Thursday, February 24, 2005

Honey, I shrunk the dollar

Spiegel Online

When a country lives on borrowed time, borrowed money and borrowed energy, it is just begging the markets to discipline it in their own way at their own time. By THOMAS L. FRIEDMAN

I have just one question about President Bush's trip to Europe: Did he and Laura go shopping?

If they did, I would love to have been a fly on the wall when Laura must have said to George: "George, do you remember how much these Belgian chocolates cost when we were here four years ago? This box of mints was $10. Now it's $15? What happened to the dollar, George? Why is the euro worth so much more now, honey? Didn't Rummy say Europe was old? If we didn't have Air Force One, we never could have afforded this trip on your salary!"

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SPIEGEL ONLINE and the online version of the "New York Times" offer their readers a special service. Approximately twice a week, you can read selected analyses and commentary from the "New York Times" on SPIEGEL ONLINE. In return, our colleagues in New York will publish selected and translated articles from DER SPIEGEL on their website each week.
The dollar is falling! The dollar is falling! But the Bush team has basically told the world that unless the markets make the falling dollar into a full-blown New York Stock Exchange crisis and trade war, it is not going to raise taxes, cut spending or reduce oil consumption in ways that could really shrink our budget and trade deficits and reverse the dollar's slide.

This administration is content to let the dollar fall and bet that the global markets will glide the greenback lower in an "orderly" manner.

Right. Ever talk to someone who trades currencies? "Orderly" is not always in the playbook. I make no predictions, but this could start to get very "disorderly." As a former Clinton Commerce Department official, David Rothkopf, notes, despite all the talk about Social Security, many Americans are not really depending on it alone for their retirement. What many Americans are counting on is having their homes retain and increase their value. And what's been fueling the home-building boom and bubble has been low interest rates for a long time. If you see a continuing slide of the dollar - some analysts believe it needs to fall another 20 percent before it stabilizes - you could see a substantial, and painful, rise in interest rates.

"Given the number of people who have refinanced their homes with floating-rate mortgages, the falling dollar is a kind of sword of Damocles, getting closer and closer to their heads," Mr. Rothkopf said. "And with any kind of sudden market disruption - caused by anything from a terror attack to signs that a big country has gotten queasy about buying dollars - the bubble could burst in a very unpleasant way."

Why is that sword getting closer? Because global markets are realizing that we have two major vulnerabilities that this administration doesn't want to address: We are importing too much oil, so the dollar's strength is being sapped as oil prices continue to rise. And we are importing too much capital, because we are saving too little and spending too much, as both a society and a government.

"When people ask what we are doing about these twin vulnerabilities, they have a hard time coming up with an answer," noted Robert Hormats, the vice chairman of Goldman Sachs International. "There is no energy policy and no real effort to reduce our voracious demand of foreign capital. The U.S. pulled in 80 percent of total world savings last year [largely to finance our consumption]." That's a big reason why some "43 percent of all U.S. Treasury bills, notes and bonds are now held by foreigners," Mr. Hormats said.

And the foreign holders of all those bonds are listening to our debate. They are listening to a country that is refusing to raise taxes, and an administration talking about borrowing an additional $2 trillion so Americans can invest some of their Social Security money in stocks. If that happened, it would almost certainly weaken the dollar, further depreciating the U.S. Treasury bonds held by all those foreigners.

On Monday, the Bank of Korea said it planned to diversify more of its reserves into nondollar assets, after years of holding too many low-yielding and depreciating U.S. government securities. The fear that this could become a trend sparked a major sell-off in U.S. equity markets on Tuesday. To calm the markets, the Koreans said the next day that they had no intention of selling their dollars.

Oh, good. Now I'm relieved.

"These countries don't have to dump dollars - they just have to reduce their purchases of them for the dollar to be severely affected," Mr. Hormats noted. "Korea is the fourth-largest holder of dollar reserves. ... You don't want others to see them diversifying and say, 'We'd better do that, too, so that we're not the last ones out.' Remember, the October 1987 stock market crash began with a currency crisis."

When a country lives on borrowed time, borrowed money and borrowed energy, it is just begging the markets to discipline it in their own way at their own time. As I said, usually the markets do it in an orderly way - except when they don't.

Friday, February 18, 2005

Fed chief sees home price bubble

By Patrice Hill
Published February 18, 2005
Federal Reserve Chairman Alan Greenspan yesterday said he sees a housing price bubble in "certain areas" and suspects prices are vulnerable to declines, but they will not collapse in any way that threatens the economy.
"I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," he told the House Financial Services Committee. "I don't expect that we will run into anything resembling a collapsing bubble. I do believe that it is conceivable we will get some reduction in overall prices, as we've had in the past, but that is not a particular problem."
Mr. Greenspan was responding to a question from Rep. Scott Garrett, a New Jersey Republican who said he is buying a house in Washington, one of several dozen urban areas on the East and West coasts that economists suspect may be experiencing housing bubbles.
Washington home prices surged on average by 27 percent last year, twice the national rate. In Northern Virginia and many other parts of the region, home values have doubled since 2000 " a boon to homeowners and housing investors but a bane to those trying to buy into the market.
"The bubble is about to burst as soon as I buy my house down here," Mr. Garrett complained to the Fed chairman.
Mr. Greenspan said homeowners have accumulated considerable wealth because of the rapid run-up in the value of their homes in recent years, and many have been tapping into that wealth through home sales, cash-out refinancings and home-equity loans.
The Fed estimates that home values have doubled from $8 trillion to $16 trillion since 1996, outpacing the rapid growth of mortgage debt, which also has doubled from $3.5 trillion to $7 trillion in that time.
"Remember that there's a very significant buffer in home equities at this stage," he said, referring to the $9 trillion difference between home values and outstanding mortgage debt.
Since most homebuyers have put down deposits of 20 percent, they have that much of a cushion against a potential drop in their home values, he said. Even when homebuyers have obtained loans of as much as 100 percent of a house's cost, he said, the rapid gains in value in many cases has provided them with a buffer against decline.
But the Fed chairman conceded that any drop in home values " which could affect as much as one-fifth of the population, according to private estimates " could put a damper on consumer spending and economic growth. Consumer spending since 2000 has been fed by the "wealth effect" created by rising home values.
"Some reversal in that [wealth] is not out of the question. If that were to occur, households would probably perceive the need to save more out of current income; the personal saving rate would accordingly rise, and consumer spending would slow."
Mr. Greenspan indicated that the Fed would like to see consumer spending out of household wealth slow some, since it has been a major factor driving down the personal savings rate to a meager 1 percent last year from a historic average around 7 percent. The Fed's campaign to raise interest rates in the last year thus has been aimed in part at cooling the overheated housing market.
However, home sales have continued at record levels. Mr. Greenspan said the Fed's intentions have been thwarted by an unusual decline in long-term interest rates, in defiance of the Fed's steps to raise short-term rates by 1.5 percentage points.
"Other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields," he said. Yet "30-year fixed-rate mortgage rates have dropped to a level only a little higher than the record lows touched in 2003."
Many analysts attribute this "conundrum" to heavy buying of U.S. Treasury bonds and mortgage-backed securities by foreign central banks and overseas investors, he said, but the explanations have not been convincing. The unexplained drop in mortgage rates "may be a short-term aberration."
Mr. Greenspan also told Congress to slow the growth of mortgage lenders Fannie Mae and Freddie Mac, which have a combined $1.55 trillion loan portfolio.
"Going forward, enabling these institutions to increase in size, we are placing the total financial system of the future at substantial risk," he said.
Most of the House questioners yesterday, like their counterparts on the Senate Banking, Housing and Urban Affairs Committee on Wednesday, focused on the heated topic of Social Security reform.
Mr. Greenspan repeated his support for creating a new system of private accounts to fully fund Social Security's obligations to retirees in the years ahead.
He said such a system would have an advantage over the current one because it would ensure that money supposedly set aside for retirement is actually saved for that purpose. Today, payroll taxes that the government doesn't use to pay retirement benefits are immediately spent on other items. About $1.5 trillion in Social Security funds have been spent that way.
Another reason Mr. Greenspan said the private accounts would be desirable is they would enable many low-income workers to enjoy the benefits of building wealth for the first time.
They "will create ... a sense of increased wealth on the part of the middle- and lower-income classes of this society who ... struggle with very little capital," he said. "For the last 25 years we have had ... an ever-increasing concentration of income and wealth in this country ... that is not conducive to the democratic process. ... It's crucial to our stability that people all have a stake in this system."

California home foreclosure at a low

San Jose Business Journal

Just over 2,500 homes went into foreclosure in Santa Clara County last year, a 19.4 percent drop from the year before, according to DataQuick Information Systems, a La Jolla-based real estate information company.

Statewide, foreclosure activity dropped to its lowest level in more than 13 years in 2004, the result of robust home sales and strong appreciation rates, DataQuick says.

Lending institutions sent default notices to 56,125 California homeowners last year. That was down 32.9 percent from 83,600 in 2003. Last year's default count was the lowest DataQuick has in its statistics, which go back to 1992. Default activity was strongest in 1996 when 217,410 homeowners found themselves in the foreclosure process.

"There's always a going to certain level of financial distress out there. People lose jobs, get divorced or have costly medical emergencies even in the best of times. Right now, though, because of increasing home values, virtually everyone can sell or refinance if they're really in trouble," says Marshall Prentice, DataQuick president.

"We expect foreclosures to go up this year. It's likely that appreciation rates will come down somewhat. And also, a lot of last year's mortgages were higher-risk loans where default rates will be higher," he says.

The 2,520 foreclosures in Santa Clara County was the largest number for the Bay Area. Other area counties and the number of foreclosures and the percentage difference from 2003 are:

* Alameda: 2,429 (-21.7 percent)
* Contra Costa: 2,183 (-20.8 percent)
* Marin: 248 (-10.5 percent)
* San Mateo: 684 (-26.5 percent)
* San Francisco: 427 (-2-.6 percent).

While all counties in California saw a decrease in foreclosure activity, the decline was strongest in Los Angeles and San Bernardino counties. Mortgage loans are least likely to go into default in San Luis Obispo, Orange and Marin counties. The likelihood is highest in Central Valley counties, DataQuick says.

Only about 10 percent of the homeowners in the default process actually lose their homes to foreclosure. Most are able to stop the foreclosure process by bringing their mortgage payments current, or by selling their home and paying the mortgage off.

While foreclosure properties tugged property values down by almost 10 percent in some areas eight years ago, the effect on today's market is negligible, DataQuick reported.

Greenspan And His Bubble

Dan Ackman

With Alan Greenspan in the witness chair yesterday, U.S. Rep. Scott Garrett, R-N.J., took the opportunity to ask the Federal Reserve chairman for some personal financial advice. Garrett told Greenspan he is buying a house in Washington, D.C., one of many areas on the East and West coasts where home prices have skyrocketed well past any increase in home-buyer incomes.

"The bubble is about to burst as soon as I buy my house down here," Garrett complained to the Fed chairman, as quoted in The Washington Times. Greenspan didn't address Garrett's particular situation, but he did offer some reassurance, albeit qualified, that if there is a housing bubble, and if it does burst, it would cause no great harm.

"I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas but not, as best I can judge, nationwide," Greenspan told the House Financial Services Committee. He added: "I don't expect that we will run into anything resembling a collapsing bubble," though it's "conceivable that we will get some reduction in overall prices as we've had in the past, but that is not a particular problem."

Of course, the Fed chairman cannot be expected to sound loud alarms. He is by nature a soothsayer. The question is, should his words be taken as a warning--and was that warning loud enough?

The numbers are fairly dramatic, even nationwide. In the last year, home buyers paid 9% more for the average existing home and 11% more for the average new home than they would have paid one year earlier, according to a report by David Kelly, an economist for Putnam. The demand spurred builders into starting 1.95 million new housing

units, up 5% from a booming 2003. In all, the number of homes being constructed in the United States is increasing at nearly twice the rate as the number of households. At the same time, the share prices of home builders like Toll Brothers (nyse: TOL - news - people ), Centex (nyse: CTX - news - people ), D.R. Horton (nyse: DHI - news - people ) and Pulte Homes (nyse: PHM - news - people ) are all up by 25% to 100% in the last six months.

While the price increases nationally are fast enough, in many areas home price inflation is running at two or three times the national rate, according to a recent report by the National Association of Realtors. In certain regions, prices have doubled in the past five years, particularly up and down the East Coast, in Las Vegas and in California. Kelly adds, "In these areas, there are many anecdotal accounts of people buying properties just to flip them, buying housing with virtually no money down, or using interest-only or negative amortization loans."

While Greenspan calls the bubble a localized phenomenon, the localities tend to be the largest in the country, such as southern California, New York, Massachusetts and the particularly overheated Las Vegas market. "It's not as if there's a bubble in Des Moines, Iowa," says Peter Schiff, a financial adviser for Euro-Pacific Capital and a persistent critic of the Fed chairman.

The question Garrett and many others want answered: Is a sharp decline in home prices inevitable, or will the prices flatten or just keep rising?

Here the chairman was cryptic. "Remember that there's a very significant buffer in home equities at this stage," he said. Most home buyers have put down deposits of 20%; they can weather a potential drop in home values, Greenspan implied. Even for home buyers who put nothing down, the recent price surges will offer a cushion against decline, he suggested. He added, though, that some home buyers, perhaps 20% of the total, face some real risk.

Kelly agrees that most home owners are fairly safe, especially those who bought their homes with the intention of living there for awhile. He does point out that there is a substantial minority of home buyers who have bought for speculative reasons, and he compares some of the housing market to the not-too-long-ago market for Internet stocks. "Irrational exuberance has not gone away, it's just wearing a different coat."

Schiff thinks the chairman is sugarcoating the story. He points out that home-mortgage borrowing has nearly tripled nationwide since 2000, which is even faster than the increase in home purchases or house prices. Despite the rise in short-term interest rates, mortgage rates are still near historic lows. Rental vacancies are at just over 10%--that's as high as they have ever been since the Census Bureau started measuring the phenomenon in the 1950s.

In short, to answer Garrett's question, Kelly would tell the congressman to consider his political future, and if he's a D.C. lifer, perhaps he should buy that house. Schiff, on the other hand, would say, don't do it; but if you must do it, avoid adjustable-rate mortgages, and make sure your debt payments are fixed.

Tuesday, February 15, 2005

Stubborn sellers dampen housing recovery

Michael Clarke, This is Money

HOME sellers' refusal to budge on asking prices is suppressing a rebound in the housing market, according to UK chartered surveyors.

Buyers' desire for a bargain and sellers stubborn approach to price slowed the market further in January, with prices falling for the sixth consecutive month.

The latest Royal Institution of Chartered Surveyors survey found the balance of surveyors reporting a house price rise against a price fall stood at minus 36, down slightly from December's reading of minus 38.

Southern England experienced the sharpest falls, according to the survey, while prices held firm in London, the Midlands and Northern England.

Although agreed sales rose for the first time in eight months during January, Rics said the rebound should have been more buoyant considering the UK's strong economic conditions.

Rics spokesman Jeremy Leaf said: 'Sellers remain unwilling to lower asking prices and, with buyers looking to secure a bargain, this has resulted in a rather slow recovery. The strength of the wider economy should support the housing market in the coming months, despite property becoming less affordable as a result of higher interest rates.

'The market has most likely already hits its lowest point and we should see a recovery in activity, though the prospects of further interest rate rises will keep conditions restrained.'

The Bank of England left borrowing costs steady for the sixth month in a row last week and economists are split over whether the next move will be up or down.

The need to slow the booming property market was one of the key reasons why the Bank hiked rates five times in the last 18 months as policymakers were concerned that double-digit house price increases were unsustainable.

But while the housing market has slowed noticeably since the middle of last year, policymakers have noted that prices turned out stronger than they anticipated in November.

Surveyors reported a slight decrease in property stock for sale, marking the first drop in eight months. The organisation said this indicated market conditions have stopped deteriorating.

Have your say...

NEARLY 500 people have voted in a This is Money house price poll during February. Nearly 60% are expecting values to fall in the next year, with 15% braced for a crash of more than 20%.

Sunday, February 13, 2005

The pros and cons of playing the real estate game

"Any homeowner who can should be moving every two years," the minimum to avoid capital gains taxes, says Kathy Courtney, owner of a Wellington real estate firm that just merged with Keller Williams Realty.

Why you should move every two years

Virtually anyone who owns a house in a market with low interest rates and high appreciation can make money, if he is willing to keep packing his bags, according to real estate agents.

The theory goes like this: By selling your house often and using your profits to trade up, you'll come out ahead. Rising real estate prices will build equity much faster than paying down principal, and the more expensive your home, the more its value will rise.

For example, if a couple buys a house for $200,000 and sells it for $300,000 two years later, they'll walk away with $100,000 cash. If they bought the house with an interest-only loan, they'll have earned that money while making rock-bottom mortgage payments and without paying anything toward principal.

If they then use their $100,000 profit as a 20 percent down payment on a $500,000 house, which they sell in two years for $700,000, they'll have raised $300,000 in only four years. That's enough to put 20 percent down on a $1.5 million mansion that could net even more profit — or enough to downsize and live debt-free.

By contrast, if they had remained in the $200,000 home with a conventional 30-year, fixed-rate mortgage, they not only would have missed out on the profits but also still would owe most of the $200,000 purchase price, since almost all of a mortgage payment goes toward interest in the early years of a conventional loan. (With a 6 percent loan, for example, they would owe $189,229 after four years.)

But be warned: If appreciation slows, you could be stuck in a house you can't afford to pay for — and can't afford to sell.

Why you might not want to

Some of the risks of playing the real estate game are hard to quantify: Will mortgage rates go up? Will appreciation slow down?

Others are as certain as . . . well, taxes.

If you want to try to make money by moving frequently — or if you're a long-time homeowner who's considering cashing in and trading up — don't be fooled by super-low, interest-only or deferred-interest mortgage payments. No matter how low your principal-and-interest payment, you'll still have to pay taxes and insurance, and those are certain to rise significantly if you buy a more expensive home.

Taxes will go up

When you move, your taxes will be assessed at the new home's market value, which generally is the price you paid for it. Tax officials and real estate agents say you should assume your taxes on a new home will be at least 2 percent of the purchase price a year. Actual taxes will vary by location.

For a $500,000 home, that means about $10,000 a year, or $833 a month, will be added to your mortgage payment to cover taxes.

Long-time homeowners might consider this scenario: You've lived in your house for 10 years. Your taxes are $2,500, or $208 a month. Although your home's market value has doubled or tripled since you bought it, your tax increases have been held down to 3 percent or less since the Save Our Homes constitutional amendment went into effect in 1995. In addition, your Florida homestead exemption means you don't pay taxes on the first $25,000 of your home's assessed value.

All of that changes when you buy a new house. Your taxes will now be assessed at the new home's value, even if the previous owner's taxes were held down under Save Our Homes. If your new home costs $450,000, say, your new tax bill will be roughly $750 a month. At $600,000, that bill jumps to $1,000 a month.

You also lose your $25,000 homestead exemption for the first year your own a new house. (You must reapply by March 1 of the next year).

Prospective home buyers should not assume taxes noted on the real estate agent's listing are what they will pay. That figure is what the previous owners paid, and in today's market, that figure is almost certainly far below what a new owner will pay.

Before buying a new house, check with the Palm Beach County Property Appraiser's office Web site to see an estimate your new taxes will be. Visit Click on Records Search, enter the address of the home, then click on Tax Calculator.

Premiums will be higher

Still more sticker shock is likely when you learn what it will cost to insure your new house. Premiums are based on the replacement costs of your new home. If your new home costs more to buy, it will cost more to replace, and most major carriers in Florida have asked for permission to raise rates.

If you live in eastern Palm Beach County (east of Interstate 95 for homes south of PGA Boulevard; east of State Road A1A if your house is north of PGA Boulevard) and have a mortgage, you'll be required to have additional hurricane insurance. Rates for hurricane insurance from Citizens Property Insurance, the state's insurer of last resort, also are going up. Additionally, if you live in a flood zone, you'll need federal flood insurance.

What you need to know: Call your insurance agent and ask for a "conditional quote" on your new house, or ask the seller how much he pays. The figure you get will be only an estimate of your future bill, but it gives you one more tool in which to evaluate the ultimate costs of your new home. Make sure you get separate quotes for each type of insurance you'll need.

Friday, February 11, 2005

Homebuilders get hammered

Smith Barney still bullish but says plateau likely
By Susan Lerner, MarketWatch

NEW YORK (MarketWatch) -- Steve Kim made his first downgrades in the homebuilding sector in more than three years Friday, but that doesn't mean the Smith Barney analyst has turned bearish on the sector.

"Our long-term bias is decidedly in favor of owning this group," Kim told clients, noting his belief that the homebuilders are in the midst of an historic revaluation that he expects ultimately will drive forward price-to-earnings multiples up to the 12 to 14 times range.

Rather, Kim thinks that with multiples approaching the high end of their recent trading range, homebuilder stocks are likely to experience a temporary plateau as the pace of earnings revisions slow.

"Until mortgage rates rise meaningfully, we believe the group can test, but not meaningfully exceed, the high end of its recently established multiple range," he said.

With a major expansion in P/Es unlikely to take place this year, Kim expects the stocks in his coverage will respond most directly to shifts in earnings momentum. That's what he believes has been the driving force behind the sector's most recent move.

"The recent rally in the stocks appears to reflect investors adjusting their prognosis for the housing market from 'critical' to 'stable,' " he said.

History, Kim said, suggests that as earnings deceleration occurs, it will usher in a period of more modest stock price performance.

"The recent rate of earnings growth roughly matches prior peaks and has been a strong predictor of flat-to-negative stock price performance over the ensuing six-to-eight months," he said.

Accordingly, Kim cut price targets on all the homebuilders he follows while also downgrading six stocks -- Beazer Homes (BZH: news, chart, profile) , Hovnanian Enterprises (HOV: news, chart, profile) , KB Home (KBH: news, chart, profile) , Pulte Corp. (PHM: news, chart, profile) , Ryland Group (RYL: news, chart, profile) and Toll Bros. (TOL: news, chart, profile) -- to "hold" from "buy."

Hovnanian paced the decline for the downgraded stocks, falling $2.90, or 5.1 percent, to $53.60.

Toll shed $2.30, or 2.7 percent, to $82.95, while Ryland dropped $1.62, or 2.4 percent, to $66.77; KB Home fell $3.64, or 3.1 percent, to $112.80; Pulte lost $1.26, or 1.8 percent, to $69.90, and Beazer slid $3.01, or 1.8 percent, to $162.32.

Meanwhile, Kim maintained "buy" recommendations on Centex Corp. (CTX: news, chart, profile) , D.R. Horton (DHI: news, chart, profile) , Lennar (LEN: news, chart, profile) , M.D.C. Holdings (MDC: news, chart, profile) and Standard Pacific (SPF: news, chart, profile) .

"The homebuilding stocks always seem to have dark clouds of pessimism overhead, and this unrelenting negative 'tilt' in sentiment creates opportunities for investors to profit simply by betting against the worst-case scenario," Kim said.

Assessing current valuations in the sector, the analyst doesn't believe they reflect any measure of what he called investors' "exuberance - rational or otherwise," though he did cut his price targets to reflect expectations that forward P/E multiples will remain in the single digits this year.

Kim's targets came down as follows: to $191 from $219 for Beazer, to $82 from $90 for Centex, to $56 from $61 for D.R. Horton, to $66 from $73 for Hovnanian, to $130 from $141 for KB Home, to $73 from $80 for Lennar, to $95 from $101 for MDC, to $79 from $87 for Pulte, to $73 from $74 for Ryland, to $96 from $103 for Standard Pacific, to $29 from $31 for Technical Olympic USA (TOA: news, chart, profile) , and to $90 from $99 for Toll Bros.

FDIC says bust in home prices not likely soon

Biz New Orleans
WASHINGTON — Average home prices rose 13 percent in the year ending September 2004, and are up almost 50 percent over the last five years. In December, the Office of Federal Housing Enterprise Oversight noted, "The growth in home prices over the past year surpasses any increase in 25 years."

Because of this rapid growth, some have become concerned about the possibility of a home price collapse, either nationwide or in a number of major cities.

A white paper released yesterday by the Federal Deposit Insurance Corp., addressed the question, “Must a bust always follow a boom?” The following are excerpts from the report:

Must a bust always follow a boom? Based on our look at history, our answer must be "no." Only infrequently do home price booms lead to busts, at least by our criteria.

If it is relatively rare for housing booms to result in a price bust, how do booms usually end? Our look at history suggests that stagnation in home prices is often the most likely outcome. Of the 54 boom episodes prior to 1998, 45 did not see a subsequent bust. In these cases, nominal home prices rose by an average of 2 percent per year during the five years after the boom ended. The equivalent figure for real home prices was a modest 2 percent per year decline. So for 83 percent of our post-boom cities, nominal prices continued to inch up and any declines after inflation were very modest. Home prices in these markets simply stagnated, or stalled out, following their booms rather than going bust.

Why do home prices bust? Two case studies are useful: the Oil Patch and the 1990s bi-coastal collapse.

If a home price boom is not a sufficient condition to cause a home price bust, as our look at history suggests, what is? Clearly one suspect is the overall economic health of these cities during their home price busts. In fact, the two major regional episodes of U.S. home price busts since 1978 were associated with rather severe, localized economic shocks that tended to affect major employers.6

This association between localized economic stress and a home price bust is best illustrated in the case of the oil patch cities during the mid-1980s. When oil prices surged in the late 1970s, the oil-producing areas of Texas, Oklahoma, Louisiana, Colorado, Wyoming, and Alaska began experiencing an economic boom and population inflows. As the economies in these cities accelerated and their populations surged, demand for housing naturally boomed.

The local economic booms in the oil patch cities began to unwind, however, as oil prices started to weaken. After surging 250 percent between 1978 and 1980, crude oil prices began a six-year decline that culminated with a 46 percent price drop in 1986. The economic stress resulting from the decline in oil prices is evident in the intermittent job loss and population outflows that characterized the oil patch cities until 1989. This economic stress in turn weighed heavily on the housing markets in these cities. In the worst cases, nominal home prices fell by 40 percent and 33 percent in Lafayette, Louisiana, and Casper, Wyoming, respectively, between 1983 and 1988.

Population outflows were perhaps the most detrimental factor weighing on housing in these cities. Not long after population growth slowed sharply in these markets, and even for several years after their average populations started growing again, home prices were in decline. One of the worst years of population loss for these cities was 1987, when Anchorage lost 2 percent of its residents, Odessa-Midland's population dropped 5.4 percent, and Casper saw a net outflow of nearly 7 percent of its residents. Population outflows are extremely harmful to housing markets, because they both depress demand for homes and raise the number of homes on the market.

What does history suggest about the current situation? First, home price booms do not last forever. Second, we have seen that most booms usually do not go bust but instead tend to result in a period of price stagnation. Finally, busts do sometimes follow booms. In those instances, severe economic shocks—often including a net outflow of population — appear to be a key factor in pushing nominal home prices sharply lower. Home price declines do not occur simply because home prices have boomed, and they do not occur independently of local economic conditions.

Although relatively few metro area housing booms have ended in busts, there are reasons to think that history might be an imperfect guide to the present situation. Foremost among these are changes in credit markets that are pushing homeowners — and housing markets — into uncharted territory. A major financial development in the 1990s was the emergence and rapid growth of subprime mortgage lending. Subprime mortgage loan originations surged by a whopping 25 percent per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of these loans in just nine years. While the growth in subprime lending has made home ownership an option for millions of households who could not qualify for conventional loans, it has also been associated with higher levels of delinquency and foreclosure.

Home buyers are also increasingly availing themselves of higher-leverage mortgage products. The effect of this structure is to raise the total loan amount to a level very near the value of the home, which may make borrowers more likely to default in the event of a housing market downturn. An increased incidence of default and foreclosure could, in turn, contribute to downward pressure on home prices as distressed properties are liquidated by lenders. However, little is known as yet about the effects these credit-market changes might have on the dynamics of boom-bust cycles, making them promising areas for future research.

FDIC Study: US Housing Market Entering Unknown Territory

By Campion Walsh


WASHINGTON -(Dow Jones)- U.S. homeowners are entering the "uncharted territory" of a residential real estate boom that has fostered surging subprime mortgage loans and increased mortgage leverage, according to a Federal Deposit Insurance Corp. study released Thursday.

Few metropolitan area residential real estate booms since the late 1970s have ended in busts, but several factors suggest past may not be prologue in the current environment, the study says.

"Foremost among these are changes in credit markets that are pushing homeowners - and housing markets - into uncharted territory," it says.

Subprime mortgage lending - made to borrowers with impaired credit histories - surged 25% between 1994 and 2003, and subprime mortgages currently make up just over 10% of all mortgage debt outstanding, the study says. Subprime lending has been associated with higher levels of delinquency and foreclosure, and subprime borrowers could be particularly vulnerable to rising interest rates or economic stresses such as job loss, it says.

Another risk factor is an increase in high-leverage mortgages, the study says. In 2003, mortgage loans exceeding 80% of a home purchase price accounted for 30% of all purchase mortgages underwritten, and in a few cities these highly leveraged purchases accounted for more than half of purchase mortgage lending.

The report says more borrowers are using "piggy back" loans, which combine a first mortgage, usually for 80% of a home's value, with a second one for 10% to 15% of the home's value. As a result, borrowers may be more likely to default in a housing market downturn.

"An increased incidence of default and foreclosure could, in turn, contribute to downward pressure on home prices as distressed properties are liquidated by lenders," the report says. "However, little is known yet about the effects these credit-market changes might have on the dynamics of boom-bust cycles," it says.

Report Follows CBO Forecast Of Cooling Market

The report, by FDIC economists Cynthia Angell and Norman Williams, identifies 33 metro area booms as of 2003 in areas where about 40% of the U.S. population resides - the highest number regional booms in the past 25 years.

Regional housing market busts that have occurred in the past quarter century have tended to be preceded by economic shocks, such as falling oil prices that hit oil-producing areas of the country in the mid- to late-1980s and post-Cold War defense contractor downsizing in California in the early 1990s.

"Should a shock occur, it seems reasonable to expect that home prices would be more likely to decline, and perhaps even bust, in those markets where prices have recently boomed," the report says.

The study defines a "boom" as an increase of 30% or more in inflation-adjusted home prices during any three-year period, and a "bust" as a 15% or greater decline in nominal home prices over five years. It uses a lower threshold for busts partly because home prices tend to fall more slowly than they rise, as homeowners tend to avoid selling in a very weak market.

The FDIC economists found that only 17% of 54 regional housing booms in the 20 years prior to 1998 ended in busts. "So for 83% of our post-boom cities, nominal prices continued to inch up and any declines after inflation were very modest," they say. The most common post-boom experience is stagnation.

The FDIC study follows a report last month by the Congressional Budget Office that found the housing market is likely to cool for the next two years as mortgage interest rates rise.

The CBO's Budget and Economic Outlook report noted that housing investment surged last year to near-record levels, reaching 5.7% of gross domestic product by mid-year.

While acknowledging concerns that speculative overheating of the housing market could lead to a collapse, the CBO cited a December report by the Federal Reserve Bank of New York indicating the rise in house prices for the nation as a whole reflects positive fundamentals rather than speculation.

"In CBO's estimation, a general collapse of prices for houses is unlikely because stronger income growth in the next two years will probably counteract the anticipated rise in mortgage interest rates," it said.

Prices could fall in in areas like the Mid-Atlantic, New England and the Pacific Coast, which have seen especially sharp growth, but these declines would be unlikely to threaten the nation as a whole, the CBO said.

Red hot real estate market may cool off this year

By John Loesing

While home prices have hit incredibly high levels in many areas of Ventura County and in adjacent communities of Los Angeles County, the residential real estate market shows little sign of tapering off this year due to the area’s continued strong economy, according to an industry report released last week.

Office and industrial real estate remain in good health, too, as vacancy rates continue to fall.

Powered by new momentum from job growth and business expansion, real estate markets in general show few signs of deflating. But according to the 2005 Ventura County Real Estate and Economic Outlook, this will be a year in which escalating home values finally begin to slow.

The price of a median home jumped almost 33 percent in Westlake Village last year to $954,878, the third-largest increase countywide next to a 42 percent spike in Ojai and a 34 percent increase in Santa Paula.

The average Calabasas home increased almost 31 percent to $1.26 million, followed by a Simi Valley increase of almost 27 percent, Thousand Oaks at 23 percent, Moorpark at 21 percent and Agoura Hills at 19 percent.

Condo sales were right behind.

"The great and not-yet-late real estate boom of the 21st Century is not over yet," said Mark Schniepp, director of the Santa Barbara-based California Economic Forecast, which put the report together.

Nationwide, the home price increase was 13 percent. But during the past 40 years, the average annual increase remains only 0.7 percent, one expert pointed out.

So is there a real estate bubble?

"Don’t expect any popping sounds next year," Schniepp said, but he warned that a "plateau" effect might be taking place. In fact, there was practically no upward movement in home prices for the entire second half of the year, the report said.

The countywide gain of 29 percent in 2004 is projected to slow to 9 percent this year and 7 percent in 2006.

The key to sustainability, Schniepp said, is demand.

New job opportunities in the Conejo and Simi valleys will keep demographics strong and spending high. Last year, 5,500 jobs were added in Ventura County, the highest total since 2000.

In addition, mortgage rates remain comfortable. But according to Schniepp, salaries aren’t keeping pace with lifestyle and homeowners are stretching themselves too thin because they perceive themselves to have higher net worth due to the appreciation in their property.

It’s a false sense of security, and as of last November only 17 percent of county households could afford to buy the median-priced home of $600,000.

"The divergence between (personal) income and housing values has become so large it’s scary," Schniepp told a gathering of real estate and banking experts in Westlake Village where the report was discussed.

Chris Thornberg, senior economist for the UCLA Anderson Forecast, said consumer spending has been the mainstay of the nation’s economy, but he noted that "people are spending beyond their means" and that at some point in the future Americans are going to have to "pay the piper."

In addition, more homes locally are being bought by speculators, or to put it another way, fewer homes are being owner-occupied. The above factors all contribute to a real estate bubble.

"Folks, we’re in a real estate bubble and at some point this is going to come down crashing down on us," Thornberg said. "We’re building ourselves up for another big recession."

For now, the report said, "there is enough demand growth, including speculation, to keep the market buoyant. . . . We hope for a soft landing."

Rental rates already have showed signs of slowing. In Moorpark, rents have been flat since July 2004 as the vacancy rate hovers around 4.5 percent.

More new homes being built

While home prices remain high, the number of sales in Ventura County continued its four-year decline with a 10 percent drop in 2004, due mainly to the lack of new housing production.

In fact, inventory constraints pushed the sales of new homes to a 10-year low in 2004. But 2005 and 2006 promise to bring relief. Simi Valley––with developments that include The Canyons––and Moorpark––with its North Park Village development––have a combined 7,200 residential units either pending or approved. Thousand Oaks has 1,692 units.

Schniepp said 2005 is setting up to be "the biggest year in a decade" for new home construction.

The big-ticket items are in Calabasas and Agoura Hills, where new single-family homes are averaging over $1 million. This year, residents will continue to occupy the new multimillion-dollar homes at The Oaks development near Calabasas Hills.

Plans show that most of the new housing will be built in the western part of Ventura County rather than in the East County and western Los Angeles County areas.

Overall, "the local Ventura County housing market will remain firm and prices will stay high," according to the economic forecast.

The number of new multifamily units is expected to grow as well. The biggest project in Thousand Oaks is Continuing Life Communities, a 370-unit retirement home development.

Commercial outlook strong

Schniepp said 2005 will be a "breakout year" for Conejo Valley employment, especially in the tech sector. As a result, the demand for office and industrial space will increase.

According to broker CB Richard Ellis, 2004 brought the Conejo Valley its fifth consecutive year of positive net absorption, the rate at which vacant commercial real estate becomes occupied. Office vacancies hover at 15 percent, but that’s still below the national average.

Countywide, the industrial vacancy rate fell to less than 9 percent, with markets especially tight in Simi Valley and Thousand Oaks. Ventura County’s inventory of industrial real estate hit a record 60 million square feet last year.

Retail space also found higher demand as vacancies in that sector fell to less than 4 percent.

The area’s biggest projects are the Simi Valley Town Center mall, the Zelman Retail Partners commercial center in Moorpark, and The Oaks mall expansion and the Rick Caruso Lakes project in Thousand Oaks.

Wednesday, February 09, 2005

Economist: Bay Area real estate slowing

Associated Press

SAN FRANCISCO - The San Francisco Bay area real estate market, which has maintained its value despite a national recession and defied predictions from economists for more than a decade, may have hit its peak, a prominent economist said Wednesday.

"I expect to see a flattening," said Edward Leamer, director of the Anderson Business Forecast Project at the University of California, Los Angeles.

Leamer was speaking to about 250 people, mostly clients of the event's sponsor, brokerage firm Hoefer & Arnett.

Leamer also said the national housing market showed signs of weakening and warned that eight of the last 10 recessions in the United States started with a plunge in home sales and prices.

Leamer, who accurately predicted the coming of the 2001 recession a year before it hit, has been forecasting a Bay Area real estate turn since at least 2002. At that time, he asked rhetorically, "What are they smoking up there" when writing about the Bay Area housing market.

His latest forecast comes at a time when Bay Area housing prices continue to set records.

The median price paid for a Bay Area home in December was $533,000, matching the record high set in November, according to DataQuick Information Systems. That median sales price reflected a 16.4 percent increase from December 2003.

The median housing price statewide is $405,000; the nationwide median is $218,900.

In June 2002, when Leamer commented about the soaring local real estate market, the median price of a Bay Area home was $416,000, according to DataQuick.

The tracking firm disagrees with Leamer's outlook.

"We just don't see it," DataQuick spokesman John Karevoll said. "We are seeing statistics that are very stable. They are consistent and they run deep."

Tuesday, February 08, 2005

Will housing prices pop?

Experts debate if the housing market is an overinflated bubble, or a strong seller's market.

By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - Is the real estate market a dangerously overvalued bubble that needs to pop sooner than later, or is the market for homes strong enough that prices can and will keep rising?

Both answers were argued at a forum on the state of the real estate market Wednesday, along with a the middle ground that the market is more or less valued just right in its current form.

The forum was sponsored by Demos, a public advocacy group that among other issues concentrates on questions of economic opportunity. While the group has put out its own papers posing worries about the current debt levels among the middle class, its panel presented a wide range of views on the state of the real estate market.

Arguing that the real estate market is a bubble certain to pop, probably sooner than later, was Dean Baker, co-director of the Center for Economic Policy Research, a Washington think tank. He presented data showing that while housing prices generally tracked close to the overall inflation rate for nearly 40 years starting in the mid-1950's, home values have grown about 40 percent in real terms since 1995. He said that's the kind of rapid rise that is not justified by the fundamentals. He compared it to the late 1990's stock market bubble and in the Japanese real estate market in the 1980's before prices there collapsed.

"There's a speculative mentality of people thinking housing prices will only go up," he said. "That's not the real world."

Baker's position was challenged by Jonathan McCarthy, a senior economist with the Federal Reserve of New York, as well as Barbara Corcoran, founder of the Corcoran Group, a leading New York real estate firm.

McCarthy argued that issues such as home improvements and income growth have helped to support some of the basic fundamentals of the market. The home improvements have increased the underlying value of the homes more than simple home price data would not capture, he said, and the combination of income growth and low interest rates have increased the affordability of homes even faster than home prices have climbed.

"If there's a bubble, prices have been bid up beyond the underlying fundamentals, and buyers have done so in the expectation that prices will continue to rise," he said. "Rapid price increases are not sufficient to say that there is a bubble out there."

McCarthy did not dispute that there were some markets where housing prices have outstripped fundamentals, but he said that they are mostly along the eastern seaboard north from Washington D.C., as well as along the West Coast. "These areas will always tend to be more volatile," he said. "But on a national scope there's probably no housing bubble."

Corcoran challenged McCarthy's view that places like New York may be in a housing bubble. She confessed that as a real estate agent her view is biased. "I can't afford to be open minded," she admitted to laughter of the crowd.

She pointed to a few key numbers she sees that suggest even a supposed bubble market like New York City is in much stronger shape than before housing prices collapsed there, with the 1987 stock market crash.

"Today seven out of 10 listings here are selling at or above the asking price," she said. "In 1987, before the stock market rash, it was three out of 10. When I compare the number of listings over the last year, it's down 40 percent from the previous year. This is a hell of a seller's market."

"I would not be the least surprised if prices go up 25 percent in the next year, even if people out there think I'm smoking dope," she added. "There's too short a supply, too many buyers." Top of page

Outsiders fuel housing boom

Home sales in the Portland area are defying a national cooling trend, powered by monied out-of-staters and low rates
Tuesday, February 08, 2005
DANA TIMS, The Oregonian

Thousands of newcomers are driving a continuing housing boom in the Portland area, countering national trends.

Low interest rates have been credited with the nationwide record pace of new construction and sales. While the boom may be slowing elsewhere, robust levels of home construction, along with sales of existing dwellings in the Portland area, describe trends far more frenetic than chilly.

Builders, real estate agents and population experts point to newcomers -- well-to-do ones -- keeping the market hot.

"In-migration is significant right now," said Randy Sebastian, who owns Renaissance Development. "And it's not just anyone who's moving here. They're high-earning professionals who are able and ready to buy new homes."

At least 20,000 more people moved into the Portland area during the past year than moved out, said Barry Edmonston, director of Portland State University's Population Research Center. Statewide, the difference probably topped 30,000, he said.

Records based on out-of-state driver's licenses surrendered by incoming residents to the Oregon Department of Motor Vehicles indicate most new arrivals came from California, Washington, Arizona, Colorado and parts of the Midwest. Most are of working age rather than retired.

"When the economy is very strong here, we get a pronounced influx of people accepting job transfers," Edmonston said. "But even when it isn't that strong, we still get a net inflow of at least several thousand people into the metro area alone."

Jim Chapman, president of Legend Homes in Tigard, addressed the hot construction market with a bow to low interest rates. The rates, despite the Federal Reserve's gradual increases in its benchmark federal funds rates since June, are dipping further. Fixed-rate 30-year mortgages fell to 5.66 percent last week, marking the fifth straight week they've hovered near historic lows.

Chapman then addressed the buying power that in-migration is adding to the mix.

"It's a huge part of the market," he said. "We're getting new buyers from all over. The Denver area alone seems to have sent a bunch in the past few weeks."

Current residents are, for the most part, not among those rushing to buy new houses, Chapman said. Given regionwide density requirements, many are choosing to remodel their houses rather than purchase new ones built on smaller lots than were available when they bought or built.

New buyers are putting Legend Homes on a pace to chalk up 2005 as one of the best sales years in its 40-year history, Chapman said.

"Across all price ranges, I'm having a difficult time keeping inventory at most of our sites," he said. "It's just hot."

Last year saw a record number of home sales in the Portland area, according to RMLS, the primary regional real estate listing service. The 33,075 sale closures topped the next-closest year -- 2003 with 31,013 sale closures. That figure outdistanced the 27,695 closures in 2002.

The trends were mirrored across the Columbia River in Clark County, where a record 8,474 sales closed last year. That was well above the 7,673 closed in 2003 and the 6,373 completed in 2002.

Near-record low inventories of residential listings -- also attributable to low interest rates -- are adding more pressure to the situation. Inventories considered healthy would provide six to eight months of listings, said Mel Roemmich, a Realtor with ERA Freeman & Associates in Portland. However, that figure hovered between 21/2 and 3 months for the last half of 2004 and continued into January, he said.

Renaissance Development's Sebastian is building houses around Wilsonville, West Linn, Sherwood, Beaverton, Southwest Portland, Woodburn and Camas, Wash. Last year was his best in the two decades he's been in the business, he said. From the looks of things so far this year, 2005 may be even better.

"Interest rates continue to be a big, big deal," Sebastian said. "That helps us because we're a move-up builder, not a starter builder. People have to be able to sell their existing house to be able to buy one of ours."

But, unlike even a year ago, he added, in-migration was increasingly popping up on his radar screen.

"It's mainly California, followed by Washington, Arizona and parts of the Midwest and East Coast," Sebastian said. "They are coming here for jobs and quality of life. And even though it may be hard for some people to believe, they find our prices very affordable. A lot of people arriving from California just can't believe how less expensive the housing is up here."

John Ludlow, a long-time Wilsonville real estate agent, is seeing the same trends. Given the one-day market time it takes new listings to sell, he takes issue with national statistics suggesting a gradual slowing of new house sales.

"I don't see us slowing down here," Ludlow said. "And there are two factors really driving it: low interest rates and plenty of newcomers just now entering the market."

Tom Jacobs, owner of Edge Financial in Tigard, nonetheless thinks some cooling will start to be felt, but not because of pure market forces. Fed-induced increases in interest rates, he said, are bound to start taking a toll on construction and new-home sales this year.

As for the buying power and market demand created by in-migration, Jacobs said it's undeniable.

"People are coming from all over," he said. "Some are also leaving, of course, but it's more in than out, for sure."

Monday, February 07, 2005

In Riverside County, Housing Market Shows Definite Signs of Slowing

# No more queues of eager buyers. Now builders are cutting prices and offering incentives.

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By Annette Haddad, Times Staff Writer

Last fall, houses in Forecast Homes' Hidden Meadows subdivision in the southwest Riverside County community of Menifee were starting in the mid-to-high $400,000s.

These days, prices are starting in the high $300,000s.



In nearby Murrieta, Shea Homes Co. is giving some buyers in its Blackmore Ranch development $10,000 in flooring upgrades and discounts on closing costs if they finance through the firm's mortgage unit. Last year Shea offered no such incentives.

A year ago, eager customers of Van Daele Development Co.'s Stoneridge development in Menifee camped out to make sure they would win spots on the prospective buyers' list. Today there are no lines — and Van Daele has lowered the price on certain units.

Southern California's hottest housing market is experiencing a bit of a frost.

Riverside County, along with neighboring San Bernardino County, has long been a sweet spot for the nation's home builders. With its burgeoning population and relatively low land costs, the Inland Empire has been one of the steadiest and fastest-growing markets in California.

In the last three years, the median price for new and resold homes in Riverside County has soared 55%. Strong demand has been a lever for builders to crank up prices: Until recently, they had only to build out one phase of a project before they could turn around and raise prices $20,000 or more on every house in the next phase.

The Inland Empire "is not as much of a slam-dunk market as it used to be," said Peter Dennehy, an industry consultant and senior vice president of Ryness Co.'s Sullivan Group Real Estate Advisors in San Diego.

Just ask D. Sidney Potter. Having realized profits from selling other recently built homes in the Inland Empire, the Los Angeles real estate investor bought two houses in Forecast's Hidden Meadows community in September. He paid $471,999 for a 3,000-square-foot model and $461,240 for a slightly smaller one.

After Potter signed the purchase documents, Forecast started advertising the same models for $27,000 and $34,000 less, respectively.

"Some of the Inland Empire builders, not just Forecast, got ahead of the market at the end of last summer when properties weren't moving as fast," said Potter, who described his Hidden Meadows investments as adding up to "paper losses at this time."

He's trying to get the company to refund the difference. So far, the two sides are at an impasse. And the company has since altered its purchase policy to keep short-term investors at bay.

Forecast Group Vice President Michael Dwight characterized the price reductions as incentives that kept the company competitive.

Since September, price gains in parts of the Inland Empire have contracted and sales have shrunk.

In southwest Riverside County, for instance, the rate of increase in the median price of a new single-family home declined 8 percentage points from the second quarter of 2004 to the fourth quarter. And in the last three months of the year, new-home sales plunged 54% compared with the same three months in 2003, according to Hanley Wood Market Intelligence, formerly known as Meyers Group.

"The frenzy is over, or at the very least there's a slowing," Dwight said.

"Slowing" might be the best descriptor, because it's not as though houses are actually getting cheaper. The median price of a new single-family home climbed throughout 2004. In the fourth quarter, that price was 33% higher year over year, at $483,990.

Still, at the first hint last fall of resistance to rising prices, builders became more aggressive about getting people to sign on the dotted line. "They need to retain their sales volume, so they quickly responded to the softening," consultant Dennehy said.

Experts have long warned that the home-selling supernova in the Inland Empire would eventually cool, as it has elsewhere in Southern California.

"There's no way … we will continue seeing what we're seeing," because even typically affordable areas are becoming less so, said economist and industry consultant John Husing.

It wasn't surprising that southwest Riverside County was among the first areas to feel the chill, he said, because it's primarily a bedroom community serving San Diego, where home prices started cooling nearly a year ago.

The fact that the supply of new homes continues to swell has contributed to the softness in pricing. Currently, 294 projects are seeking buyers in the Inland Empire, 50% more than a year ago, according to Ryness. In Riverside County along the I-215 corridor leading to San Diego, billboards touting new subdivisions far outnumber signs for fast food or cellular phone service.

No one is warning of an oversupply crisis of the kind that foreshadowed the housing bust in the early 1990s. Then, builders rapidly expanded throughout Southern California, whether they had buyers lined up or not. This time, companies are careful to have buyers lined up before construction begins.

In Ryland Group's Eastridge community in Menifee, the paint had barely dried before "For Sale" signs started popping up throughout the neighborhood. Late last month, nearly two dozen "For Sale" placards could be counted — many in front of houses purchased by investors who never moved in.

Even so, the Ryland sales force is working to boost interest in the next phase of Eastridge, where homes are being offered in the high $300,000s to low $400,000s, less than the listing prices of many of the first-phase Eastridge resales.

The Calabasas-based home builder, which just reported its sixth straight year of higher profit, offers incentives of about 3.2% to 3.5% of the sales price and has changed its contracts to prevent investors from buying properties and quickly reselling them, spokeswoman Marya Jones said.

"Our strategy is to build stable residential communities," Jones said.

For homes in the $300,000-to-$400,000 range, demand remains steady, observers said.

Daniel Oppenheim, a building industry analyst for Banc of America Securities, has been surveying local real estate firms to gauge market dynamics. He found that demand at the lower price range was still accelerating, although builder incentives increased 78% in December.

"We recognize that one month does not make a trend, but we believe this bears watching, as higher incentives generally suggest slowing market conditions," he wrote recently.

Husing, for one, believes that even with any slowing, home prices in the Inland Empire will rise by double digits again this year — but closer to 10%.

And many builders are optimistic. Centex Homes — ranked sixth among Inland Empire builders in market share — just plunked down $18 million for a 10-year lease to double its office space in the heart of the region because of expansion plans in southwest Riverside County and adjacent communities.

Sunday, February 06, 2005

Hurricanes take some wind out of housing boom

By Noelle C. Haner
Orlando Business Journal

ORLANDO -- As the vice president of development for Avatar Properties Inc., Tony Iorio has a lot to be proud of.

Avatar posted a record 1,921 new home sales in its three Orlando-area communities last year -- an 18 percent increase over sales in 2003. The growth came despite losing 44 sales days to the three hurricanes that blew through the region in 2004, along with the cleanup and building material and construction labor shortages that followed.

"We definitely had some setbacks," explains Iorio. "Homes under construction were absolutely delayed, and the delivery of those homes was delayed anywhere from one month to three months. Land development was impacted because water was everywhere. The roads were saturated."

The story is much the same throughout the Orlando market, begging the question: What would Orlando's 2004 housing market have been like if not for hurricanes Charley, Frances and Jeanne?

Iorio believes those 44 lost days made a difference. "Could it have been a better year? Yes. Every day you are open, there is a potential for sales, but if you're closed because people are preparing for a storm or you are repairing homes from a storm, that potential disappears," he says.
Unabated growth

To be sure, 2004 was a good year for Orlando's housing market.

According to analysts with Metro-study, last year's new homes starts, closings and inventory continued a 2 1?2-year, double-digit growth spurt in Orange, Lake, Osceola, Seminole and northeast Polk counties. Since the second quarter of 2002, the market's growth has averaged 20 percent every quarter.

For 2004, Orlando's construction starts ended with a record high of 27,673 new homes in Orlando, an increase of nearly 28 percent over 2003. The annual closings rate was up as well -- a little more than 21 percent, from 19,325 units in 2003 to 23,413.

As a result, the inventory of single-family homes -- those either under construction, vacant or used as model homes -- soared more than 37 percent over 2003 to 15,655, which is an eight-month supply for the Orlando area.

Existing home sales were off the charts as well.

The Orlando Regional Realtor Association reports 26,091 homes were sold in 2004, which is close to an 8 percent increase over 2003's figure of 24,251 sales.

Industry experts say the Orlando market's strength was supported by people who were trying to take advantage of the market before home prices and interest rates begin a predicted steady climb over the next year.

"Those sitting on the fence jumped off. They took advantage of low interest rates, and they decided to purchase before prices increased more because of building supply, impact fee and land costs," says Leslie Peters, Orlando division president of Morrison Homes, which sold 984 homes in its 11 Central Florida communities.
What is and what will be

Still, some housing industry experts believe last year's hurricane season took some steam out of the Orlando market -- and may continue to do so in 2005.

"If not for the hurricanes, the numbers would have been even more incredible," says Jack McCabe, chief executive of Deerfield Beach-based McCabe Research & Consulting LLC.

The reason: Shortages of building materials and labor throughout the state left many homes that should have been completed prior to the end of 2004 still under construction when Floridians rang in 2005.

According to Metrostudy, the greatest impact was felt on the number of closings in the market. Although closings were up on a year-to-year basis, they were down slightly from 6,030 homes in the third quarter of 2004 to 5,932 in the fourth quarter. The decrease in closings bumped up the number of homes under construction at the end of 2004 by 50 percent to 12,882 when compared with 2003, while the number of finished vacant homes in the market remained virtually unchanged.

"There is no doubt the ability to start and finish new homes was significantly impacted by the hurricanes," says Anthony Crocco, Metrostudy's director of the Orlando-Jacksonville region.

Morrison's Peters agrees. "The hurricanes really impacted our closings. We couldn't get roofs on the houses," she says.

As a result, a number of builders have gone into 2005 with more homes under contract and construction than they have had in the last four years, notes McCabe. For example, Miami-based Lennar Corp. carried some 675 homes over into 2005 because of Florida's hurricanes and other market issues.

This backlog is resulting in a home- building process that has been getting -- and will continue to get -- longer by the year, say Crocco.

"Our vendor pool and supply distribution chain were amped up and at capacity two years ago," he says. "The timeline for delivery started lengthening last year, but the crush of activity in the market now is lengthening it even more ... in some cases by as much as 50 percent."

This backlog coupled with the prediction of a slow increase in interest rates may have a cooling -- but not freezing -- effect on the Orlando housing market in 2005.

"This year is going to be a transitional one for real estate in Florida," says McCabe. "We are going to see some things that will slow it down. Even so, it will be a strong year."

Investors worry but still favor real estate

Plans to buy belie price bubble fears


Here's some good news: People with a few bucks in their pockets say they're confident enough in the economy to begin investing in it again.

Here's some bad news: The same folks believe there's a real estate bubble lurking out there, lying in wait to suck the air out of their home values.

And here's some weird news: Many of the people who say they're worried that housing prices are going to skid are also saying that's exactly where they plan to put their money.

That's the essence of a new quarterly poll of affluent Americans by a Cleveland investment firm. The McDonald Financial Group Affluent Consumer Confidence Index queries individuals whose incomes are at least $150,000 or personal assets -- not including their homes -- equal at least $500,000.

The survey's index suggests that their overall confidence in the economy is up 7 points, after dropping 13 points during the presidential campaign. In a pronouncement that would be music to any investment firm's ears, the survey concludes that 30 percent of affluent Americans say they'll put money into the stock market.

Their real estate worries don't show up until deep into the report.

"Real estate bubble fears are now on par with their highest point in the survey, with 56 percent of affluent Americans now saying there is a real estate bubble (up from 54 percent in October, tied with the survey's high point in July of 2004)," the survey said. "Thirty-four percent are concerned that rising interest rates will cause a significant drop in housing prices." The percentage of those who call themselves "very concerned" jumped five points, to 12 percent.

So, will they flee from real estate? Apparently not. The proportion of affluent people who said they plan to buy property jumped from 20 percent in October to 24 percent in recent weeks.

"That's pretty consistent with what we've found all along" in the two years that McDonald Financial Group has conducted the survey, according spokesman David Legeay. "They say, 'Yes, we're afraid of it, but we're going to continue to invest in real estate.' There's a definite disconnect there. I have trouble explaining it."

"When you look at the data, it's clear the people we surveyed feel really good about their local economy, yet they're concerned on a national basis," Legeay said. "Maybe it's a local feeling that all is good for me, but I'm worried about everybody else."

Some skeptical housing-industry watchers might see this duality as a form of irrational exuberance. Legeay shrugs, but he knows one thing for sure: The refinance whirlwind, at least at the high end, seems to be spent. "About 12 months ago, some 30 percent said they were going to refinance," he says. In the current survey, that number drops to less than 1 percent.

Economic Outlook: David Smith: House prices may wobble but won’t crash to earth


ON this Sunday morning, with the spring daffodils pushing through the cold February soil, talk of a housing crash may seem gloomy. But that is what I want to talk about.

Not that such talk is new. The first housing-crash story I could find in the present cycle came in 1996, when one Bob Beckman predicted a 20-year fall in prices. There was another batch in 1997, when the fear was that Labour’s election would hit house prices hard.

In 1998 and 1999, when the stock market was booming, there was a steady trickle of housing-crash predictions, building further when the stock-market boom turned to bust in 2000. The September 11 attacks on America persuaded many that housing was about to take a dive and, in the three years since, talk of a housing crash has built up to a crescendo.

So why revisit it? On Thursday, at the RAC Club, I debated the issue with Roger Bootle, head of Capital Economics. The event, kindly sponsored by Sector Treasury Services, was the unexpurgated version of a briefer run-in we had before Christmas. So how did it go? As I put it, from the “soft landing” perspective, there are three key questions. The first is whether a house-price crash can happen without an overall recession in the economy. Every previous “crash” in house prices, in the depression of the early 1930s, in the turbulent 1970s (1973-76), in the late 1970s and early 1980s, and most recently in the early 1990s, was accompanied by a severe recession. The crash of the early 1990s followed a doubling of interest rates, from 7.5% to 15%, and a near-doubling of unemployment, from 1.6m to 3m.

Bootle’s argument was that house prices then started to fall ahead of the rise in unemployment. Both housing and the job market were subject to the same negative influence, a sharp interest-rate rise.

Except that the housing crash of the early 1990s did not really get going until unemployment was rising sharply and small firms were failing in their tens of thousands. By mid-1990, prices were just 1.6% lower than a year earlier. Over the following 12 months, prices slipped by a mere 0.2%. The worst year for the market was 1992, in the autumn of which prices were recording a 12-month fall of 8.7%.

This came after the big rise in unemployment and when the government lost control of economic policy (subsequently grabbing it back) with sterling’s expulsion from the ERM. So the claim stands. Can house prices crash without a general recession? I think not. Is there going to be such a recession? After 50 successive quarters of growth there is no sign of it.

The second argument related to actual, rather than “real” or inflation-adjusted, house prices. There were only two occasions in the 20th century when actual prices fell substantially — during the depression of the early 1930s and in the early 1990s. On both occasions, curiously, the peak-to-trough fall in prices was 13%.

Mostly, as in 1973-76, 1979-82 and partly in the early 1990s, a much bigger real fall occurred because prices stagnated while more general inflation — 27% in 1975, 22% in 1980, 11% in 1990 — ran its course.

Bootle’s argument is that, with inflation low, actual and real will become more or less the same thing. Without inflation to disguise things, actual prices will have to fall, by 20% in his view, to correct the market’s overvaluation.

Except, to me, that is not how the housing market works. Sellers will not cut prices unless forced to do so by economic circumstances. Most house moves are voluntary; people have a choice whether to go ahead or not. If the choice is between selling at a price they consider too low, most will withdraw the property from the market. House prices, in a phrase invented by Lord Keynes, are “sticky downwards”. This is a recipe for stagnation, not a crash.

My third argument was about the house price/earnings ratio, the traditional measure used to assess whether the market is overvalued. Depending on which version you use, the ratio is currently about 5.5, or even higher, against a long-run average of under 4. Bootle said this showed the need for a drop in prices.

My take was rather different. Leaving aside the question of whether the notion of average earnings belongs to the age of mainly industrial employment and has much meaning these days, two things have happened to the housing market in recent years which justify a permanent revaluation. The first was the liberalisation of the mortgage market to new entrants in 1982, and which may only have come fully on stream with the intense competition of the 1990s and beyond. Before 1982 mortgages were rationed, building societies and local authorities the only providers.

The other effect has been the permanent change in interest rates. In 1979-97 the base rate averaged 10.4%; in the period since, it has averaged 5.3%. This change justifies a big shift in the house price/earnings ratio. Bootle argued correctly that real (after-inflation) interest rates have not come down as much as actual rates, and that homebuyers no longer get mortgage relief. But actual interest rates — and actual monthly mortgage payments — are the main determinant of what people will pay for houses and how much they will borrow. The change here has been huge and, as I say, looks permanent.

To be fair to Bootle, there were other arguments. In real terms, he argued, the recent house-price boom has been more powerful than its predecessors — prices rising strongly at a time of low inflation. House prices, he noted, have risen more sharply than other assets, most notably equities and commercial property.

The interest-rate burden on homebuyers may be low, he said, but when debt repayment is taken into account, it is set to increase strongly. First-time buyers are being kept out of the market across the country by high prices, and the difficulty of scraping together a deposit.

All good points. But none seemed to me, or to an audience that voted 2:1 for a soft landing, to be clinchers. The latest evidence from Nationwide and Halifax suggests prices rose last month. Mortgage approvals appear to have stabilised. If it looks like a soft landing, which it does, it probably is.

Saturday, February 05, 2005

Prepayment penalties, balloon payments increase foreclosure risk

By Holden Lewis

Some activities invite heartbreak and loss: driving without a seat belt, marrying someone after one date, experimenting with heroin. Add another to the list: getting a home loan with a prepayment penalty or balloon payment.

People who refinance their mortgages with loans containing prepayment penalties or balloon payments are more likely to undergo foreclosure, according to a study by researchers at the University of North Carolina.

Prepayment penalties and balloon payments are most often found in subprime mortgages (higher-rate home loans for borrowers with flawed credit). It’s common sense that these loans have higher foreclosure rates, and this research backs it up with hard evidence, says one of the authors.

"Our study for the first time really definitively gives you the order of magnitude of the additional risk of foreclosure that are posed by these terms," says Michael Stegman, director of the Center for Community Capitalism at the University of North Carolina in Chapel Hill.

The study, by Stegman, Walter Davis and Robert Quercia, estimates that a prepayment penalty increases foreclosure risk by about 20 percent, after compensating for factors such as income and credit score.

Mortgages with balloon payments were 46 percent more likely to go to foreclosure than loans without balloon payment provisions to comparable borrowers, according to the study of more than 122,000 subprime refinance mortgages originated in 1999.

Prepayment penalties punish borrowers for refinancing, and balloon payments punish borrowers for not refinancing. A prepayment penalty is levied on the borrower for paying off the mortgage early _ whether by refinancing the loan or selling the house. A balloon loan requires the outstanding balance to be paid in a lump sum after a set period.

Almost 72 percent of the mortgages in the study had prepayment penalties, usually lasting three or more years. About 14 percent of the mortgages had balloon provisions. About 80 percent of balloon loans have prepayment penalties, Stegman says.

In a theoretical worst-case scenario, the two loan provisions could bump into each other: A borrower could be forced to pay a prepayment penalty for refinancing within five years of getting the loan, and could be forced to make a balloon payment of the entire balance at the mortgage’s five-year anniversary. Few, if any, lenders would be that diabolical. But federal laws wouldn’t prohibit it.

In the study, a common prepayment penalty was a fee of six months’ interest on the outstanding balance. That means that someone who borrowed $100,000 at 12 percent interest, and who then sold the home a year later, would have to pay a penalty of almost $6,000 for paying off the loan early.

Without a prepayment penalty, a homeowner with an unaffordable mortgage can get out of financial trouble by refinancing the loan or selling the house. A prepayment penalty can trap a borrower into keeping the unaffordable loan past the point of no return into delinquency, foreclosure and eviction.

Prepayment penalties and balloon payments are abusive and predatory, say Stegman and fellow critics of subprime loans. They are costly, are applied unfairly, lead to foreclosures, and don’t even give borrowers a break on interest rates, says Keith Ernst, senior policy counsel for the Center for Responsible Lending in Durham, N.C.

That last assertion is disputed by the subprime lending industry. Ameriquest, the biggest subprime lender, has best-practices guidelines that pledge "to show borrowers how they can reduce their rates through discount points and prepayment options."

New Century Financial Corp., the second-biggest subprime mortgage lender, says that it does not make or buy loans with balloon payments. As for prepayment penalties, New Century says it offers loans with and without them: "When a borrower opts for a loan with a prepayment charge, the borrower benefits from a lower interest rate or pays lower upfront fees," its guidelines say.

Nevertheless, Ernst, in a report issued this month by the Center for Responsible Lending, concludes that on subprime refinance loans, there is no significant difference in rates between mortgages with prepayment penalties and those without, "as borrowers receive the burdens of penalties without the compensating benefits."

"Once the penalty is in place," Ernst adds, "the borrower’s ability to build wealth is significantly hampered since the borrower either continues to pay excess interest or gives up accumulated home equity to get a better loan."

The University of North Carolina study says that, of the borrowers who got loans with prepayment penalties, 37 percent ended up paying the fees, either because they refinanced or they sold their homes. "These penalties, if fully enforced, generated hundreds of millions of dollars for lenders at the expense of borrower equity," the report says.

Atlanta Fed raises possible collapse of home-loan giants

By James Tyson in Washington, Fairfax Digital

A possible failure of one or other of America's home-loan megabanks, the so-called Fannie Mae and Freddie Mac, has been publicly mooted for the first time by senior monetary officials.

The two institutions - household names in the US - have admitted accounting errors totalling $US14 billion ($18 billion) all up. Together they have $US1700 billion of debt and underpin home loans worth more than $US7600 billion. A collapse of either would rock world financial markets.

The failure of Fannie Mae or Freddie Mac would force Congress to rush through a taxpayer-financed bail-out to reduce the threat of "substantial" financial market instability, the Federal Reserve Board's Atlanta branch says. The Congress should deter such disruption by giving a regulator power to close the government-chartered companies and sell their assets in the event of default, the Atlanta Fed says in a report presented at an American Enterprise Institute meeting in Washington by Robert Eisenbeis, the Atlanta Fed's research director. The institute advocates eliminating federal benefits for Fannie Mae and Freddie Mac.

"It is clear to me they [Congress] would have to engage in a taxpayer bail-out at a great cost to the country as a whole," Mr Eisenbeis told the meeting.

Freddie Mac spokeswoman Sharon McHale declined to comment, as did Fannie Mae spokeswoman Janice Daue.

The Senate Banking Committee and House Financial Services Committee said they planned in coming weeks to consider legislation backed by the Bush Administration that creates a regulator with receivership power over the two largest buyers of US mortgages.

Fannie Mae and Freddie Mac oppose receivership, saying it would provoke doubts among debt investors about their ability to receive their money back in the event of default. Such doubts would increase borrowing costs for the companies and for consumers, they said.

Congress created Fannie Mae and Freddie Mac to expand home ownership by acquiring mortgages from banks with the proceeds from bond sales.

The two institutions enjoy government benefits giving them a borrowing advantage over rivals that averaged 0.4 of a percentage point from 1999 until the first half of 2003, according to a Fed study in December 2003.

The total windfall was between $US119 billion and $US164 billion.

While affirming the companies' safety and soundness, the Office of Federal Housing Enterprise Oversight last year told Fannie Mae and Freddie Mac to raise their reserve capital 30 per cent beyond the required minimum because of accounting errors.

On December 21, Fannie Mae's board ousted chief executive Franklin Raines and chief financial officer Timothy Howard after the Securities and Exchange Commission ruled that the Washington-based company had made mistakes in accounting for contracts designed to protect its more than $US900 billion portfolio of mortgages from swings in interest rates. Fannie Mae has estimated it will have to restate earnings by about $US9 billion from 2001 until mid-2004.

Freddie Mac disclosed in 2003 that it had understated profits from 2000 until 2002 by $US5 billion in an effort to reduce earnings volatility.

The Government needs "to have an explicit, carefully thought through plan" for managing the companies in the event of insolvency, including ranking the order in which different categories of investors would recover their assets, the Atlanta Fed says.

"Uncertainty in the priority of claims is the enemy of market discipline," Mr Eisenbeis said.

With the Office of Federal Housing Enterprise Oversight lacking full authority to resolve a default, such power falls to Congress. This "reinforces the market perception of implied government support" for the companies, the Atlanta Fed says in the report. "The current set-up appears designed more to create substantial spillover effects and force Congress to mitigate the problems by providing the creditors of a failed housing enterprise with a bail-out," it says.

Housing supply shrinks; buyers scramble

By Elizabeth Rhodes
Seattle Times staff reporter

January's warm weather may have been a blow to local ski areas, but to John Hama, it was a blessing.

"As long as the weather is good, there are buyers at open houses," said Hama, the owner of two Home Realty offices in North Seattle.

Indeed, January's unusually fine weather brought out the buyers — so much so that last month's accepted offers were up 21 percent on single-family homes in the 15-county Western Washington area, compared with January 2004, according to monthly statistics released yesterday by the Northwest Multiple Listing Service. Accepted offers on condominiums rose 28 percent from a year ago.

"We're having a great first of the year here," Hama said, mentioning that even in January some houses were receiving multiple offers.

Denny Bullock, branch manager of Prudential Northwest's Renton office, described the latter part of last month as "just explosive." There is a lot of energy in the market because the economy is good and interest rates continue to stay below 6 percent.

"The only problem we have is a lack of homes for sale," Bullock said.

Compared with a year earlier, the number of properties for sale in King, Snohomish, Pierce and Kitsap counties fell 19 percent.

The situation was particularly acute in King County, where the 5,299 single-family homes for sale were down 22 percent from the previous January. Some 1,678 King County condos were available, down about 33 percent from last year.

Not only are first-time and move-up buyers vying for them, but "there's a large share of investors out there," Hama said. "It seems like they're taking money from someplace and looking to invest, either in single family or multifamily."

This fast market means buyers must be ready to act quickly, and they are, Bullock says. They're almost always preapproved for a home loan, and some even have an inspection done on a property before they make an offer.

"A preapproved, psychologically ready-to-buy buyer will buy a house within 27 days of when they indicate to a Realtor they're ready to start looking," Bullock said.

Prices continue to climb because demand is high for the smaller number of properties. Last month, the median price of a King County single-family home was up 12.6 percent compared with the previous January.

King County condominiums appreciated 7 percent, to a median $198,000. (Median means half the properties sold for more, half for less. These numbers reflect sales — not asking — prices.)

The most expensive area within Central Puget Sound continues to be on the Eastside, where the median was $377,075. But that wasn't the most expensive within the 15 counties that report to the Northwest Multiple Listing Service.

That distinction belongs to San Juan County, where the January median was $445,000. One reason for that high number: the amount of waterfront on desirable San Juan, Lopez, Orcas and Shaw islands. Waterfront homes are more expensive.

Friday, February 04, 2005

The Super Bowl Indicator

by Kevin Duffy

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In the "Can you top this?" category, several creative football fans in Philadelphia are apparently financing trips to the Super Bowl by tapping into the equity in their homes. To the typical European or Asian consumer, octogenarian, or hospital patient just awakening from a 10-year coma, such behavior must seem bizarre. To the average post-millennial American, this is barely one degree of separation from normalcy.

Alone, most people act rationally. Put them in a crowd and entertain them? They shave their heads, paint their faces, expose their over-hopped bellies to sub-freezing temperatures, shout obscenities at well-intended referees, and generally lose their minds. (In the City of Brotherly Love, they sometimes toss snowballs at these same officials.)

When everyone is thinking alike, no one is thinking. Worse, the collective level of intelligence drops to the lowest common denominator. What is sure to whip people into a frenzy? Nothing beats an easily discernable uptrend and a simple explanation for its perpetual continuation, i.e. all the ingredients for everyone to get rich. The longer the trend goes on, the smarter, more invincible, and more daring the mob becomes.

Five years ago, the crowd thought technology stocks paved the way to early retirement. Their rationale was simple: the future would be high-tech, highly productive, and highly profitable for those "New Economy" companies who "got it." Never mind that the Nasdaq 100 had vaulted 10 times in just the past five years or that Cisco Systems’ $500 billion market capitalization dwarfed its sales of $19 billion. They sold their stodgy old-line stocks (often to insiders) just to buy more.

In hindsight, the signs of excess were all there. What the consumer craves, Madison Avenue, Wall Street, and the mass media supply. Ubiquitous TV ads encouraging day trading reached the sublime, one showing a successful teenager with his own personal helicopter. Half of 2000’s Super Bowl ads were for dot-coms, many hastily produced. CNBC (a.k.a. "Bubblevision") told its audience what they wanted to hear: the future is bright, technology (e.g. the Internet) is bringing information to the individual investor, and the real risk is missing the ride. Analysts and strategists were mostly bullish, and those who didn’t give the consumer what he wanted were replaced. Investment bankers packaged new product and insiders – especially those fortunate enough to own stock in New Economy companies – generously sold from existing inventory.

Predictably, it all ended badly, but did we learn anything? Has human nature really changed? Has the mob dissipated, kicked its gambling addiction, and gone back to work?

For starters, CNBC is still in business, Las Vegas is undergoing a construction boom, TV shows about casinos are hot, and stock market speculation is back. A recent headline reads, "Google Heads For the Moon." With a market cap of $57 billion, sales of $3.2 billion, and its two founders in their early 30s worth north of $7 billion each, one could argue Google has already reached its destination.

The real crowd pleaser these days, however, seems to be cheap credit. Everywhere one turns there is a billboard, TV ad, or phone solicitation offering once-in-a-generation low rates to the marginally creditworthy, as long as the collateral has four walls and a front door. The formula is simple: interest rates will remain low, credit will stay abundant, and real estate always goes up. A logical conclusion follows: Buy as much house as possible and borrow as much as the lenders allow.

Over the last 5 years household real estate gained $6.3 trillion (62%) in value, yet homeowners piled on another $2.8 trillion in mortgage debt, or 44% of this new found "wealth." (Keep in mind, these are averages which include the 20% or so who own their homes outright, mostly retirees. Home equity extraction is certainly much higher for those with mortgages.) At the margin, many are literally betting the ranch that the easy credit stars stay aligned indefinitely. Like a compulsive gambler, the home buyer on margin is opting for higher-octane fuel, moving from fixed mortgages to ARMs, and now to interest-only mortgages and "piggy back loans" which cater to the buyer who is challenged to come up with a down payment. Despite the lowest interest rates in 46 years, the average American pays over 13% of his disposable personal income just to service his debts, a record.

It is not just borrowers who are optimistic. Mortgage lenders are in a generous mood these days and why wouldn’t they be? Borrowing at 2% and lending at 5% is good work if you can get it, especially if your collateral keeps rising in value. Not only do they want this virtuous credit cycle to continue, they expect it.

On conference call after conference call, we find executives with remarkably similar forecasts: the good times will continue. The CEO of subprime lender New Century Financial, Robert Cole, admitted, "We’re all competing aggressively for market share," without a thought that the consensus might be wrong. CFO Patti Dodge projected minimal loan losses over the next 18 months based on their "historical experience" of the "last 7 to 8 years." Countrywide Financial, the nation’s #2 subprime lender and prodigious advertiser, plans to double its assets by 2008. CEO Angelo Mozilo recently boasted, "Shareholders’ total annual return the past 10 years averaged 30% per year and 45% the past 5 years… This is the real Countrywide story." (We think the real story might be Mozilo "divesting" himself of $157 million in company stock over the past two years.)

As the housing beat goes on, who can fault those who, from time to time, hook up an ATM to their house in order to take the wife to Paris or the kids to Disneyworld? Or if they happen to be Eagles fans, why not use some of the proceeds to buy tickets to Super Bowl XXXIX?

We understand the Super Bowl’s half-time show this year will be sponsored by Ameriquest Mortgage, this country’s #1 supplier of subprime home loans. Five years ago online broker E*trade secured this dubious distinction. This time, like the last, we’ll let the fanatics have their fun. We’d rather watch this spectacle unfold in the comforts of our own home.