Monday, January 31, 2005

U.S. Dec. new home sales flat as inventories build


By Rex Nutting, Investors Business Daily



WASHINGTON (MarketWatch) -- Inventories of unsold new homes grew to a 31-year high in December as sales were disappointingly flat after a big drop off in November, according to U.S. Commerce Department data released Monday.

New home sales increased 0.1 percent to a seasonally adjusted annual rate of 1.098 million units in December from a downwardly revised 1.097 million in November, originally reported as 1.126 million. Sales had peaked at 1.263 million in October. Read the full release.

The inventory of unsold homes on the market increased by 2.6 percent to 432,000, the highest level since August 1973. The inventory represents a 4.8-month supply at current sales rates, the highest since July 2000.

Economists were expecting a bounce back in sales to about 1.18 million in December, according to a survey conducted by MarketWatch. See Economic Calendar.

In all of 2004, a record 1.183 million new homes were sold, up 8.9 percent from 2003's 1.086 million. It's the fourth year in a row for record new home sales.

The median price of a new home increased 13.2 percent year-over-year to $222,000 in December. For all of 2004, the median price increased 12.2 percent to $218.900.

Most economists expect housing to slow, but not collapse, as the Federal Reserve continues to raise short-term interest rates at a measured pace. Despite five increases in the federal funds rate during the year, however, average mortgage rates have been steady.

The regional picture was mixed in December, suggesting that weather may have been a factor in sales. While sales in the Midwest jumped by more than 50 percent, sales declined about 16 percent in both the Northeast and South. Sales increased about 6 percent in the West.

The government cautions that its housing data are particularly prone to sampling and other statistical errors. It can take six months to establish a new trend in home sales. In December, the six-month average sales rate was 1.154 million, down from 1.170 million in November.

In a separate report, the government said personal incomes surged by a record 3.7 percent in December. Excluding the $32 billion dividend payment from Microsoft, incomes rose about 0.6 percent. Real consumer spending increased 0.9 percent. See full story.

In another report, the Chicago purchasing managers index rose to 62.4 percent in January from 61.9 percent in December, ahead of expectations.

Is there a housing bubble?

Alan Abelson: Barrons Online
"IS THERE A HOUSING BUBBLE? If nothing else, that this should even be in question is testimony to the sagacity of that venerable maxim that none is so blind as those who won't see. House prices have wafted inexorably heavenward, climbing something like 8%-10% these past 12 months alone. Sales of existing homes set an all-time high in 2004. And the boom in starts continues apace. Even Wall Street, skittish about the industry's history of wide swings, appears to have come around to the notion that happy days lie ahead for homebuilders as far as the analytical eye can see.

In truth, about the only ones insisting that there is no housing bubble are the people who build houses and folks who are drooling over the prospect of selling theirs for some obscene multiple of what they paid for it. The real question is not whether there's a bubble in housing but when it's going to burst. And that's far from crystal-clear, although we'd hazard that for investors, it's better to be early than sorry. But then we've an unreasonable aversion to bubbles that dates back to when we were a little shaver and couldn't quite get the hang of blowing the darn things.
[chart]

The chart on this page, the handiwork of Ed Hyman's admirable ISI Group, provides graphic demonstration of just how steamy the housing market is. That line snaking its way up toward the ceiling is Ed's clever version of the affordability index: it divides existing home prices by median family income. What it shows is that the home-price-to-income ratio at 3.35 is a record high and firmly in what Ed labels as bubble territory.

Noting that the housing boom is even more heated in Canada, Great Britain and Japan, he suspects that the U.S. version has a ways to go. Frankly, much as we respect Ed's savvy about markets, we don't find varying degrees of mania the most persuasive investment argument."
"Particularly in light of the latest University of Michigan survey of consumer sentiment. Which shows, reports David Rosenberg of Merrill Lynch in his latest commentary, that the share of households convinced this is the time to take the plunge and buy a house either because real estate is a good investment or to get a piece of the action, jumped to 22% in January, double the percentage a scant 15 months ago.

Still another ominous sighting of possible bubble trouble ahead is by Bank of America's crack market strategist, Joseph Quinlan. Joe cites a story in the Christian Science Monitor that real estate is "one of the hottest curriculums on college campuses" these days.

Over 60 colleges offer degrees in real estate, more than double the number a decade ago. A full 5,000 young scholars now attend New York University's Real Estate Institute (we shame-facedly admit we weren't even aware that NYU had a Real Estate Institute; tells you what we know).

Joe reminds that in the late 1990s, as the stock market bubble was getting ready to pop, enrollment in financial-services courses ballooned all over this fair land.

Our final exhibit in our case for a housing bubble all ready to burst comes from a sharp-eyed reader who also can evidently turn a pretty phrase as well. It concerns Lennar, a leading homebuilder, based in Florida, but with stakes in Texas, California, Nevada and elsewhere. The company has done spectacularly well, racking up sharply rising revenues and earnings, and shareholders have done spectacularly well, too: From around 20 a few years ago, the stock set a recent new high a couple of points below 60.

Our reader, a Miami resident, sent along a piece in a local business paper, the Daily Business Review, laying out in neat detail that, as he put it, the chief operating officer "talks like a bull but walks like a bear." Although said officer and his executive cohorts were brimming over with optimism in a conference call with analysts in mid-December, that didn't prevent him from selling 98,156 shares of Lennar common less than a month later. At $54-$55 a share, he pocketed more than $5 million. (He still owns 60,000 restricted shares and another nearly 71,000 through trusts.)

Insiders may have all kinds of good reasons for selling. But, as we've said before, anticipation that the stock will go up is not one of them."

Builders Stocks Mixed on Housing Data

Forbes

Shares of the nation's top home builders mostly shrugged off economic data released Monday that indicated December sales of new single-family homes fell short of expectations, just one month after the industry suffered its steepest decline since 1994.

The Commerce Department said new home sales rose 0.1 percent to a seasonally adjusted annual rate of 1.1 million units in December - missing Wall Street expectations for sales of 1.2 million units. The data comes after new home sales plunged 12 percent in November.

The report indicated sales were weakest in the South and Northeast, but Midwest sales appeared strong. For the year, new home sales rose 8.9 percent to a record 1.18 million units.

Home building stocks - which were among the strongest performers on the stock market last year - originally turned lower after the government report was released. But the sector began to rebound as analysts noted that home builders continue to see market share gains.

"The relatively soft national numbers are in contract with results from public companies," said Daniel Oppenheim, an analyst with Banc of America Securities. "We continue to see a disconnect between the healthy demand seen by the publicly traded homebuilders and monthly new home sales from the Census Bureau."

Oppenheim said the housing market remains healthy, and he expects sales will continue to be strong. Builders have benefitted during the past few years on relatively low mortgage rates and an expansion of the U.S. economy.

D.R. Horton Inc. shares rose 65 cents to $39.62, Toll Brothers Inc. rose $1.05 to $77.88, Hovanian Enterprises Inc. rose $1.16, or 2.3 percent, to $52.36, Pulte Homes Inc. rose 57 cents to $65.56, KB Home rose $1.01 to $108.80, and Lennar Corp. fell 28 cents to $55.98. All stocks trade on the New York Stock Exchange.

Despite the weaker-than-expected new home sales data, analysts maintain the overall market remains healthy. Higher mortgage rates might slow down new home sales modestly in 2005, but Wall Street remains bullish on the industry.

U.S. home builder shares slammed by high inventory

NEW YORK, Jan 31 (Reuters) - The shares of U.S. home builders tumbled Monday after a government report showed sales of new homes slowed in December, while the inventory of homes being built with no committed sale grew.

The Dow Jones U.S. Home Construction Index fell 0.69 percent in late morning trading. The shares of M.D.C. Holdings Inc. were off 1.1 percent at $70.98, while the shares of Lennar Corp. (LEN.N: Quote, Profile, Research) lost 1.67 percent to $55.32 on the New York Stock Exchange.

Monday morning, the U.S. Commerce Department said new single-family home sales fell 0.1 percent from November and 2 percent from December 2003. Sales in the Northeast and South fell 15.7 percent and 16.3 percent, respectively. Sales in the Midwest were up 55.5 percent from a month earlier. Sales in the West rose 6.3 percent.

"It certainly is consistent with what we've been seeing trend-wise in terms of a slowing down," said Raymond James & Associates analyst Rick Murray. "What's weighing on the stocks is not so much the disappointing sales number, but the inventory number is beginning to concern people."

The supply of new homes were at 4.8 months' worth in December, the highest since June 2000.

"You have two trends working here," Murray said. "Sales are slowing down and inventory are growing. That means the amount of speculative building going on continues. If there's excess inventory, builders are more apt to have to resort to incentives and possible price reduction."

The inventory number can make a precarious situation worse, said Robert Curran, Fitch Ratings senior director.

"It's a piling on thing," Curran said.

But Curran noted the amount of finished homes still unsold comprised 22.3 percent of the inventory in December 2004, less than the 23.9 percent in December 2003.

"I will be keeping an eye on that statistic," Curran said.

The further along in construction that the home remains unsold, the more it costs the builder.

"That's where you're likely to have to do some sort of a effort to move that," Curran said. "In the interim, you're paying real estate taxes, construction loans. You want to move that."

Still, the analysts said the December sales figures just reinforces the slowdown of the home building industry, which saw a record year in 2004. But they do not invest too much in the single month's unrevised figures.

"It's very hard to tell about numbers in the months of December, January and February," Curran said. "A few digits one way or another make a big difference. However, there's enough data to suggest that there's a little bit of slowing in demand."

As to the large increase seen in the Midwest, Curran dismissed that figure, which is the most sensitive to weather and the smallest of all the areas, as a "statistical dead spot."

U.S. Sales of New Homes Rose 0.1% in Dec. to 1.098 Million Rate

Jan. 31 (Bloomberg) -- U.S. sales of new homes rose 0.1 percent last month to 1.098 million houses at an annual rate, capping the fourth consecutive record year.

The increase followed a revised 1.097 million pace in November, the Commerce Department said today in Washington. Sales in 2004 totaled 1.183 million, up 8.9 percent from 2003.

Homebuying may slow this year, after four straight annual records for new and previously occupied homes, as mortgage rates increase. Job gains will probably limit the amount of the decline, economists said.

``The momentum of the housing sector should slip a bit this year,'' Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, said before the report. `This doesn't have any kind of ominous implication for the economy at large. It's just that there's less than the usual amount of pent-up demand.''

The median forecast in a survey of 59 economists before today's report called for sales to rise to 1.2 million from a previously reported 1.125 million in November. Estimates ranged from 1.086 million to 1.310 million.

Combined sales of new and existing homes totaled a record 7.86 million.

Sales of new homes rose in two regions. They increased 56 percent in the Midwest to 241,000 houses at an annual rate, erasing the 37 percent decline in the prior month. Sales rose 6.3 percent in the West to 320,000. Sales declined 16 percent in the South to 467,000 and 16 percent in the Northeast to 70,000.

The median price rose to $222,000 in December after falling to $219,000 the month before.

The number of new homes for sale rose to 443,000 last month, the most since August 1973, from 426,000 in November. The median number of months those homes have been for sale increased to 4.2 in December from 4.1.

Months' Supply

Measured against sales, the supply of new houses rose to 4.8 months' worth in December, the highest since June 2000, from 4.7 in November.

Earlier today, the Commerce Department reported that consumer spending rose 0.8 percent in December after rising 0.4 percent in November. Incomes increased 3.7 percent, boosted by a special dividend from Microsoft Corp., after rising 0.4 percent. Excluding the dividend, incomes rose 0.6 percent.

Centex Corp. and KB Home are among builders that say they will be working this year to complete previous orders.

``We see 2005 as being every bit as good as 2004, if not better,'' said Timothy Eller, chief executive of Dallas-based Centex, the fourth-largest builder by stock value. ``It's a great time to be a homebuilder.''

The backlog of ordered homes was up almost 20 percent in January from a year earlier and represents five to six months of production as well as revenue of $5.5 billion, Eller said.

The backlog at KB Home has increased 57 percent and represents revenue of $4.8 billion, according to Domenico Cecere, the Los Angeles-based company's chief financial officer. KB Home is the seventh-largest U.S. homebuilder.

``We're going into 2005 smoking,'' Cecere said.

Interest Rates and Sales

Even so, sales are likely to taper off in 2005. Douglas Duncan, chief economist at the Mortgage Bankers Association, said sales of new homes will probably drop to 1.118 million. Sales of existing homes will probably decline to 6.138 million from 6.68 million, he said.

``The housing market is still going to be strong this year, just not historically strong,'' Duncan said.

An improving job market, rising wages and a growing economy are likely to promote an increase in consumer prices that will lead to an increase in all interest rates this year, including mortgages, according to economists such as Duncan.

By contrast, a slower pace of employment growth than in the first half of 2004 and statements from Federal Reserve policy makers that they will raise the benchmark interest rate at a ``measured'' pace led mortgage rates to drop more than a half percentage point in the last six months of 2004.

Mortgages

Duncan expects the rate for overnight loans between banks, which the Fed is targeting at 2.25 percent, to rise to 3.2 percent this year. Fed policy makers meet this week and are expected to increase the target to 2.5 percent.

The 30-year mortgage rate, which fell to a three-month low of 5.66 percent last week, may reach 6.2 percent this year, according to the National Association of Realtors.

The U.S. last year experienced the largest increase in payrolls since 1999, with 2.23 million jobs added. The biggest increases were in the first half of the year, averaging 204,000 a month, compared with 168,000 in the second half.

Monthly payrolls will expand by about 200,000 this year, said economist Stephen Gallagher at Societe Generale in New York. That exceeds the 125,000 needed to accommodate growth in the working-age population, he said.

Economic growth slowed to a 3.1 percent annual rate in the final three months of last year, the slowest in almost two years, from 4 percent in the third quarter, the Commerce Department reported last week.

A Bloomberg News survey taken Jan. 3 to Jan. 7 calls for the economy to grow 3.5 percent this year after 4.4 percent in 2004. Growth averaged 3.8 percent a year over the past decade.

Sunday, January 30, 2005

Could bubble housing markets go bust this year?

Kenneth R. Harney, Seattle Times
Syndicated columnist

Are home prices irrationally exuberant?

If you own a house in any of the three dozen metropolitan areas where appreciation rates exceeded 20 percent in the past 12 months, you might think so. Ditto if you live in one of the 14 major markets where the average home more than doubled in price in the past 60 months alone. That's pretty exuberant by all historical standards.

But are any of these hyperinflationary areas — primarily in California, Nevada, Florida, New England and the mid-Atlantic states — heading for significant corrections in values this year? Could one or more of these bubbles go pop?

New economic research offers both disquieting and reassuring answers.

On one hand, some of the frothiest local markets are exhibiting unmistakable signs of speculative fever. One hint is the percentage of home and condo purchases attributable to investors — buyers in pursuit of capital gains rather than places to live.

Nationwide, 8.4 percent of all home loans in 2004 went to investor buyers, according to the San Francisco-based research firm LoanPerformance Inc. But in Las Vegas, which was by far the fastest-appreciating housing market in the country last year at a record-setting 41.7 percent, the proportion of investor loans was 16.1 percent, almost double the national average.

In Miami, where the housing price appreciation rate last year was 23.6 percent, 11.3 percent of purchase mortgages went to investors. In Los Angeles, 10.4 percent of new loans went to investors, while housing prices soared by 30.5 percent.

Another disquieting sign in some high-gain markets has been a rapid surge in "interest-only" mortgages, which allow buyers to make artificially low monthly payments for initial periods ranging from two to five years, followed by sharply higher payments afterward. Many interest-only buyers either cannot afford to buy high-priced houses at standard interest rates or expect to flip the property at a profit before the higher payments kick in.

Interest-only loans accounted for barely one-third of 1 percent of all new home purchase mortgages in 2001, according to LoanPerformance, but now account for 14.5 percent of purchase loans in red-hot San Diego, 10.5 percent of new loans in Boca Raton-West Palm Beach, Fla., and 13.2 percent of loans in Las Vegas.

Other forms of payment-reduction plans also are booming in high-fizz markets, including mortgages that allow buyers to set their own payment levels and rack up substantial "negative amortization" — that is, add to the principal debt on the property month after month, rather than reduce it.

All these techniques increase home buyers' leverage — their ability to acquire high-cost real estate at minimized costs. But they also increase their risk of losing the house should their incomes or appreciation rates drop unexpectedly.

Which raises what one mortgage economist calls "the leading question of the new year": Could any of the major bubble markets go snap, crackle and pop in 2005?

In a new statistical research study, economist Michael D. Youngblood identifies 27 local housing markets that have reached bubble stage. Youngblood, who works for Friedman, Billings, Ramsey & Co., an investment-banking firm based in Arlington, Va., defines bubble markets as those where per capita income growth rates severely lag housing price growth and are seriously out of sync with historical price-to-income norms.

Most of the bubble markets in Youngblood's study are in California, but a handful are not, including Boston; New York; Honolulu; Boulder, Colo.; Danbury, Conn.; and locally, Bellingham. Notably absent from Youngblood's list are all the high-appreciation markets in Florida, plus metropolitan Washington, D.C., and Philadelphia, where household incomes have lagged housing price increases, but whose ratios are still within historical norms.

Are there dangers of busts in any of the 27 bubble markets? Youngblood comes to this reassuring conclusion: Even in the highest-flying markets, it would take four straight quarters of economic recession — rising unemployment and flat or declining household incomes — to precipitate a housing-price bust. And not one of the 27 has yet racked up even one quarter of recession, Youngblood says. Any serious housing price deflation — if it is in the cards — is unlikely for at least a year.

That's not to suggest that appreciation rates are likely to keep humming along in the double digits indefinitely. To the contrary, price gains of that magnitude are not sustainable. They eventually burn themselves out by making housing unaffordable to all but a small percentage of potential buyers.

Youngblood and many other mortgage economists expect a slowdown in the rate of housing-price growth in even the zestiest markets in the coming year or two. But no busts.

It's not a bubble, just a slow leak

By Gregory J. Wilcox, Columnist, Daily News

Looks like we can lock the real estate bubble-bursting scenario away in the attic with its economic hobgoblin cousins, at least for a while.

One thing is certain, though. The residential real estate market of the foreseeable future will be similar in many respects, and different, from today's.

That seems to be the consensus of a flurry of market reports, forecasts and analysis that arrived throughout last week.

The best news for current owners is that the price bubble probably won't be bursting. It came during a panel discussion at the Los Angeles County Economic Development Corp.'s yearly forecast.

The news seemed grim at first because economist G.U. Krueger of IHP Capital Partners was going to talk about the housing bubble. And when someone is going to talk about a bubble right away there's expectation of a very big pop.

Not gonna happen, though.

Krueger's company invests in real estate and helps advise the California Public Employees' Retirement System where to put its considerable amount of money. They are still going to invest in residential real estate.

And we have to be careful about how we characterize a bubble, too.

What may happen with this price bubble can be summed up in three words: a slow leak.

"I don't think prices will come down. But we call it a bubble ... and get all bent out of shape," he said.

Others agree with him, including Jack Kyser, chief economist at the Los Angeles Economic Development Corp.

Owners probably won't get those 20 percent annual returns on their investment of the past few years. It may be close to 10 percent.

Kyser thinks by this time next year, the 30-year, fixed-rate mortgage may be around 6.5 percent. That's where they were expected to be by now and that's a level still considered manageable.

"As we move into this year you are not going to see the double-digit rates of appreciation. It's going to really simmer down," he said.

That's the leak.

There are areas of concern, though, notes the Los Angeles-based California Association of Realtors.

But most people trying to buy that first house will likely find it a daunting experience because prices are going to keep rising. Last year only 26 percent of the buyers were first-timers, and that is expected to keep sinking, the association predicts.

It's going to take more cash and creativity to get into a home, too, if last year's market is any indication.

Here's what a typical first-time buyer profile looked like last year.

Between the ages of 30 to 40 years old with the median age of 32.

Nearly half were married and about 33 percent single.

More singles pooled resources and co-owned properties. Shared purchases increased 13.2 percent last year.

The annual salary was $75,000 and the median price of the house $401,500.

During 2004 the median amount of that first mortgage increased 33 percent. And more first-time buyers took out a second mortgage, too. This kind of financing increased to 57.2 percent last year from 36.4 percent in 2003.

And adjustable rate mortgages jumped almost threefold, to 33.5 percent last year from 11.9 percent in 2003.

Leslie Appleton-Young, the vice president and chief economist at the association, said that this year first-time buyers are going to have to exercise options like never before.

"They are either going to have to get loans from family members, they are going to have save longer and more aggressively to get a down payment or they are going to have to compromise on size or location," she said.

And hopefully they can capture some appreciation before the bubble really does burst.

Saturday, January 29, 2005

Bank values disguised by housing fears (UK)

Times Online


NORTHERN ROCK, the mortgage specialist, opened the bank reporting season on Wednesday with a 13 per cent rise in pre-tax profit and a 14 per cent higher dividend. Its shares promptly fell by 3 per cent. This pattern is likely to be repeated when the bigger banks start revealing their 2004 results in 12 days’ time.

Banks are lower rated than any other successful sector, except housebuilding. HSBC and Standard Chartered, the overseas banks, rate near to the market average. But the seven remaining quoted domestic banks trade at between ten and eleven times their expected 2004 earnings, a bigger discount than usual.

Blame the link with housing. Over three decades, banks regularly lost large sums by lending too much to some cash-hungry region or sector that subsequently collapsed.

There are deep-seated suspicions that a collapse of the UK housing market will be the successor to the great commercial property disaster and the Latin American debt crisis. To say otherwise risks a charge of complacency. Yet the chances of a housing crash big enough to knock clearing bank profits really do look remote.

In the early 1990s, building society profits, in particular, were affected by bad mortgage debts and repossessions. But that was because unemployment doubled to three million in three years. Today, fewer than a million are registered unemployed and the figure has been stable for three years. Falling house prices would, however, inevitably lead to a slowdown in new business, especially if this led, as usual, to a fall in the number of people moving house. First-time buyers are already becoming thinner on the ground.

Goldman Sachs points out, however, that this should lead only to slower growth in mortgage lending, not an actual fall. Goldman Sachs notes that even in 1995, the nadir of the last housing downturn, mortgage lending grew 4 per cent.

The trend in the average new mortgage is determined by house prices over the past seven or ten years, the average life of a mortgage, rather than this year. After a period when prices double, the purchaser of a second-hand house will need a bigger loan than the person who bought it last time.

Even if house prices fall by 20 per cent and transactions fall to a 30-year low, Goldman Sachs calculates that outstanding mortgage loans should still rise by 8 per cent this year and 6 per cent in 2006. If interest rates stabilise this year, profit margins ought to be under less pressure unless lenders stupidly undercut each other to gain market share.

Most banks are about much more than mortgages. Unsecured personal lending, though far less important, may fall back this year. Business lending should pick up to compensate for a slowdown in consumer lending, provided that the banks avoid rushing into modish sectors such as commercial property and management buyouts. Altogether, profits should keep rising, albeit more slowly.

The whole sector offers value, even if bank shares usually perform better towards the end of the year. Investors are spoilt for choice. Royal Bank of Scotland, HBOS and Barclays all look cheap on earnings. Lloyds TSB offers more than 7 per cent dividend yield. At these ratings, more bids from continental banks would make sense too.

Is a new bubble ready to burst?

International Herald Tribune


DAVOS, Switzerland Martin Varsavsky did quite well out of the technology boom, earning €38 million when he sold a Spanish Internet company to Deutsche Telekom in 2001. But then, mindful that the technology business was headed downhill fast, Varsavsky tried to be more conservative with his next big move. "I wanted to go into something with less of a downside, so I went into land," the 44-year-old Argentine entrepreneur said, highlighting his purchases of real estate in Madrid and the Balearic Islands. Then something funny happened. Spanish residential property prices rose - by 17 percent last year alone. And although he saw technology go bust, Varsavsky is serene about real estate, even as the market boils. "The Spanish market may stop rising," Varsavsky said on the sidelines of the annual meeting of the World Economic Forum here, "but I don't think it's a bubble." But there is a danger he may be wrong. As the world economy heals from scars left by the decline of the technology sector, economists are on the lookout for hot spots in the world that would feed the next potentially destabilizing bubble. Out on the horizon, bullish bond markets, juiced by the prospects of low inflation, could be sowing the seeds of trouble. But it was the sharp rise in housing prices from London to Los Angeles to Lisbon that most worried economists, policy makers and industry types gathered in this Alpine town. "If there were a major contraction in prices, then there would be serious consequences," said Richard Syron, the chief executive of Freddie Mac, the big American mortgage financing company. Consumers in America, Europe and parts of Asia have gotten rich as the value of their real estate has surged in recent years. Stung when money vanished after the technology bubble burst, they have opted for seemingly safer investments in bricks and mortar. Rock-bottom interest rates, now hovering around 50-year lows in the United States and Europe, have fueled a buying spree that has pushed prices up sharply in London in the past three years and by 20 percent in New York in a single year. In Shanghai, where job-seeking Chinese are migrating in droves, housing prices have soared 20 percent over the past 18 months. Consumers have used the rising value of their homes as collateral for loans that have allowed them to spend significantly over the past five years, keeping factories humming from Chicago to Shanghai. The worst-case scenario is that if home values suddenly collapse, consumers will sharply rein in purchases, throwing economies into a tailspin. Some countries have already sought to prevent a rapid deterioration in price levels: the Bank of England, for instance, has with some success been notching up interest rates to reverse conditions of super-easy money. Actions like these may help. But as long as consumers and investors ride the euphoria of double-digit returns, it is tricky to know when a bubble may be close to bursting. Robert Shiller, a Yale University economist and author of the book "Irrational Exuberance," published in 2000, has tracked the notion of bubbles in history, but a precise definition has eluded him. Broadly, he says, a bubble economy is a time when expectations of future price increases are used to justify current values. But this conclusion often comes only after the bubble pops. Few economists would doubt that people in the United States, Spain, Britain, Australia and parts of China have rapidly bid up home prices over the past five years on the belief that values will continue to rise. Part of the gold-rush mentality has been fueled by the industry itself and by economists and academics who argue that a given asset is not overvalued. The media, by publishing their views, become unwitting accessories, Shiller says. Shiller says that the public became convinced in the 1990s that even embryonic technology companies could be worth billions before they ever earned a profit because the Internet had upended business models. Likewise, real estate today profits from the belief that a house is a solid asset with impregnable value. Similar beliefs are feeding fears of another potential bubble, in the bond market. With demand rising, companies and countries in emerging markets have been able to reduce the interest they pay, forcing yields down. Though it is historically abnormal, defenders of this trend note that the outlook for inflation is better now than it has been in a generation, making investors willing to put their money into assets that pay a low interest rate. "The most credible counterargument that we're facing a bubble is that economic volatility is much lower," said Andrew Bosomworth, senior vice president with Pacific Investment Management, a major American bond fund. The argument offered by many for why bubbles appear can be summed up in two words: easy money. Excess liquidity is now chasing all sorts of assets, forcing up prices. The U.S. Federal Reserve opened the money spigot as the American economy began to creak in 2000 and kept providing cash after the terrorist attacks of Sept. 11, 2001. Though it began to raise rates last year, U.S. credit is still historically cheap. The European Central Bank has kept its benchmark rate at 2 percent since mid-2003. A jarring rise in interest rates might well punish real estate or bond speculators by depriving them of loose credit, Takatoshi Ito, a professor at the University of Tokyo, said. But it would also hit ordinary homeowners. "Once you have it, deflate slowly," Ito said, recalling his personal losses after the Japanese property bubble was pricked in the late 1980s. DAVOS, Switzerland Martin Varsavsky did quite well out of the technology boom, earning €38 million when he sold a Spanish Internet company to Deutsche Telekom in 2001. But then, mindful that the technology business was headed downhill fast, Varsavsky tried to be more conservative with his next big move. "I wanted to go into something with less of a downside, so I went into land," the 44-year-old Argentine entrepreneur said, highlighting his purchases of real estate in Madrid and the Balearic Islands. Then something funny happened. Spanish residential property prices rose - by 17 percent last year alone. And although he saw technology go bust, Varsavsky is serene about real estate, even as the market boils. "The Spanish market may stop rising," Varsavsky said on the sidelines of the annual meeting of the World Economic Forum here, "but I don't think it's a bubble." But there is a danger he may be wrong. As the world economy heals from scars left by the decline of the technology sector, economists are on the lookout for hot spots in the world that would feed the next potentially destabilizing bubble. Out on the horizon, bullish bond markets, juiced by the prospects of low inflation, could be sowing the seeds of trouble. But it was the sharp rise in housing prices from London to Los Angeles to Lisbon that most worried economists, policy makers and industry types gathered in this Alpine town. "If there were a major contraction in prices, then there would be serious consequences," said Richard Syron, the chief executive of Freddie Mac, the big American mortgage financing company. Consumers in America, Europe and parts of Asia have gotten rich as the value of their real estate has surged in recent years. Stung when money vanished after the technology bubble burst, they have opted for seemingly safer investments in bricks and mortar. Rock-bottom interest rates, now hovering around 50-year lows in the United States and Europe, have fueled a buying spree that has pushed prices up sharply in London in the past three years and by 20 percent in New York in a single year. In Shanghai, where job-seeking Chinese are migrating in droves, housing prices have soared 20 percent over the past 18 months. Consumers have used the rising value of their homes as collateral for loans that have allowed them to spend significantly over the past five years, keeping factories humming from Chicago to Shanghai. The worst-case scenario is that if home values suddenly collapse, consumers will sharply rein in purchases, throwing economies into a tailspin. Some countries have already sought to prevent a rapid deterioration in price levels: the Bank of England, for instance, has with some success been notching up interest rates to reverse conditions of super-easy money. Actions like these may help. But as long as consumers and investors ride the euphoria of double-digit returns, it is tricky to know when a bubble may be close to bursting. Robert Shiller, a Yale University economist and author of the book "Irrational Exuberance," published in 2000, has tracked the notion of bubbles in history, but a precise definition has eluded him. Broadly, he says, a bubble economy is a time when expectations of future price increases are used to justify current values. But this conclusion often comes only after the bubble pops. Few economists would doubt that people in the United States, Spain, Britain, Australia and parts of China have rapidly bid up home prices over the past five years on the belief that values will continue to rise. Part of the gold-rush mentality has been fueled by the industry itself and by economists and academics who argue that a given asset is not overvalued. The media, by publishing their views, become unwitting accessories, Shiller says. Shiller says that the public became convinced in the 1990s that even embryonic technology companies could be worth billions before they ever earned a profit because the Internet had upended business models. Likewise, real estate today profits from the belief that a house is a solid asset with impregnable value. Similar beliefs are feeding fears of another potential bubble, in the bond market. With demand rising, companies and countries in emerging markets have been able to reduce the interest they pay, forcing yields down. Though it is historically abnormal, defenders of this trend note that the outlook for inflation is better now than it has been in a generation, making investors willing to put their money into assets that pay a low interest rate. "The most credible counterargument that we're facing a bubble is that economic volatility is much lower," said Andrew Bosomworth, senior vice president with Pacific Investment Management, a major American bond fund. The argument offered by many for why bubbles appear can be summed up in two words: easy money. Excess liquidity is now chasing all sorts of assets, forcing up prices. The U.S. Federal Reserve opened the money spigot as the American economy began to creak in 2000 and kept providing cash after the terrorist attacks of Sept. 11, 2001. Though it began to raise rates last year, U.S. credit is still historically cheap. The European Central Bank has kept its benchmark rate at 2 percent since mid-2003. A jarring rise in interest rates might well punish real estate or bond speculators by depriving them of loose credit, Takatoshi Ito, a professor at the University of Tokyo, said. But it would also hit ordinary homeowners. "Once you have it, deflate slowly," Ito said, recalling his personal losses after the Japanese property bubble was pricked in the late 1980s. Martin Varsavsky did quite well out of the technology boom, earning €38 million when he sold a Spanish Internet company to Deutsche Telekom in 2001. But then, mindful that the technology business was headed downhill fast, Varsavsky tried to be more conservative with his next big move. "I wanted to go into something with less of a downside, so I went into land," the 44-year-old Argentine entrepreneur said, highlighting his purchases of real estate in Madrid and the Balearic Islands. Then something funny happened. Spanish residential property prices rose - by 17 percent last year alone. And although he saw technology go bust, Varsavsky is serene about real estate, even as the market boils. "The Spanish market may stop rising," Varsavsky said on the sidelines of the annual meeting of the World Economic Forum here, "but I don't think it's a bubble." But there is a danger he may be wrong. As the world economy heals from scars left by the decline of the technology sector, economists are on the lookout for hot spots in the world that would feed the next potentially destabilizing bubble. Out on the horizon, bullish bond markets, juiced by the prospects of low inflation, could be sowing the seeds of trouble. But it was the sharp rise in housing prices from London to Los Angeles to Lisbon that most worried economists, policy makers and industry types gathered in this Alpine town. "If there were a major contraction in prices, then there would be serious consequences," said Richard Syron, the chief executive of Freddie Mac, the big American mortgage financing company. Consumers in America, Europe and parts of Asia have gotten rich as the value of their real estate has surged in recent years. Stung when money vanished after the technology bubble burst, they have opted for seemingly safer investments in bricks and mortar. Rock-bottom interest rates, now hovering around 50-year lows in the United States and Europe, have fueled a buying spree that has pushed prices up sharply in London in the past three years and by 20 percent in New York in a single year. In Shanghai, where job-seeking Chinese are migrating in droves, housing prices have soared 20 percent over the past 18 months. Consumers have used the rising value of their homes as collateral for loans that have allowed them to spend significantly over the past five years, keeping factories humming from Chicago to Shanghai. The worst-case scenario is that if home values suddenly collapse, consumers will sharply rein in purchases, throwing economies into a tailspin. Some countries have already sought to prevent a rapid deterioration in price levels: the Bank of England, for instance, has with some success been notching up interest rates to reverse conditions of super-easy money. Actions like these may help. But as long as consumers and investors ride the euphoria of double-digit returns, it is tricky to know when a bubble may be close to bursting. Robert Shiller, a Yale University economist and author of the book "Irrational Exuberance," published in 2000, has tracked the notion of bubbles in history, but a precise definition has eluded him. Broadly, he says, a bubble economy is a time when expectations of future price increases are used to justify current values. But this conclusion often comes only after the bubble pops. Few economists would doubt that people in the United States, Spain, Britain, Australia and parts of China have rapidly bid up home prices over the past five years on the belief that values will continue to rise. Part of the gold-rush mentality has been fueled by the industry itself and by economists and academics who argue that a given asset is not overvalued. The media, by publishing their views, become unwitting accessories, Shiller says. Shiller says that the public became convinced in the 1990s that even embryonic technology companies could be worth billions before they ever earned a profit because the Internet had upended business models. Likewise, real estate today profits from the belief that a house is a solid asset with impregnable value. Similar beliefs are feeding fears of another potential bubble, in the bond market. With demand rising, companies and countries in emerging markets have been able to reduce the interest they pay, forcing yields down. Though it is historically abnormal, defenders of this trend note that the outlook for inflation is better now than it has been in a generation, making investors willing to put their money into assets that pay a low interest rate. "The most credible counterargument that we're facing a bubble is that economic volatility is much lower," said Andrew Bosomworth, senior vice president with Pacific Investment Management, a major American bond fund. The argument offered by many for why bubbles appear can be summed up in two words: easy money. Excess liquidity is now chasing all sorts of assets, forcing up prices. The U.S. Federal Reserve opened the money spigot as the American economy began to creak in 2000 and kept providing cash after the terrorist attacks of Sept. 11, 2001. Though it began to raise rates last year, U.S. credit is still historically cheap. The European Central Bank has kept its benchmark rate at 2 percent since mid-2003.A jarring rise in interest rates might well punish real estate or bond speculators by depriving them of loose credit, Takatoshi Ito, a professor at the University of Tokyo, said. But it would also hit ordinary homeowners."Once you have it, deflate slowly," Ito said, recalling his personal losses after the Japanese property bubble was pricked in the late 1980s.

Friday, January 28, 2005

Bubbles unlikely to pop this year

Kenneth Harney, News Day.com


Are home prices irrationally exuberant?

If you own a house in any of three dozen metropolitan areas where appreciation rates exceeded 20 percent in the past 12 months, you might think so. Ditto if you live in one of the 14 major markets where the average home more than doubled in price in the past 60 months alone. That's pretty exuberant by all historical standards.

But are any of these hyperinflationary areas -- primarily located in California, Nevada, Florida, New England, New York and the mid-Atlantic states -- heading for significant corrections in values this year? Could one or more of these bubbles go pop?

New economic research offers both disquieting and reassuring answers.

On the one hand, some of the frothiest local markets are exhibiting unmistakable signs of speculative fever. One hint is the percentage of home and condo purchases attributable to investor (nonoccupant) buyers in pursuit of capital gains rather than residences for themselves.

Nationwide, 8.4 percent of all home purchase loans made by lenders in 2004 went to nonoccupant investor buyers, according to the San Francisco research firm LoanPerformance Inc. But in Las Vegas, by far the fastest-appreciating housing market in the country last year at a record-setting 41.7 percent, the proportion of investor loans was 16.1 percent, almost double the national average.

In Miami, where the housing price appreciation rate last year was 23.6 percent, 11.3 percent of all new purchase mortgages went to investors. In Los Angeles, 10.4 percent of new loans went to investors, while housing prices soared by 30.5 percent.

Another disquieting sign in some high-gain markets has been a rapid surge in "interest-only" mortgages, which allow buyers to make artificially low monthly payments for initial periods ranging from two to five years, followed by sharply higher payments afterward. Many interest-only purchasers either cannot afford to buy high-priced houses at standard interest rates or expect to flip the property at a profit before the higher payments kick in.

Interest-only loans accounted for barely one-third of 1 percent of all new home purchase mortgages in 2001, according to LoanPerformance, but now account for 14.5 percent of purchase loans in red-hot San Diego, 10.5 percent of new loans in Boca Raton-West Palm Beach, Fla., and 13.2 percent of loans in Las Vegas.

Other forms of payment-reduction plans also are booming in high-fizz markets, including mortgages that allow buyers to set their own payment levels and rack up substantial "negative amortization" -- that is, adding to the principal debt on the property month after month, rather than reducing it.

All these techniques increase home buyers' leverage -- their ability to acquire high-cost real estate at minimized costs. But they also increase their risk of losing the house should their incomes or appreciation rates drop unexpectedly.

Which raises what one mortgage economist calls the leading question of 2005: Could any of the major bubble markets pop in 2005?

In a new statistical research study, economist Michael D. Youngblood identifies 27 local housing markets that have reached bubble stage.

Youngblood, who works for Friedman, Billings, Ramsey & Co., an investment-banking firm based in Arlington, Va., defines bubble markets as those where per capita income growth rates severely lag housing price growth and are seriously out of sync with historical price-to-income norms.

Most of the bubble markets in Youngblood's study are in California, but a handful are not, including Boston, New York, Honolulu, Boulder, Colo., Danbury, Conn., and Bellingham, Wash. Notably absent are all the high-appreciation markets in Florida, plus metropolitan Washington, D.C., and Philadelphia, where household incomes have lagged housing price increases, but whose ratios are still within historical norms.

Are there dangers of busts in any of the 27 bubble markets?

Youngblood comes to this reassuring conclusion: Even in the highest-flying markets, it would take four straight quarters of economic recession -- rising unemployment, flat or declining household incomes -- to precipitate a housing price bust. And not one of the 27 has yet racked up even one quarter of recession, notes Youngblood. Any serious housing price deflation -- if indeed it is in the cards -- is unlikely for at least a year.

That's not to suggest that appreciation rates are likely to keep humming along in the double digits indefinitely. To the contrary, price gains of that magnitude are not sustainable. They eventually burn themselves out by making housing unaffordable to all but a small percentage of buyers.

Youngblood and many other mortgage economists expect a slowdown in the rate of housing price growth in even the zestiest markets in the coming year or two. But no busts.

Take 'stock' in lucrative housing market




Outpacing the flaccid, once technology-driven stock sector as an investment tool, the more potent housing market has hammered home its position as a cornerstone of the economy's foundation - and it appears to have much more staying power.

Consumer spending, as everyone knows, is the real petrol that powers the economic engine and housing wealth is proving to be a stouter grade of fuel than stock market investments.

Housing and all its related transactions - purchasing, furnishing, maintaining, improving and investments - accounted for 23.1 percent of Gross Domestic Product in 2003 and over the past 50 years that figure has been as high as 25 percent.

Consumers spend about five-and-a-half cents out of every dollar increase in both housing wealth and stock wealth. Spending from housing wealth, however, takes only a year or so to reach 80 percent of its long-run wealth effect, compared with nearly five years for the same effect from stock market investments, according to "Housing Wealth Effects," produced by the Joint Center for Housing Studies at Harvard University and Macroeconomic Advisers, LCC.

"In other words, housing produces a quicker lift to the economy while home-price growth provides lasting benefits," says David Lereah, the Chicago-based National Association of Realtors chief economist.



"Homeowners are more confident of gains in housing wealth, so they spend more readily and quickly when they occur," he adds.

For years, many homeowners have known the feeling of owning, something once called the "psychological equivalent of gold," and the new Harvard study helps second that emotion.

The new study also says:

- About 6 in 10 homeowners have more home equity than stock wealth. The percentage is higher among lower income households, according to another study.

- Housing wealth accounts for 36 percent of the nation's tangible assets.



- Late last year, the home ownership rate was 68 percent, but only 52 percent of households held stock.

- In 2001, the Federal Reserve Board's Survey of Consumer Finances showed that the top 1 percent of stockholders controlled 33.5 percent of stock, while the top 1 percent of homeowners controlled 13 percent of home equity.

"The broader distribution of home ownership means that changes in stock wealth affect a much smaller share of households and mostly affects those with larger disposable incomes," says Lereah.

McLean, Va.-based Freddie Mac underscored the significance of the Harvard study just days after its release. Freddie Mac, a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing, reported in its quarterly Conventional Mortgage Home Price Index that home values increased by an annual rate of almost 16 percent in the third quarter of 2004, up from 9.9 percent in the second quarter.

Meanwhile, the Dow Jones Industrial Average has been stuck in the "10,000" neighborhood for nearly half a decade and other stock market indices have likewise floundered.

A less scientific study by EscapeHomes.com revealed earlier this year that homes in select second home markets were appreciating even faster - by as much as twice as fast as the rest of the housing market. Strong anecdotal evidence also points to a growing trend of investors who traded in stock market investments for residential real estate - both of those who won and lost during the dot com boom and bust era.


That's due in part to a near 45-year low in interest rates appearing just as many small investors were pulling out of the stock market when values began to fall in 2000, the Harvard study says.

Acquired equity, along with low interest rates, has allowed many laid off, outsourced and otherwise unemployed homeowners to "eat their home" or live off the equity gain until better days arrived.

The study also reiterated the intrinsic tangible value of home ownership as physical shelter that also shelters owners from taxes while yielding a financial return.

There is also value in home buying as a highly leveraged investment. Buyers get a large piece of the rock for a small, up-front investment in the form of a down payment and closing costs.

In return "investors" build wealth in two ways - through price appreciation and via forced savings in the form of mortgage payments that shrink the principal.

"It is also appealing because it allows owners to tap into that wealth at favorable interest rates to finance other forms of investment and consumption," Lereah says.

A growing number of homeowners are doing just that and they are rolling their returns right back into real estate in the form of home improvements and second home purchases.

The National Association of Realtors-commissioned study isn't without an ominous edge.

Its findings suggest that an expansion of monetary policy - a lowering of interest rates - at the onset of economic weakness can boost the economy. On the other hand, higher interest rates could slow home sales, reduce equity borrowing, curtail consumer spending and send the economy into another tail spin.

After struggling to maintain recent rate dips, mortgage interest rates have begun to rise slightly, in what could be the beginning of a delayed trend toward higher interest rates for all of 2005.

Okahumpka awaits housing boom

Developers follow a new interchange for Florida's Turnpike and the widening of County Road 470.

By Martin E. Comas
Sentinel Staff Writer


OKAHUMPKA -- Joe Branham has lived most of his life on more than 70 acres of oaks, citrus trees and natural springs in this rural community.

"We had wild turkeys pecking around our patio the other morning," the 73-year-old retired biology professor said Thursday. A bobcat sat and watched him a few weeks ago while he worked in his yard.

But Branham's rustic peace and quiet -- along with that of other Okahumpka residents -- may soon come to an end.

Three miles up the road, a new interchange opened Saturday at Florida's Turnpike and County Road 470, southwest of Leesburg.

In addition to funneling hundreds of more cars through Okahumpka, the interchange also is attracting developers who have plans to build thousands of homes near the interchange.

"There's a general feeling of hopelessness, and there's nothing we can do about it," Branham said. "We knew it was bound to happen."

To accommodate the increased traffic, Lake County has plans to widen C.R. 470 -- the only road through town -- to four lanes between the new interchange and U.S. Highway 27 in the next few years.

The county also plans to improve the nearby C.R. 470 intersections at County Road 33 and U.S. Highway 27.

Along with these road improvements, thousands of new homes will soon rise around Okahumpka.

Leesburg this week agreed to annex about 245 acres near the turnpike just south of Okahumpka for the Triangle Lakes development of almost 950 homes. Construction is expected to start by next year, according to city officials.

Two years ago city officials agreed to a development of about 8,000 homes on almost 3,500 acres just west of Okahumpka.

Construction is yet to begin on that project. But with more than 16,000 people, it will be roughly the size of a small city near the turnpike.

James "Red" Fussell, 72, was born and reared in Okahumpka.

As a boy, he learned how to swim in a spring on Branham's property, much like the Seminole Indians did who lived in the area in the early 19th century.

Fussell isn't happy that cars and trucks will soon speed through his quiet community.

"I'm not in favor of all this growth," he said Thursday. "But I know we can't have a sleepy little town forever.

"There's a lot of history in this little bump in the road, and I hate to see it go."

For years, he would walk across C.R. 470 from his home to pick up his mail at the Okahumpka post office.

He doesn't do it anymore, "with all those trucks going by," he said.

If the land around Okahumpka develops as expected, daily traffic on C.R. 470 could triple to about 25,000 vehicles in the next 20 years, according to Lake County transportation studies.

As a two-lane road, C.R. 470 could not support that much traffic, said Jim Stivender, Lake's public works director.

Christa Deason, a turnpike spokeswoman, said the new interchange at C.R. 470 will relieve much of the congestion at the U.S. Highway 27 interchange. However, it will increase the number of vehicles crossing through Okahumpka, she said.

The $20 million interchange was built because of the recent development plans that Leesburg approved in the area and traffic generated from Federal Correctional Complex in Coleman, Deason said.

"We don't just go out and build interchanges on what may happen there," she said. "There is obviously going to be a need there soon. So this is very good locally."

To William Dempsey, 63, the surrounding growth is good. It means more shops, more businesses and more work for the painting contractor who has lived in Okahumpka for three years.

"It opens up more opportunities for us," he said. "Especially for the younger people that live in this area."
http://www.orlandosentinel.com/news/local/lake/orl-lklinterchange28012805jan28,1,5194819,print.story?coll=orl-news-headlines-lake&ctrack=2&cset=true

Housing boom spawns a home-repair craze


By Kenneth R. Harney/ Housing Update
Friday, January 28, 2005
WASHINGTON - A new study finds Americans spend nearly $250 billion annually on home improvements - much of it on high-end kitchens or other big-ticket projects.
Baby boomers - those born between 1946 and 1964 - especially spend big, according to the report, produced by Harvard University's Joint Center for Housing Studies.
Researchers found that 60 percent of baby boomers completed home-renovation projects in 2003, spending a collective $72 billion.
But Generation Xers (those born between 1965 and 1974) are rapidly catching up. From 1995 to 2003, the number of Gen Xers who owned homes tripled - and their remodeling expenditures soared more than fivefold.
The Harvard report looked primarily at home-renovation spending.
But along the way, the study also uncovered some interesting facts about America's socioeconomic climate. For instance, the report found that:
The income gap between rich and poor households is widening. The average income for the top 20 percent of households is now 15 times that of the bottom 20 percent. That's up from less than 9-to-1 in 1975.
Among the top 25 percent of households in income terms, 90 percent own their own homes. By contrast, only 49 percent of the bottom 25 percent own their own residences.
Minority and immigrant families accounted for 35 percent of all first-time home buyers during 2003.
Home-equity growth among all categories of owners powered consumer spending in recent years, greatly softening the 2001-02 recession.
Not only did home-equity gains produce a ``wealth effect'' - giving homeowners enough confidence to buy goods and services - they also produced the necessary cash. Homeowners pulled out $333 billion in home equity via cash-out refinancings between 2001 and 2003. That's nearly triple the preceding three years' level.
Some interesting facts the study uncovered about home-renovation spending:
One-third of all cash-out-refinacing proceeds go toward home improvements.
Homes worth $400,000 and up represent just 11 percent of total owner-occupied units. But owners of these homes accounted for 43 percent of all 2002-03 spending on additions, and about a third of expenditures on kitchen and bathroom remodeling.
All but 15 percent of the $40 billion the high-end homeowners spent on home renovations in 2003 went to professional contractors. By contrast, those who owned homes worth $100,000 or less spent some 33 percent of their home-repair funds on do-it-yourself projects.
Some 41 percent of Gen Xers' home-improvement spending went toward do-it-yourself projects. By contrast, only 26 percent of baby boomer's home-improvement money covered do-it-yourself work.
http://business.bostonherald.com/realestateNews/view.bg?articleid=65612&format=text

Thursday, January 27, 2005

A Record New Housing Boom In The Tulsa Area

KOTV

The Homebuilders Association of Greater Tulsa says more than 4,200 homes were built in the Tulsa area in 2004.

The biggest boom was in Broken Arrow, where 686 new homes went up. Owasso saw 538 new homes and 527 new houses were built in Tulsa.

News on 6 anchor Terry Hood says while the rest of the economy is finding its feet again, the Tulsa area housing market has never been stronger, thanks to historic low interest rates.

Anna Hollinger has sold over $40-million worth of property in the past two years. She says most of the houses she sells are custom built, by folks who want to stay in the area, and know exactly what they want in a home.

And while luxury homes are going fast in midtown and south Tulsa, smaller homes in the suburbs are selling well too. Brad Emmons and his family have already moved into a new house near Owasso, even though construction crews are still putting on the finishing touches. He's lived in Tulsa for years, but said his new home is just what he was looking for to accommodate his growing family. "We still plan on growing our family, 2, 3, 4, 6, and 10. We haven't decided, but we'll have more than enough home for how many we want to go with."

Brad says the time has never been better to buy a house, and contractors and realtors agree. They don’t see an end to the boom anytime soon.

Will housing prices keep rising? Economist Robert Shiller discusses the enigma of market highs and lows

Booms and Bubbles
Will housing prices keep rising? Economist Robert Shiller discusses the enigma of market highs and lows
‘There will always be bubbles’
WEB EXCLUSIVE
By Karen Lowry Miller
Updated: 6:03 p.m. ET Jan. 27, 2005

Jan. 27 - Robert Shiller will publish the second edition of his book “Irrational Exuberance” (Princeton University Press) this spring. Noted as a rare voice who predicted the stock market crash in 2000, the Yale economist has become a sort of bubble guru and was part of panel discussing bubbles at the World Economic Forum meeting in Davos on Thursday. He has now added a chapter on real estate to his book and is also launching a company that will sell futures allowing people to hedge against movements in housing prices in a given city.

Under SEC rules, Shiller may not discuss his yet-to-be-published predictions about real-estate bubbles while the review of his corporate application is pending. But he elaborated on some of his already known opinions about real-estate prices in a conversation with NEWSWEEK’s Karen Lowry Miller at the Swiss ski resort. Excerpts.

NEWSWEEK: What can you say about your outlook for housing prices. Is it a bubble?
Robert Shiller: I’m not objective any more because I will have a financial interest [when the new company is launched]. I can’t be objective so I won’t say. If people talk about a bubble, they think in terms of deflating or bust. But the real question is, how it will look longer term? As I’ve said in the past, I don’t think housing prices will be higher five to 10 years from now.

Is it possible to spot a bubble?
It is possible for people who follow these things carefully. Most people are not professionals. In 1999 to early 2000, enlightened open-minded people recognized it, but markets are driven by the unenlightened.

Why are we in a world of bubbles now? Is it thanks to low interest rates for so long?
It’s not all due to [U.S. Federal Reserve Board chairman] Alan Greenspan. In my book I have 12 precipitating factors. Monetary policy is one, but not the first.

What is the main one?
The main one is the rise of capitalism around the world. For the last couple of decades there’s been a greatly increased public acceptance of capitalist institutions. As I’ve written, there’s been a change in perceptions. In an increasingly capitalist world, it’s everyone for him or herself. The value of property is much more on people’s minds. In the 1950s, when economists did talk about it, they said prices are driven by construction costs. The real driving force in real estate and stock markets is the sense that, sure it can go down, but it will go right back up, so don’t worry.

What is a bubble exactly?
A bubble means enthusiasm grows for assets and people don’t see the limits, but there are limits. Actually, bubble is a misnomer. Even in the stock market. A bubble bursts in a flash, and seconds later it is gone forever. But [on] Oct. 28-29, 1929, the stock market fell 24 percent in two days. By early 1930 it was back to the peak, then there was a series of steps down to 1932. There was a boom in the stock market [from] 1932-37. No one remembers, but it was up just as much in the 1930s as in the 1920s. The reasons bubbles are so enigmatic is because you never know when they are over.

So what shall we call it?
I’m always trying to find a better metaphor. I thought of random walk, but it exaggerates the randomness. We need a new metaphor for upward momentum

Hot-air balloon?
Maybe. They have to come down sometime, but if you keep throwing sand bags out they rise up again for awhile.

What is the next bubble? If money pulls out of real estate, where can it go next?
I have to say that is an intellectual fallacy. The value of something can go down without money having to go somewhere else. It’s theoretically possible for all markets to go down at the same time. If people change their minds and get depressed, they just won’t spend or invest.

Now that we know more about them, can we prevent them?
Bubbles are a little like wars. There is a half-life of maybe 50-100 years, then people forget. There will always be bubbles.

DAVOS-Freddie Mac CEO sees no U.S. real estate bubble

DAVOS, Switzerland, Jan 27 (Reuters) - Freddie Mac (FRE.N: Quote, Profile, Research) , the No. 2 U.S. mortgage finance company, does not think that the U.S. housing market is in bubble territory, the company's chief executive said on Thursday.

"Do I think that there has been a tremendous run? Yes. Do I think that it is a major issue for the U.S. as a whole? No," Freddie Mac Chief Executive William Syron told reporters on the sidelines of an economic summit in the Swiss resort of Davos.

Housing prices are also starting to cool after recent rapid gains, especially in some local markets that have been particularly hot, Syron said.

Tuesday, January 25, 2005

Iowa sees a housing boom


Justin Foss
MASON CITY, Iowa (KIMT)


A building boom is making a usually slow winter speed right by.

Across the state of Iowa, the number of new homes being built is dramatically increasing.

Last year in Waterloo, they saw a fifty-five percent increase.

In Mason City, fifteen percent more building permits were issued in 2004 than in 2003.

That increase is keeping construction companies very busy.

Larry Elwood builds homes and tells KIMT Newschannel Three, "And of course our main goal right now, is if anybody is moving or transferring it's more towards the springtime, before school starts or school's out sort of thing."

Experts say the boom in new home sales comes from record low interest rates and more good jobs being added to the state.

A BIG RISE IN INTEREST RATES COULD COST YOU A BUNDLE


By JOHN CRUDELE, The New York Post

January 25, 2005 -- THAT ticking noise I men tioned in my first column of 2005 did turn out to be the sound of time running out for the stock market rally.

But the real noise you should be listening for is the air coming out of bonds.

You say that you never invest in bonds so you really don't care?

Well, I wouldn't turn to the sports pages just yet.

You have a bigger bet on the bond market than any wager you could possibly place on next week's Super Bowl. (By the way, Eagles 24, Patriots 10)

First, here's something very basic. When the price of a bond goes down, the (yield) interest rate goes up. That's automatic, like the two ends of a teeter-totter going in opposite directions.

Last spring I said the economy wasn't as strong as Washington was pretending, so interest rates wouldn't go up. I was mostly right.

What happened was highly unusual. The Federal Reserve has been trying to raise interest rates by boosting the so-called Federal Funds rate five times.

The sixth hike may be on the way in early February.

But borrowing costs in the real world haven't moved very much.

While savers can get a little more interest on short-term certificates of deposit, you'll pay nearly the same rate on 30-year mortgage now as you did last summer. Same for car loans and money borrowed longer than a few months.

Astoundingly, the financial markets did not obey the dictates of monetary regulators.

The real world has told Alan Greenspan that he and his Fed colleagues are out of step with reality.

So here's the big question for 2005: Will bond prices finally get hammered because interest rates are rising in accordance with the Fed's wishes?

The value of your home or apartment could very well decline if borrowing costs go up. If rates rise substantially, the housing bubble that everyone else has been worrying about could burst.

The second problem that higher rates could cause would come by way of the stock market.

If interest rates climb, companies will join everyone else in paying more to borrow money.

And if borrowing costs increase, corporate profits will decline. Investors — already in a bad mood — won't like that.

But the big question is: Will interest rates climb?

The answer is, I don't know. Nobody does. Working in favor of rates staying down (and bonds up) is the fact that the nation's economy is growing modestly.

The big issue is that there are several substantial problems that could spook bond investors into demanding higher rates.

First, the Fed wants rates up. That alone could eventually be enough to boost borrowing costs.

The extremely weak dollar may lead foreign investors to demand higher rates on their money.

You already know all the other problems: the U.S. trade deficit, the federal budget deficit, the war in Iraq and Social Security concerns.

Any one problem on its own could jolt interest rates if investors become nervous enough. So, will rates go much higher?

If you grabbed my feet and started tickling until I gave an answer, I'd say there's a slightly better than even chance that they will.

But the odds are only that close because of something we Americans should be proud of: even with all those problems, foreigners still think their money is safer here than anywhere else. And they are willing to accept less of a return for that peace of mind.

California Bankin'

By Stephen D. Simpson, Motley Fool

Dude! Commercial Capital Bancorp (Nasdaq: CCBI) posted fourth-quarter results on Monday that left its investors dreaming for a little more from this California-based bank. While earnings of $0.36 per share slightly beat the Wall Street mean estimate of $0.35, the real story lies in the nitty-gritty numbers.

First, the bad news. Core loan originations were down 9% to $496 million from the third quarter and the net interest margin declined by 11 basis points to 3.38%. The bank's taxes were also somewhat artificially low, as management took advantage of tax credits related to low-income lending. Finally, the company sold about $160 million of attractive loans during the quarter, a sale that helped goose the EPS figures.

Even though it appears that the company had to strain a bit to meet analyst expectations, there are plenty of things to like about it. Bad debt expense remains incredibly low, with only 0.13% of loans (a total of $6.4 million) being reported as non-performing. Commercial Capital continues to position its investment portfolio for higher interest rates, and the loan pipeline for March stands at $483 million. If the company can continue its historical trend of producing actual loan originations at a rate of about 1.3 times, that suggests over $624 million in loan originations.

Fools should also note that this bank isn't your typical savings and loan. Over 71% of the bank's loans are made for multifamily housing and commercial projects. What's more, this bank actually keeps most of the loans it makes. This helps insulate the bank from the boom-bust cycle that many mortgage lenders have begun to experience with the slowing housing market. So, while compressing interest margins and a tougher mortgage market aren't great news, Commercial Capital may not be as vulnerable as others.

This bank has been smokin', and the valuation reflects it. The trailing price-to-earnings ratio is over 19 and the price-to-book is about two times. Neither of those numbers seems high until you realize that a more normal industry P/E is in the low teens and a more normal price to book is below 1.5. So even though the bank operates in an attractive niche, investors need to ask themselves how much of a premium they want to pay -- especially when Commercial Capital looks to be just squeaking by on its estimates. Risk-tolerant investors may find the bank's growth too sweet to pass up, but more conservative dudes and dudettes might just wanna chill out and wait for a better price.

NEVADA ECONOMY: Unemployment creeps upward


Las Vegas area joblessness falls even as state rate advances slightly

By JOHN G. EDWARDS
REVIEW-JOURNAL



Click image for enlargement.
Graphic by Mike Johnson.

Nevada continues to lead the nation in job growth thanks to the explosive Las Vegas area economy, even though the statewide unemployment rate edged up slightly in December, a report Monday from the state Department of Employment, Training and Rehabilitation shows.

Statewide, December's unemployment rate was up 0.1 percent to 3.8 from November's 3.7 percent. For the Las Vegas area, however, unemployment fell 0.1 from November to December when 3.5 percent of Southern Nevadans were jobless.

Overall employment in the Las Vegas area rose by 5.3 percent to 855,500 in December from the same month in the prior year. Statewide, total employment grew 4.8 percent to 1,115,000, the employment department said.

The jobs figures look even better when compared to a year ago, with the 3.5 percent Las Vegas area unemployment rate declining from 4.5 percent. Statewide, unemployment decreased to 3.8 percent from 4.7 percent in December of the prior year, the state department reported.

The state's December jobless rate compares to 5.4 percent unemployment nationally and 5.8 percent in California last month, said Robert Murdock, chief economist for the employment department.

"That puts Nevada in a very positive light for unemployment," Murdock said, noting that Nevada is leading the nation in job growth.

However, Dawn McLaren, research economist with the Bank One Economic Outlook Center at Arizona State University said the unemployment numbers are unreliable.

The number of workers who stop seeking jobs during slack periods makes unemployment look lower than it is, she said. Similarly, the number of workers starting to seek work again makes unemployment look higher than it is when job prospects pick up.

She and Murdock also expressed opposite views on prospects for Nevada's economy.

"We're just looking at strong growth up and down the line," Murdock said, referring to job growth in various business segments. "All the industries are looking strong. For the most part, there's really not any huge pocket of unemployment in Nevada."

He counted 45,000 new jobs in Las Vegas over the 12 months ending in December. Statewide, the number of jobs grew by 53,700.

But McLaren saw danger lurking in the Nevada and Las Vegas area economy, however.

"I have a feeling that you guys have a big housing bubble," McLaren said.

The Las Vegas economy looks vulnerable to a bust, in part, because so many Las Vegas-area jobs are in the construction trades, she said. About one-fifth of the new jobs in Las Vegas over the last year are in construction.

Las Vegas construction jobs increased by 9.3 percent over December a year earlier, compared to a 3.3 percent growth in leisure and hospitality jobs.

The Western Blue Chip Economic Forecast, which the Arizona State center produces, suggests that housing permits that were up about 21.1 percent for the state in 2003 will grow by only 1 percent this year.

By comparison, Murdock saw good news around the state. Mining is picking up in Northern Nevada cities, such as Ely and Elko, he said. Elko saw unemployment slip to 3.8 percent from 5 percent a year earlier while employment surged 4.6 percent. That unemployment rate is a 0.3 percentage point increase from November's 3.5 percent rate.

The Reno area saw unemployment slip to 3.3 percent from 4 percent a year ago, another 0.3 percentage point increase from November. Employment around Reno increased 4.1 percent, the state reported.

Carson City-area unemployment jumped to 4.9 percent in December, up from 4.3 percent in November, but down from last December's 5.7 percent rate. Employment around the capital city rose by 2 percent over the 12-month period.

The largest part of the state's labor force, however, is concentrated in the Las Vegas area, which enjoyed explosive growth and big housing price gains last year.

McLaren compared Las Vegas to the Phoenix area in about 1990 when a frantic construction binge ended with a sickening drop in housing prices and employment. "It's growth feeding growth," she said.

She, however, noted that Phoenix's problems happened in the wake of the savings-and-loan industry scandals.

In Las Vegas, "it may be more of a slow type of fizzle" rather than a spectacular collapse in employment and housing prices, she said.

McLaren said skyrocketing housing prices last year far exceeded growth in personal income in the area. If personal income fails to catch up, prices will come down, she predicted.

"(Otherwise) who is going to live in these houses?" she asked.

She suggested many of the Las Vegas home buyers are speculators.

"When my friends start investing in real estate, you know the market is starting to crash," she said. "I feel sorry for you guys, and I feel even sorrier for my friends who've invested in your market."

Nobody Knows When a Bubble Will End


By Amy Feldman, Money Magazine

NEW YORK (MONEY Magazine) - Robert Shiller argues that housing in many cities is undergoing the same irrational exuberance as stocks did in their bubble days. MONEY's Amy Feldman spoke with him in late December about what homeowners and potential buyers can do to keep from getting burned.

Q. So far, home buyers have been right in thinking home prices will keep going up.

A. Part of what drives the bubble is this confidence that the market will always go up. When people hear what a house sold for 30 or 40 years ago, they are astonished. But a lot of that is just inflation, not any increase in real value. It is possible that home prices will sag for a long period of time.

Q. How do today's historically low interest rates play into this?

A. Long-term interest rates have been going down since the 1980s. And mortgage institutions are lowering payments with the expansion of adjustable-rate mortgages and interest-only mortgages, especially in the bubble cities.

Interest rates are a significant factor, but they are not the cause of the bubble. I think they are a potential bubble-burster because as rates start going up, some people will find it intolerable to make their mortgage payments.

And I don't think interest rates have to go any higher to make the bubble burst. The last bubble peaked around 1990, and the Federal Reserve was cutting rates at the time.

Q. So what should we do?

A. Most people want to live in their homes, so they should stay. But people can make decisions to reduce their home-price exposure. One possibility is to not be as ambitious about the size of your house. If you think that you'll move again in five years, then wait to buy your dream house.

Q. What about homeowners who are sitting on big paper profits -- should they cash out?

A. I wouldn't advise someone to sell, because their family situation is probably the dominant consideration. But if someone is at the margin, the question is timing. That's the problem with bubbles: Nobody knows when they will end.

Q. You came up with a pilot insurance program for people in Syracuse to bubbleproof their homes. Did it work?

A. The Syracuse project was a success but on a small scale. Not that many people signed up. We have to come up with a better marketing strategy, and I think we need to get private insurance companies involved. I don't think it will be long until we have hedging vehicles for houses.

Q. What are you doing personally?

A. I bought a summer home on an island in Long Island Sound in 2002. I worry about a bubble in vacation properties. But we wanted to live there in the summer. Top of page