Wednesday, April 20, 2005

Will the walls come falling down?

From The Economist Global Agenda

House prices have been growing at a breakneck pace in many developed countries. This has encouraged householders to keep spending even during the global slowdown. But now that housing markets are looking soft, consumers may be forced to retrench

AMERICAN homeowners, particularly those who have just bought their properties, are full of reasons why the run-up in house prices in recent years will continue indefinitely. These days, however, this is beginning to sound like so much whistling in the dark. While prices rose by 11.2% in 2004, the rate of increase slowed markedly in the fourth quarter, to only 1.7%. On Tuesday April 19th, the Commerce Department announced that housing starts fell by 17.6% in March, the sharpest monthly decline since 1991. The next day, the Mortgage Bankers of America (MBA), an industry group, reported that mortgage applications had fallen the previous week, despite a slight dip in interest rates. Investors who thought that real estate was a haven from the volatility of the equity markets might be getting a little nervous.

But worse may come. House prices have received an enormous boost in recent years from falling interest rates, which enabled homeowners to sell their properties for a higher price without a commensurate increase in the buyer’s monthly mortgage payment. But as interest rates have started to rise, buyers have turned to increasingly risky forms of financing in order to keep their monthly payment from bankrupting them. The MBA reports that over a third of new applications in recent weeks have been for adjustable-rate mortgages, up from just 12% in 2001. Anecdotal evidence suggests that “interest only” mortgages, which allow borrowers to make no payments on principal for a period of years, are also on the rise.

These changes have allowed more marginal homebuyers to clamber on to the housing ladder. But if interest rates rise as economists expect, many of those buyers will find it difficult to keep up their payments. And with many putting so little down—a fifth of American mortgages in 2003 were for more than 90% of the purchase price—any fall in house prices could leave a lot of them with negative equity, forcing them to default.

The increasing riskiness of mortgages is not the only sign that America is experiencing a housing bubble. The ratio of house prices to rents is well above its historical average, as is the ratio of prices to median incomes. And people seem increasingly to be basing their house-buying decisions on the notion that the large capital returns of the past few years—house prices in America are up by 65% since 1997—will continue indefinitely. As with a stockmarket bubble, if this confidence is shaken, prices could begin to fall rapidly.

America is not the only country that has been experiencing a big run-up in prices. Its market isn’t even the most frothy. Between 1997 and 2004, house prices more than doubled in Australia, Britain and Spain, and nearly tripled in South Africa and Ireland (see table). And while America’s ratio of house prices to rents is 32% higher than its average value from 1975 to 2000, by that metric houses are even more overvalued elsewhere: by at least 60% in Britain, Australia and Spain, and by 46% in France.

Inflated house prices may have been a key factor in helping these countries weather the global slowdown in 2001. When household wealth is increasing, particularly housing wealth, consumers respond by saving less and spending more; economists call this the “wealth effect”. Explosive house-price growth thus encouraged consumers to keep their spending steady despite external shocks. It is probably not a coincidence that Germany, one of the few European countries where house prices have not been rising, fared far worse during the slowdown than its neighbours or America.

Unfortunately, when housing markets decline, the same process works in reverse: consumers have to cut back their spending and save more to compensate for lost home equity. Lower consumer demand generally means a slowdown in GDP. The sharper the correction, the greater the effect on the overall economy.

But how far will the market really fall? Prices have already begun to soften in places like London and New York, particularly at the high end, but it is possible that in most places price increases could simply moderate, giving incomes and rents time to catch up. An IMF study on asset bubbles estimates that 40% of housing booms are followed by housing busts, which last for an average of four years and see an average decline of roughly 30% in home values. But given how many homebuyers in booming markets seem to be basing their purchasing decisions on expectations of outsized returns—a recent survey of buyers in Los Angeles indicated that they expected their homes to increase in value by a whopping 22% a year over the next decade—nasty downturns in at least some markets seem likely.

A fall in American house prices could be bad news not just for American homeowners, but for the rest of the world. Robust American demand has supported export-driven growth in many economies, particularly emerging markets and Asia. If American consumers have to raise their abysmal savings rate, exporting nations will feel the pinch. And given the parlous state of the Japanese and European economies, it seems unlikely that they will be able to pick up the slack—particularly if many European countries are coping with the fallout from their own housing bubbles.

Most worryingly, a collapse in American export demand could trigger a vicious cycle. In order to keep their currencies low against the dollar, and thus boost exports to America, Asian central banks have been accumulating dollar reserves, which they have poured into Treasury bonds. This has increased the supply of capital in America, and thus been at least partly responsible for the borrowing binge that fuelled the housing boom. If house prices fall, and suddenly poorer Americans have to cut back on their purchases, this will shrink the supply of cheap credit from Asian central banks, pushing up interest rates and causing house prices to fall even further. Those who thought that housing was a haven may be in for a nasty surprise.


At 9:16 AM, Anonymous Anonymous said...

it's not a matter of "if" it's "when".... people will find out as Japan did that real estate is more a liability than asset. if a stock loses value there is no cost in sitting on it till the market comes back. on the other hand real estate has real expenses.

At 10:47 AM, Anonymous Anonymous said...

"The sky is falling! The sky is falling!"

Did you even read the chart from the Economist ? From '97 to today, housing prices in the US have risen a ton less than in most other developed nations (65% vs. 147% in the UK, 179% in Ireland, 113% in Australian, ...).

At 11:47 AM, Anonymous Anonymous said...

The value of a family's house only affects them if they have to sell. I've been hearing that prices are 'overvalued' for a long time. When I bought my first house, a two-flat building in San Francisco with a small apartment in the basement, my parents were horrified. They said I should wait for prices to be more reasonable and for interest rates to drop.

That house may have dropped in value but I just lived in it and collected rent. In today's San Francisco, I could probably get a bit more than the $19,900.00 I paid for it (probably about a million dollars more) but it means nothing. I'm not selling. So who cares?

At 3:49 PM, Anonymous Anonymous said...

"The sky is Falling"

As for prices increasing only 65%, that is the average for entire United States. Some states have risen a whole lot more. Also the US is huge compared to those smaller countries.

At 7:10 PM, Anonymous Anonymous said...

Supply and Demand.
In areas of properity the party charges on. As long as rates are low, demand will continue. And in areas like LA there is not much more supply. Argue for a pop all you want, but while doomsdayers jumped off the wagon, the buyers aren't listening. WHy? Real Estate is not a stock. It is a home first and foremost. And sure people do take burps into consideration, however homebuyers look at the long term and do not day trade their home.

Case in point is that to buy a home in 1992 in LOs Angeles was foolish when considering that in many markets lost a 30% value in one year. The non existant day trader lost big. The homeowner won hugely.

Real Estate Marketing

At 12:09 AM, Blogger uksecuredloans said...

Reverse Mortgages – a Reversal of the Mortgage Process

Mortgages have assumed a number of characters from the time of their inception. The traditional mortgages used to be of the repayment type. Every month the mortgagor used to pay a certain amount towards both principal and interest. Sensing the hardships that people have to face in making these payments, mortgage providers came up with interest only mortgages. But the present day customer is more pampered. He needs a mortgage where he enjoys the cash, but is not required to pay a penny towards the repayment.

A reverse mortgage is a perfect solution to such requirements. It allows a homeowner to plough the equity in his home to get cash. While the borrower enjoys cash on the mortgage, he is rid of any monthly payments.

The amount of loan received on the reverse mortgage will depend on the age of the borrower and the value of the home. The borrower has no obligation to repay the loan as long as he continues to reside in the house or as long as he survives.

To understand the reverse mortgage, it will be beneficial to compare it with forward mortgages. The forward mortgages are the traditional mortgages. These require a monthly payment either towards both principal and interest, or only towards the interest. This way the forward mortgage is repaid at the end of the repayment period.

However, reverse mortgage works opposite to the forward mortgage (hence the name). The lender advances money to the customer, for which he receives no payment. This means that the debt goes on increasing. Simultaneously the equity in home decreases. This is a rising debt and falling equity scenario. The amount of debt can never increase the value of the home. Thus, the mortgage provider, at the time of repayment, can only lay claim on the home.

Reverse mortgage is only available to people who are 62 years or more of age. The home to be mortgaged must be owned by the borrower, either individually or as a joint holder. He must have lived in the home for the majority of the years and this must be the primary residence of the customers.

Reverse mortgage is a good source of income for the elderly people. The borrower must decide the manner in which the amount received through the reverse mortgage is to be disbursed. The government does not tax the amount received on the mortgage, and the borrower is free to use the money in the way he likes. Customers who want a regular income can draw a regular monthly payment. Some customers want a credit line opened in their name so that they can draw cash as and when they want. For others the availability of a lump-sum amount is more important, since they can apply it for purposes that are more constructive. Even a combination of these options may be used to draw the money on mortgage.

The reverse mortgages are also distinct from the other mortgages on the ground that there is no limitation on the amount of income a person must have in order to be eligible for a reverse mortgage. The mortgage is secured on the home of the borrower. This shields the lender against any defaults on the mortgage. Therefore, credit history of the borrower is not much of a problem.

Keeping the home as collateral does not mean losing the right to stay in the home. The borrower can continue living in the home as long as they wish. The mortgage provider holds the right to the property, or the first mortgage. When the mortgage is repaid, the mortgage provider has to part with the rights to the home.

The mortgage will have to be repaid on the death of the last of the co-owners, if the borrower moves house permanently, or if the house is sold. Repayment of the mortgage also becomes due when the borrower fails to pay the property taxes, maintain the home, or pay the insurance of the home. Bankruptcy, letting your home, adding a new owner to the homes title, and being indicted in a fraud or misrepresentation are sufficient grounds on which the mortgage provider may demand repayment. If in case the borrower is not able to repay the mortgage, then the house will be confiscated.

Reverse mortgage leaves little equity in the home to be used by the heirs, unless the home equity is growing at an increasing rate. This will even impede the borrower from getting a secured loan or mortgage. Thus, even though a reverse mortgage is better because there is no obligation to make monthly payments, they must be taken with caution. Planning the repayment of the mortgage in advance, will let you enjoy the mortgage, while saving your house from repossession.

Most of the people who learn that reverse mortgage do not necessitate any monthly payment feel that it is the best kind of mortgage. Nevertheless, this is only one aspect of the reverse mortgages. Reverse mortgages need to be repaid. Paying the whole amount of the mortgage along with interest at once will be difficult. This article explains the various points to be remembered while taking of reverse mortgages.

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At 4:53 PM, Anonymous Anonymous said...

People it is the price that matters. Most Americans are priced out of the housing market. It does not matter how low interest rates are if there is no buyers that can afford these homes. Also, is no one concerned about the flattening yields in the bond market. This is telling us there is a credit crunch occurring and the liqiudity is drying up. Interest are falling due to a weak economy and lack of real demand.

At 1:10 PM, Blogger msa showcase said...


At 8:22 AM, Anonymous Anonymous said...


It is simple enough, I am a mortgage broker, and I hate myself for what I do. Being in Los Angeles, I sell people loans which I know they cannot pay within a few years. Up to now, Int. only and ARM's were the hot deal, but now even those are out of reach, so I offer negative ammortization, hey it pays the bills.

Forbes recently released an article regarding the most vulnerable markets in the US "WHEN" and not "IF" the market corrects itself. Guess what, CA, FL, NY, etc. were all on top of the list. From my personal experience as an insider for over 28 years, the housing market in CA will eventually crash at least 40% because frankly my friend, living in a state where 2/3 of loans are based on ARM's, interest only, or negative ammor., there is bound to be disaster especially when most buyers are putting 50+ percent of their incomes towards their housing expense. And stop with the "oh, this time it's different" and "there is not enough land in CA" or the all famous "market will never crash because people need to live somewhere" because I have heard these and other excuses through 2 other down cycles. Simple put, housing goes throught up and down cycles and we are currently at the peak of another boom.

If you believe that housing will go up forever, let me share something with you. I made a killing in CA when the crash hit in the 90's, but I recently sold everything, and am now waiting on the sidelines, to again double my net worth with the next crash. Trust me, my uncle has become a millionaire throught 2 previous crashes.

Law of physics, "WHAT GOES UP, WILL COME DOWN"

The difference between a rich man and poor man is patience. A rich man buys when no one is buying and sells when everyone is buying, Law of supply and demand my friends. Hence todays stock market, where everything is so undervalued that if you buy now, in 3-4 years, you can double your money, like if you had bought housing in mid 80's and 90's.

So to the buyers in CA, please be smart about housing, because you are on a train without breaks which will eventually crash into something.

To the people in disagreement with me "wanna be investors", you guys should keep on buying because I plan to retire in a few years when my uncle, I, and other real investors buy your properties in foreclosure court at 50-60 percent discount.


At 1:31 PM, Anonymous Anonymous said...

"I am a mortagae broker, and I hate myself for it"

A mantra to live by. I know you have to pay your bills...but "F" everyone else in the process. I guess it's not you, but your industry...propping up these inflated prices by any means possible...even to the point of negative amort. loans (INSANITY!). Blind faith investing. Home buyers can only afford what is lent to them. As rates rise, banks can only lend you so much...and that determines what you can pay for a home. The only way many can get in now is with these "hybrid" mortgages... Keep propping up that house of cards Mortgage Assoc. ...just dont sneeze!

At 8:50 PM, Anonymous Anonymous said...

Hi Blogger! Ik ben op zoek naar hypotheken Zou Afab echt zo goed zijn als iedereen beweert? Of kan ik beter zoiets als Geldshop proberen?

Groetjes Albert

At 6:52 AM, Anonymous Anonymous said...

Having done some research into living conditions I have made the decision to move to the US! Apart from the medical care (which having just watched the film Sicko I am slightly concerned about) I have decided that there are more positives then negatives and am therefore very excited about the prospect of moving.
However I am concerned with purchasing a house, are mortgages over there the same as there are here? Do I need a large deposit and having spoke to a few people online I am concerned I wont be able to find a company to give me mortgage broker bonds and if I cant can I buy a house? Also I am familiar with the term surety bond so is a mortgage bond just a guarantee I will pay on time or is it more?

At 5:33 PM, Anonymous Anonymous said...

Fireproof Safe
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buy a safe

At 4:46 PM, Anonymous Anonymous said...

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