period 1985-95 and now stands at 8.1. After looking over the edge in the wake of the September 11 attacks on America, Irish house prices are rising 12%-13% a year and show little sign of slackening. Interesting.

PS: Last week’s reference to the skip index, my economic indicator based on the number of skips in the street, brought some excellent suggestions. The most popular related to lorries. It appears I should be looking at the number of heavy lorries on the road, particularly those travelling in the early hours when most of us are tucked up in bed. Tim Denison of retail specialists SPSL suggests another: the time it takes to get through on the phone to your credit-card company.

To embark on a slightly different strand, I was invited the other day to an evening of “drinks and networking”. Drinks, yes, but networking fills me with the kind of horror expressed by the late Sir Nicholas Ridley when asked, on quitting the cabinet, whether he intended to spend more time with his family. That, he said, was the last thing he would want to do.

This kind of jargon is taking over the world. On the radio, I really did hear somebody say, “we’re a people business”. On the television news somebody was talking without embarrassment about being “on alert 24/7”. If I hear another consultant type say: “You can talk the talk but can you walk the walk?” I will gladly strangle him. As I will, the next time I hear: “Do the math.”

What does it mean when somebody offers to give you the “heads up” on something? Or, my particular bête noire, a Home Counties accent, usually female, saying those two little words beloved of Australian soaps: “No worries.”

If somebody can write a bestseller on the use of the apostrophe, there may be one here. In the meantime, there’s a copy of my own Free Lunch for the best example of irritating business, economic or other jargon. The terms used in this column every week are admissible.




Don't fear 'bubble burst' in prime areas


Steve McLinden, Bankrate.com

Dear Steve,

Is it wise for me to hold on to my home that has already tripled or even quadrupled in value since the year 2000? Or is it wiser to sell now while the real estate market is hot and pocket the huge profits now when I can? I live in a hot market, Brevard County, Florida.
-- Sam

Dear Sam,
This is a very common question these days, especially from folks in Florida, Southern California and other coastal areas, as well as in vibrant areas of the Southwest such as Phoenix and Las Vegas.

Although you don't say whether you plan to move out of the market, the tenor of your letter indicates you're probably staying. And that always begs the question of what you'll do for replacement housing.

If you like where you are, intend to stick around awhile and can make your mortgage payment without much pain, you just might want to stay put. In other words, you might make off with a huge profit from a sale, but if you want a similar home locally and all the quality-of-life benefits you've enjoyed, you'll probably be spending those profits and then some to get one.

If you plan to downsize to a less-expensive location nearby but aren't ready to give up that fast-appreciating home, you have a three-year window where you can retain it and rent it out without sacrificing the generous capital gains tax exemption ($250,000 for just you or up to $500,000 if you are married and filing jointly) from the sale. The big condition is that you must have owned and occupied the place as your principal residence an aggregate of two of the five years before it sold. Miss those requirements and you'll be paying about 15 percent capital gains tax.

Even with the rash of violent weather this year in Florida, demand for quality housing is not likely to abate there. Historically, home values have rebounded vigorously after major hurricanes because there's always enormous demand, both domestically and internationally, for prime coastal-area property. Sure, more skittish homeowners are putting their homes on the market now and lot of closings got delayed due to damage, but sales figures and Realtors indicate demand will remain brisk when all the dust settles.

If you truly fear getting caught in a so-called housing bubble and must sell for peace of mind, the best way to put those profits to work in replacement housing would be to move to a market where values are lower. But first, realize that even if you remain in your current home, and values were to somehow drop slightly over the next few years -- which seems very unlikely, by the way -- you'd still retain a lot of value in a highly desirable location. The odds are greater that you'll continue to see good gains in the next few years, though perhaps not at the racehorse rates that have occurred recently. Still, the forces of supply and demand remain heavily in your favor.

Congratulations on your good fortune and good luck with your decision.


Are housing prices heading toward a major meltdown?



The Modesto Bee, CA

We're hearing more sour notes connected to soaring home prices, which until now have been a pretty sweet tune for real estate owners.

First there's the recent estimate by the California Association of Realtors that a family now needs an annual income of $107,880 to buy the median-priced home in the state. Fewer than 20 percent of Californians have that kind of income.

Then there's a report in Smart Money magazine that Modesto is among several Northern California cities where real estate markets are overvalued.

Finally, there's a prediction from some national real estate experts that the California bubble is about to burst.

All of that would seem to point to a significant slowdown, although we sure aren't seeing it here, if the number of subdivision proposals going to government officials is any indication.


We urge Gov. Schwarzenegger to move ahead in appointing Superior Court judges to vacancies around the state, including four in our area. We hope he didn't try to reinvent the wheel in the selection process. Governors have appointed local judges for years, relying on input from nominees' colleagues and others and doing thorough background checks. Many things in state government needed a massive overhaul; the judicial appointment process isn't one of them.


Congratulations to the many people who had a hand in Empire's handsome new park, which will open in January. A dedication ceremony was held last week to allow for the recognition of outgoing Stanislaus County Supervisor Pat Paul, an advocate for the park.

The attractive six-acre facility, in front of Teel Middle School on Yosemite Boulevard, features a playground; picnic tables and shelter; barbecue area; and baseball and soccer fields.

There also are some promising developments in the campaign to add a swimming pool to the park, says Sheriff's deputy Noel Vento. The county is applying for a $1 million grant, using the money and services contributed so far as the required match. Vento also had a recent visit from a representative of the governor and hopes to take his case directly to Schwarzenegger in February.

Finally, on Tuesday, Vento will receive one of the more meaningful contributions to date.

After hearing about the drowning deaths of three Empire boys, children in the neighboring city of Hughson conducted a penny drive to help with a pool. The effort started with the first graders in Bonnie Doyle's class and expanded to include Cub Scout Pack No. 326. In all, the Hughson kids raised $700. We love it!


We all know about the obsession over the Scott Peterson trial. Any time there have been big developments in the case, The Bee's Web site — www.modbee.com — has gotten tens of thousands of additional hits. Message boards are devoted to every facet of the case, TV talk shows are cluttered with wild speculations, and on and on.

Thus, it was inevitable that some folks would look for a way to make a buck out of this fascination. And so they have. Following the Nov. 12 verdict, copies of The Modesto Bee and some other papers started showing up on eBay. Someone paid $22.50 for a Nov. 13 edition of The Bee that was sold at a newsstand for 50 cents. The highest price among 21 Bees sold on the popular Internet site: $36 for the Nov. 13 and 14 papers. And then there was the person who shelled out $300 for a junior high yearbook showing Scott when he was voted friendliest in his class. No comment.



Posted on 11/27/04 00:00:00

Friday, November 26, 2004

Housing market 'to fall by 20pc' (UK)


By Philip Aldrick , Telegraph

Roger Bootle, a leading City economist, yesterday warned that "the world economy is poised on a knife-edge" because the over-inflated internet bubble has simply transferred to the world's housing markets.

Speaking after the Chartered Institute of Management Accountants' annual conference, he said: "What has happened in the housing markets is a bubble transferred from the equity market. Just like that bubble, people have been pursuing money for nothing. They think it's a no-brainer - buy as much as you can and it'll make money for you."

Mr Bootle, HSBC's former chief economist and now managing director of the consultancy Capital Economics, expects the UK housing market to collapse by 20pc over the next three years, driven down by overvaluation. "It has already started," he said.

He cited the soaring house price-to-earnings ratio, a key valuation measure, which is more than 50pc higher than the long-term average.

A collapse in the housing market was just one threat to the global economy, he said, with the weak dollar and heavily indebted US and UK consumers also likely to have a damaging effect.

Unlike last time, there was now nowhere for the bubble to transfer and the global economy could be in for a hard landing.

But, he added, the problems had emerged at the same time as China offered "a fantastic expansion of production . . . so the opportunities for increased growth in the world economy are enormous."

Housing experts say cash in now

By J.N. SBRANTI, The Modesto Bee, CA
BEE STAFF WRITER

SAN FRANCISCO — National real estate experts have advice for California homeowners: Sell now.

California home prices have soared 123 percent the past five years, so it's time to cash in, advised Anthony Downs, a real estate economics expert for the Brookings Institution, a nonprofit research organization.

"Sell whatever you don't want to keep forever. No one knows where the market peak is, but this must be close to it," Downs said.

He presented the keynote address this week at the 27th annual Real Estate & Economics Symposium in San Francisco.

The event was sponsored by the University of California at Berkeley's Fisher Center for Real Estate and Urban Economics.

Home ownership must be looked at as an investment, Downs said. So a real estate investment should be balanced with other assets, such as stocks, bonds and cash.

"Too much investment money is looking for property" right now, Downs said, which makes it a seller's market.

Downs wasn't the only expert at the symposium who predicted California's housing bubble soon will burst.

"Home prices have moved up too far, too fast," warned Ken Rosen, who is chairman of the Fisher Center and of the Rosen Consulting Group, which tracks real estate markets. "We always get price corrections after (big run-ups) because homeowners cash out and move out of state."

During the past year, Rosen said, home prices skyrocketed 31.8 percent in Sacramento and 32.1 percent in San Diego. In Atlanta, by contrast, prices went up 3.4 percent.

Rosen said abnormally low interest rates have convinced many buyers — in California and nationwide — to jump into the housing market sooner than they typically would. He said new home sales particularly have increased because of lower mortgage costs.

"These low rates have moved demand forward, so I think we're in for a correction," Rosen said. "Higher rates really are going to change things."

Mortgage rates will rise this year, Rosen predicted. He expects the 10-year bond rate, which is used as a benchmark for many adjustable-rate loans, to rise from its current 4.2 percent to 5.5 percent by the end of next year.

"There's more risk out there. When rates rise, there may be a deflation (of home values)," Rosen said. Rising adjustable mortgage rates also may cause problems for homeowners. "There is a chance for a price correction and defaults and delinquencies."

Not everyone who spoke at the symposium agreed.

Bruce Karatz is chairman of KB Home, one of the nation's largest builders. He sees more good times ahead.

"The doomsayers have been predicting for a number of months that interest rates were going to go higher," said Karatz, noting that rates have stayed steady this year. "I don't see a tremendous fall off in home-buyer demand for some time."

Among KB Home's many current developments are Oakcrest in Modesto, Bridlewood in Patterson, and Autumnwood Estates and Villas in Lathrop.

Even if mortgage rates go up, Karatz is convinced homes will continue to sell.

"Home buyers are driven by events, not by interest rates," Karatz explained.

Builder argues rates' affect is small

He said people buy houses when they get married or divorced, need more space for children, need less space because they've grown older, want a vacation home or need an investment.

Karatz said those events will continue to happen, so homes will continue to sell.

But some big-time real estate investors are moving money out of the housing market.

The California Public Employees' Retirement System, the nation's largest public pension fund, is selling many of its real estate investments.

Michael McCook, CalPERS' senior investment officer for real estate, said the retirement fund has more than $12.1 billion in real estate holdings.

Some of those funds are invested with Hearthstone Inc., which is the financial backer for land development on 865 acres at Bellevue Ranch, the master planned community in north Merced.

McCook said his fund plans to eventually own $16 billion in real estate around the world, but currently is selling some of its property and banking the profits.

"There will be some great opportunities down the road to buy," McCook said. Right now, he agreed, is a good time to sell.


Thursday, November 25, 2004

Mortgage approvals plummet (UK)

Michael Clarke, This Is Money

THE number of mortgages approved by UK banks has plummeted by more than a third compared to a year ago. Figures released by the British Bankers‘ Association show 59,011 homeloans were approved in October, down 35% on 2003 numbers and a 7.3% drop compared to September.

Gross mortgage lending during the month reached £15.1bn, £1.2bn lower than September and a 15.2% year-on-year drop.

The figures add further weight to the general view that house prices are facing further falls over the new year.

The Bank of England yesterday warned of a significant slowdown in the market and predicted further prices erosion.

Over the past month almost every indicator has showed a rapid deceleration in annual house price inflation with several showing price falls on the month.

BBA director of statistics David Dooks said: 'The weakening demand for mortgage lending and consumer credit seen over the past few months continued in October and weak approvals data suggest that this pattern will be maintained in the short-term.

'With mortgage lending volumes slowing it is not surprising that competition among lenders is intensifying and at the same time, borrowers are looking to reduce their borrowing costs.'

As a result, re-mortgaging is holding up and accounted for 39% of all approvals in October.

In the consumer credit market, new borrowing on credit cards hit its lowest level since February at £7.1bn.

The personal loans and overdraft market was also at down at £2.8bn, suggesting recent debt scare stories may have hit home with consumers.

Housing prices surge, but experts foresee market slowing

By Joe Kovesdy, Ahwatukee Foothills News

Staff Writer

Prices for existing homes on the market jumped 6 percent in October, making cheaper houses scarce in Ahwatukee Foothills.

October median prices for existing home sales reached $247,450 in Ahwatukee Foothills, compared with $233,950 in September.

For buyers, higher interest rates combined with stable income and higher home prices will make affordable housing a tougher find in the Phoenix area, according to Jay Butler, director of Arizona State University's Real Estate Center.

Chris Meyer, a real estate agent with Realty Executives, said the rise in prices requires him to move quickly to show affordable houses.

"If I show two homes to a client in the morning and another opens up in the evening ­ I have to show it right then," Meyer said.

For cheaper housing, buyers are moving farther and farther outside Phoenix to East Gilbert, Maricopa, Coolidge, Laveen, Buckeye and Surprise, where buyers feel pressure to place first dibs on housing opportunities.

"To find something affordable you're going to have to go way east or way west," Meyer said. "People are camping out so that they can be first in line for new lots ­ up to four days."

The most affordable homes in the Ahwatukee Foothills ­ homes at $200,000 and under ­ can be found in the area surrounding the Warner-Elliot Loop. Built mostly between 1978-84, these homes are single family with shingle roofs, Meyer said.

According to the Real Estate Center, the number of Ahwatukee Foothills homes resold in October was 180, compared with 115 in October 2003.

Economist Elliott Pollack, president of Elliott D. Pollack & Co., an economic and real estate consulting firm in Scottsdale, said that a slowdown in activity in California and other parts of the country suggests the same may be headed for Arizona.

"The coasts are probably in the early stages of a housing bubble," Pollack said at the East Valley Economic Forum on Nov. 16.

"People have been substituting their home as a credit card," he said. "This works as long as interest rates are low and housing rates are up."

Pollack added that the Valley housing market is not sustainable at its current level.

U.S. mortgage applications fell last week--MBA

By Dean Patterson

NEW YORK, Nov 23 (Reuters) - New applications for U.S. home mortgages fell last week, even as mortgage rates edged downward, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage activity fell 5.7 percent to 715.0 in the week ended Nov. 19, more than offsetting a 4.3 percent gain the prior week.

Economists said the MBA report shows the housing market will likely remain strong. They predicted a gradual slowing in the market next year and rising mortgage rates.

"The numbers are down a little but remain strong," said David Berson, chief economist of Fannie Mae in Washington, D.C. "These numbers don't indicate any near-term fall off in activity."

Rates on fixed 30-year mortgages averaged 5.64 percent last week, excluding fees, down from 5.70 percent the prior week.

The MBA's seasonally adjusted index of refinancing applications fell 8.3 percent to 2179.3 after a 10.6 percent advance the prior week.

The association's purchase index, a gauge of loan requests for home purchases, dropped 3.5 percent last week to 463.3, building on declines of the two prior weeks.

The refinancing share of mortgage activity remained relatively high in the latest week at 48.4 percent, from 48.6 percent the prior week, the MBA said.

The share of adjustable-rate mortgages was also stable at 34 percent of total applications, unchanged from the prior week.

Fixed-rate 15-year mortgage rates were unchanged last week. However, adjustable-rate mortgages rose. The MBA said one-year adjustable rate mortgages climbed 24 basis points to 4.13 percent, excluding fees.

Berson predicted a 5 percent dip in home sales next year and 30-year fixed-rate mortgages at about 6.25 percent at the end of 2005.

Ken Mayland, president of Clearview Economics LLC in Pepper Pike, Ohio, predicted a similar decline in housing, but with a sharper rise in mortgage rates to about 6.83 percent by the end of next year.

"I think the peak in housing has been seen, but we are still seeing exceedingly strong numbers," Mayland said.

Some economists have voiced concern that so many homeowners have shifted into adjustable-rate mortgages in recent years, putting their finances at risk to a spike in interest rates.

Both Berson and Mayland said it is unlikely a problem because homeowners are more inclined to refinance into a more favorable structure when times change.

In addition, they said, a big share of adjustable-rate mortgages are hybrids with fixed rates for a set period of time, such as three to seven years, further reducing the risk.

"Thanks to refinancing, millions of households have locked in four-decade-low mortgage rates," Mayland said.

Connecticut : State's Home Sales Plunge

But Housing Prices Continue To Climb

By KENNETH R. GOSSELIN, Courant Staff Writer

Sales of single-family homes in Greater Hartford slowed dramatically in October, the strongest sign yet that the area's hot housing market is cooling off.

But despite weaker sales, home prices in the 57-town area continued to rise in October, making double-digit gains in both average and median sales prices.

Closed sales in October were down an eye-popping 20.25 percent - to 878 from 1,101 the same month a year ago, according to the Greater Hartford Association of Realtors.

This was the fourth consecutive month of slower sales and the steepest decline so far.

Although mortgage rates remain low, economists say demand in Greater Hartford appears to be waning after three straight years of record sales.

"People that wanted to buy have already moved because of the anticipation of interest rates rising, which hasn't happened yet," said Susan Coleman, a professor of finance at the University of Hartford.

Prospects for job growth in Connecticut also remain lackluster. That means fewer people moving to Connecticut to take jobs and buy houses.

And homeowners already living in the area may be less confident about buying a starter or a larger house if they are not sure they could find another job if they lose theirs.

"We may have already satisfied much of the demand," said Ronald F. Van Winkle, a West Hartford economist.

Coleman said prices are still rising because there is still some - albeit weaker - demand in the market.

"People that are prepared to buy are willing to pay the higher prices," Coleman said.

In October, the average sale price rose 12.02 percent, to $274,733 from $245,250 from the same month a year. And the median sales price rose 11.54 percent, to $232,000 from $208,000 in October, 2003.

No one is predicting a collapse of the housing market, but economists and realty agents clearly see a slowdown coming that will rein in price increases.

"I'm not expecting a severe downturn in Connecticut's housing market," said Donald L. Klepper-Smith, a West Haven economist. "This is not 1989."

The housing market has not been flooded with new construction, and mortgage rates have not risen sharply, he said.

Mortgage rates remain much lower than many had predicted earlier this year. Many economists had expected the 30-year rate to be well above 6 percent by now.

According to Freddie Mac, the average for a 30-year, fixed-rate mortgage edged slightly lower this week to 5.72 percent, with an average 0.6 points, down from 5.74 percent last week.

But when rates rise, as economists expect they will, price increases in Greater Hartford will slow. Fewer buyers will be able to afford to buy homes whose prices had been rising at double-digit rates annually, Klepper-Smith said.

Even with weakening sales, 2004 is shaping up to be a healthy year, according to the Greater Hartford Association of Realtors.

Through October, the association reported:

Closed sales are up 3.42 percent, to 9,775 from 9,452 for the same period last year.

The average sales price rose 7.88 percent, to $262,664 from $243,479 for the same period in 2003.

New listings rose 6.04 percent to 15,857 from 14,954 in the first 10 months of 2003.

The statistics include most existing-home sales; some for-sale-by owner transactions are not included.

Wednesday, November 24, 2004

Q&A: What the Fall of the Dollar Really Means


The U.S. housing market, a major force behind the economic recovery, is likely to take a significant hit. "The housing industry has been feasting on very low mortgage rates," Zandi says. "In some ways, the Chinese and others have been providing very low mortgage rates for U.S. buyers.
Dollars falling
Don Mason

Economist Mark Zandi says he expects the dollar to continue depreciating over the next few years, but he does not think it will collapse. Corbis

NPR.org, November 24, 2004 · For the seventh time in a month, the U.S. dollar hit a record low against the euro Wednesday, falling to $1.3160 from $1.3086 late Tuesday. In recent months, the U.S. dollar has also lost ground to the yen and the Canadian dollar.

Most of us know that when the value of the dollar falls, we end up paying more for imported goods. But how else does this affect the U.S. economy? We turned to Mark Zandi, chief economist for the consulting firm Economy.com, for a primer on what the dollar's fall really means.

Q: Why do we want foreign investment in the U.S. dollar?

When we say that foreigners invest in the dollar, we mean they are buying U.S. Treasury securities, corporate stocks and bonds, mortgage-backed bonds -- everything for sale on U.S. markets. Foreign investment helps fuel the growth of those markets.

In the 1990s, the bulk of foreign investment went into U.S. stocks and corporate acquisitions. Nowadays, most investment from abroad comes from central banks -- the central banks of China and Japan, in particular -- and most of that money is going into U.S. Treasury securities.

Investing in U.S. Treasury securities is less risky for central banks than putting their money in corporate stocks and bonds. Foreign central banks are also less inclined to take an ownership stake in U.S. companies, Zandi says, adding: "Can you imagine if the Chinese central bank owned a big chunk of GM?"

Q: What does the U.S. Treasury do with foreign investment?

The U.S. Treasury uses investment from abroad to finance the federal deficit -- which, in the fiscal year ending Sept. 30, was $413 billion. Much of that deficit is a result of the Bush administration's tax cuts, and spending associated with homeland security and U.S. military operations in Iraq and Afghanistan.

"In a very real way, foreign investment has been used to finance our national security activities abroad and at home," Zandi says.

Q: What happens if the dollar continues to slide?

Zandi says he expects the dollar to continue to depreciate over the next three or four years. "I don't think it will collapse, but it will deflate, particularly against the Chinese and other Asian currencies," he says. "They’ll be buying less of our assets, hopefully, and that means higher interest rates."

Q: You used the word "hopefully" to describe foreign investors' potential loss of interest in U.S. assets. Is the dollar's slide a good thing?

The dollar's fall will result in painful adjustments for the U.S. economy, but "ultimately, it's the right thing, and we'll be better for it," Zandi says.

U.S. consumers and the federal government are borrowing and spending aggressively, consuming more than they produce. "Personal saving rates are close to zero, which means many households are borrowing more than they earn," Zandi notes. "The federal government is borrowing at a record pace."

So far, foreign investors have been willing to finance U.S. borrowing. But foreign nations have a finite amount of excess savings to lend to U.S. borrowers. "We're very close to that end now," Zandi says.

Some economists estimate that the United States is already borrowing about three-quarters of foreign nation's excess savings.

"These are things that can't continue forever," Zandi says. "We need to save more, and the only way it's going to happen is if we're forced to do it."

Meanwhile, the depreciation of the dollar will force U.S. consumers and the U.S. government to behave in a more responsible manner, to consume less aggressively and produce more goods, Zandi predicts. In the end, the dollar's fall will make it cheaper for foreign consumers to buy U.S. goods -- a positive outcome we'll reach only after an arduous period of correction.

"The longer it takes for us to make that adjustment, the more painful it will be," he says. "If we take our medicine now, we won't need to take as much in the future."

Q: Will the fall of the dollar send investors fleeing?

There is an upside to the fact that so much of the money the U.S. Treasury borrows comes from the central banks of China and other Asian nations, Zandi notes: These investors can't pull their money out all at once without significantly affecting the value of what's left of their investment. That's likely to keep investor flight from getting too out of hand, he says.

"We're not going to lose the money," Zandi says. "We'll just have to pay more to get it."

Q: You've said the dollar's depreciation will spur a rise in interest rates. Does this pose a danger to America's economic recovery?

As the dollar depreciates, foreign investors will want higher returns for their money to compensate for the increased risk. That means U.S. individuals, corporations and the federal government will have to pay more for the money they borrow.

Zandi expects interest rates to rise in a measured, modest way. But he says how fast and how high rates rise depends on how quickly we can move from being big consumers to "balanced consumers." "The longer the process takes to begin, the more painful it will be," he says.

We're likely to see inflation, though how fast it surges depends on how quickly we can get U.S. borrowing under control, he says.

The U.S. housing market, a major force behind the economic recovery, is likely to take a significant hit. "The housing industry has been feasting on very low mortgage rates," Zandi says. "In some ways, the Chinese and others have been providing very low mortgage rates for U.S. buyers."

Higher interest rates will weaken housing market significantly, he says, noting prices in certain "bubble" markets -- such as in D.C., Florida and California -- are likely to fall or stay flat.

He also expects a significant slowdown in auto sales, which have been fueled by generous financing offers from automakers.

Q: Does the dollar's fall signal a shift in global economic power?

"I don't think our problems are with Europe," Zandi says. "The dollar's slide against the euro goes back to China."

Zandi says as the dollar weakens, China's central bank has sought to diversify its assets. "They are taking the dollars they get in trade, and instead of buying more U.S. Treasury bonds, they re buying euros, Canadian dollars and British pounds."