Wednesday, August 31, 2005

Seattle Housing : The biggest bubble?

Is your city overpriced?
Forbes : 7/21/2005
Cost of living -- from housing to the electric bill -- is going up just about everywhere, but these 10 cities have the rest of the country beat. Seattle tops the list. Again. Does your hometown make the cut?

Once an overpriced city, always an overpriced city.

That may not be how the old saw goes, but it's one of the things gleaned from the fourth edition of its "Most Overpriced Places" study. A couple of cities fell off the list, and others shuffled places. For the most part, the roster is still made up of metropolitan areas that will suck dollars from your wallet in a flash.

Now: Plenty of places are expensive. You probably think where you live is far too costly, especially since real estate costs keep heading north around the country. Movie tickets used to cost a quarter, and with a million dollars you could get a mansion. In Los Angeles this year, the median home price rose above a half-million dollars, according to the California Association of Realtors. Don't even get us started about the cost of catching a film.

Here's the full list:
  1. Seattle
  2. New York City
  3. Portland, Ore.
  4. Chicago
  5. San Jose, Calif.
  6. Bergen-Passaic, N.J.
  7. San Francisco
  8. Middlesex, N.J.
  9. Denver
  10. Los Angeles
You can also see a slide show with more details.

Still, if jobs are plentiful and incomes are rising, the real effect of increasing costs is small. But when prices go up, when employment is stagnant and when incomes are flat, well, that’s when things are overpriced.

How we got the list
To determine the 10 most overpriced places in the country, we started with the 150 cities examined in Forbes' 2005 Best Places for Business and Careers. They were ranked from 1 to 150, with 150 being the worst. We extracted the rankings for job growth, income growth and cost of living (including the cost of housing, utilities, transportation and other expenditures), then added to the mix a housing affordability index from research firm

The index measures how much of a local median-priced home (the price at which half the homes are more expensive and half are less expensive) you can buy if you earn the local median income, given current interest rates. We totaled everything to see which cities come out on top -- or on the bottom -- depending on your perspective.

Seattle in first ... again
Seattle, once again, took the highest spot on our "Overpriced List," because it's still recovering from the dot-com blowout five years ago. New York and San Francisco, which have hard-earned reputations for being super-pricey cities, made the cut, as did a couple of New Jersey locations..

Miami, on the other hand, dropped from the list, but came in at a close no. 12. Job growth there is solid, but the cost of housing is still high. Milwaukee came in just outside the top 10, as well, with its expensive housing.

Housing costs a big factor
In fact, housing costs were a major factor in determining the most-overpriced rankings. Despite all the talk of a bubble soon to burst, real estate continues racing up a steep price hill. The National Association of Realtors expects 2005 to be another record-setting year in the U.S.

If you're unfortunate enough to live in an overpriced city, stop your whining. After all, there must be something keeping you there, whether it's the museums or an easy commute. If you're lucky enough to live outside of the top 10, count your blessings -- and your dollars.

Pro Bubble vs No Bubble Crowd

Knowing what happened during the stock market boom era, would you believe whatever Jack Grubman/Mary Meeker/Henry Blodget and others will recommend, knowing what you know today?

Here, the housing bubble team will add the names of folks who are going on record about the existence (or lack of) a bubble. Over time, the masses will know who the liars are:

Folks claiming that a bubble exists:
  1. Robert Shiller
  2. Doug Kass
  3. Dean Baker
  4. Paul Krugman
  5. Paul Volcker, Former Chairman, Federal Reserve
  6. Jon Puplava
  7. Stephen Roach, Morgan Stanley

Folks claiming that no bubble exists: (It must be noted, that many of these individuals will speak either way. Occasionally they may say that there is a bubble in some markets, while claiming elsewhere that this is the new normal. This dual stand makes it convenient for them to jump on the "I told you so!" bandwagon, no matter which way the wind blows.)
  1. Alan Greenspan, Chairman, Federal Reserve
  2. David Lareah, Economist, National Association of Realtors
  3. David Jones, Texas A& M University
  4. Ben Bernanke, Chariman, President's Council of Economic Advisors

Tuesday, August 30, 2005

National poverty rate increases for 4th straight year

From San Jose Mercury

Latest numbers from Census indicate
1. Rise in poverty for the fourth consecutive year
2. Increase in number of people without health insurance to 45.8 Million
3. Income has remained stagnant

How will this effect housing?

How big is your bubble

Check out this interactive map to see the valuation of the properties in your city BankRate

Housing Statistics

  1. 23% of all homes purchased in 2004 were for investment (Source : National Association of Realtors)

  2. 13% of all homes purchased in 2004 were vacation homes (Source : National Association of Realtors)

  3. There are 72.1 million owner-occupied homes in the US, followed by 43.8 million second homes of which 6.6 million are vacation homes. There are 37.2 million investment units (compared to 72.1 million owner-occupied homes): (Source : 2003 Census)

  4. 32% of all mortgages are ARMS (Source : Mortgage Bankers Association)

  5. 9% of the mortgages in 2004 were subprime or made to people with poor credit. That's $517 billion in dollar value

  6. Zero down loans exceeded $90 billion last year.

  7. More than a third of all mortgage applications in Q1 2005 were for ARMs. ARMs could turn out to be dangerous for most consumers in a rising interest rate environment.

  8. $400 Billion : That's the value, by which the housing stock has grown in value for each year over the last four years.

  9. Non-performing loans in the mortgage business of General Motors Acceptance Corp, the finance arm that is the most profitable part of the carmaker, increased from $1.3bn to $3.4bn in 2004

  10. Homeowners under the age of 25 are the fastest group of property owners in the Northeast, according to the US Census Housing and Household Economic Statistics Division. Between 1997 and 2004, homeowners under the age of 25 jumped 11 percent -- and now these youths make up one-quarter of all property owners in the Northeast. (source : Boston)
  11. The amount Americans owe on home equity lines of credit jumped to about $491 billion at the end of 2004, up 42 percent from a year earlier, and more than triple the amount at the end of 2000.

  12. The last two quarter-point hikes by the Fed will cost home equity borrowers about $2.5 billion more in interest this year. And most economists expect at least another full-point increase by the Fed this year, meaning another $5 billion in debt service for those consumers.

  13. Not all of the $1.4 trillion in variable-rate mortgages adjust every year. But a 1 percentage point rise in rates on only half of that loan portfolio would mean about $7 billion more in interest costs to those borrowers.

Paul Krugman: Days late, dollars short

By Paul Krugman The New York Times

PRINCETON, New Jersey Most of what Alan Greenspan said at last week's conference in his honor made very good sense. But his words of wisdom come too late. He's like a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up.
Regular readers know that I have never forgiven the Federal Reserve chairman for his role in creating today's budget deficit. In 2001 Greenspan, a stern fiscal taskmaster during the Clinton years, gave decisive support to the Bush administration's irresponsible tax cuts, urging Congress to reduce the federal government's revenue so that it wouldn't pay off its debt too quickly.
Since then, federal debt has soared. But as far as I can tell, Greenspan has never admitted that he gave Congress bad advice. He has, however, gone back to lecturing us about the evils of deficits. Now, it seems, he's playing a similar game with regard to the housing bubble.
At the conference, Greenspan didn't say in plain English that house prices are way out of line. But he never says things in plain English.
What he did say, after emphasizing the recent economic importance of rising house prices, was that "this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent." And he warned that "history has not dealt kindly with the aftermath of protracted periods of low-risk premiums." I believe that translates as "Beware the bursting bubble."
But as recently as last October Greenspan dismissed talk of a housing bubble: "While local economies may experience significant speculative price imbalances," he said, "a national severe price distortion seems most unlikely."
Wait, it gets worse. These days Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."
If Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Greenspan's successor to manage the bubble's aftermath.
How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.
One way or another, the economy will eventually eliminate both imbalances. But if the process doesn't go smoothly - if, in particular, the housing bubble bursts before the trade deficit shrinks - we're going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the "R" word for 2006.
And here's where Greenspan is still saying foolish things. In his closing remarks he suggested that "an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit." Translation, I think: The end of the housing bubble will automatically cure the trade deficit, too.
Sorry, but no. A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more competitive on world markets, leading to higher exports and lower imports.
So there's a rough ride ahead for the U.S. economy. And it's partly Greenspan's fault.

Bubbles All Around Us

Summary and Investment Conclusion

The world may be in the middle of the biggest bubble in history. The bubble (e.g., property, stock, commodities) could exceed 50% of global GDP in value. The key cause of the bubble is that the major central banks failed to lower inflation targets to account for the combination of productivity acceleration due to IT and the new upward stickiness in wages due to the influx of three billion people into the global economy since the mid-1990s.

The major central banks mistakenly released too much money in the past decade, justifying it with the low inflation relative to the recent past. The monetary excesses have led to the rapid expansion of asset valuation relative to income. The global economy has become dependent on the demand spillover from asset inflation.

The global bubble economy has unusually been resilient despite the rising Fed funds rate because: 1) the increasing use of leverage in financial markets is temporarily offsetting the liquidity impact of the Fed raising interest rates, and 2) some bubbles could prop up each other. The persistence of these bubbles expands the excesses in the global economy and makes the eventual correction more painful.

The end of the global bubble economy may be near. Mr. Greenspan recently recognized the role of the Fed’s monetary policy in the US housing boom, its associated consumption boom and the US savings shortfall. The Fed may be in a campaign to pop the bubble. The global economy could experience a big downturn or many years of slow growth to correct the past excesses.

Production-driven Asia has benefited tremendously from the global demand boom. Recently, it has also seen over $700 billion in hot money inflow, which is part of the global liquidity bubble. When the global bubble bursts, Asia could fare worst, as a global demand slowdown and hot money leaving may happen together. Indeed, the seeds for another Asian Financial Crisis have been planted, in my view. It will take proactive policy measures, especially ones that stop sudden money outflow, to prevent such a crisis.

Many Bubbles

Something unusual happened in the mid 1990s: the ratio of the US stock market capitalization to its GDP began to surge above its normal range. Mr. Greenspan made his famous speech on the ‘irrational exuberance’ in the stock market in 1996. The market shivered briefly but resumed climbing. It culminated in early 2000 when the listed stocks in the US exceeded 160% of GDP in value – more than twice the historical normal level.

After the tech bubble burst, US housing value began a similar upward move in relation to the US GDP. The ratio of US housing value to GDP could exceed 160% this year, up from 120% in the 1990s. The average of this ratio was 105% between 1950 and 1999 and the highest level during this period was 130% in 1989, right before the S&L crisis.

Similar trends in stock and property markets were observed in Australia and Britain. Between 1985 and 1995, the capitalization of Australia’s stock market averaged 37% of GDP. It is now about 120%. The value of household dwellings in Australia has swelled from 176% of GDP in 1995 to 337% now. Australia has had an excellent economy in the past decade due to its asset bubbles, I believe. Its extraordinary household debt (160% of household disposable income) and current account deficit (6.7% of GDP) show that its bubble-induced excesses are even worse than those of the US.

The capitalization of London Stock Exchange-listed stocks climbed to 198% of GDP in 1999 from 125% in 1995 and is now at about 134%. Its property price appreciated twice as fast as its per capita income in the past decade. Its current account deficit was 2% of GDP last year. London seems to exemplify the excesses – unreal prices. However, the UK’s macro data look tame compared with other economies with bubble problems.

The Anglo-Saxon bubbles have underwritten the global trade boom. Asia, and China in particular, has been the main beneficiary. With high savings rates, Asia has turned the export income into new capacity to keep inflation low. The booming trade has triggered monetary excesses in the region also. It occurred first in Southeast Asia in the mid-1990s. When foreign investors became scared of the property bubble there, capital flight caused the burst and the Asian Financial Crisis.

After the bubble deflated in Southeast Asia, China began to experience a property bubble. As the trade boom shifted to China from Southeast Asia, the liquidity excess made the same switch. A property bubble in an emerging economy is usually about putting up new buildings. China has not been different. This has also caused excess investment in commodity industries. Overall, China may have invested 30% of GDP in excess.

We often hear two arguments to justify the trends described above: (1) interest rates are low, and (2) corporate earnings are good. Neither argument is good enough, I believe. Low interest rates signal low-income growth rates. Hence, the real cost of money has not changed much. Good corporate earnings are supported by consumption, fueled by borrowing against asset appreciation. The good earnings are a bubble phenomenon.

The Bubble Genesis

Two factors led to a bubble-prone environment. First, technology led to productivity acceleration. In particular, IT dramatically increased the optimal scale economies of retail distribution. As the big-box retailers took market shares away from traditional retailers, it served to slow down inflation, ceteris paribus.

Second, the influx of three billion people of the ex-planned economies into the global economy was a strong headwind for wages in the established industrial economies, cutting off the traditional linkage between money supply and inflation. This deflationary force became stronger over time as IT made the labor arbitrage easier.

The fundamental changes in the 1990s severed the short-term relationship between money supply and inflation. Indeed, the monetarist explanation for inflation championed by Milton Freidman was discarded in the 1990s as inflation rates failed to respond to surging money supplies.

However, money did cause inflation in asset markets. Rising asset markets led to a demand boom in the Anglo-Saxon economies. That demand could have caused inflation. But, the ex-planning economies were eager to accumulate capital to replace the useless capital built up during the planning era. That force increased their supply faster than their consumption. Their supply kept inflation low despite the bubble-induced boom in the Anglo-Saxon economies, allowing their bubbles to expand further.

The Power of Momentum

The monetary environment in the past decade has been favorable for speculation in asset appreciation. While the appreciating assets may change, some assets are usually rising. The growth of the hedge fund industry reflects this reality; hedge funds are flexible enough to capture the upside from whatever assets are appreciating.

The increasing risk appetite is denting the effectiveness of monetary tightening by the Fed. In particular, the increasing use of leverage in financial markets is offsetting the liquidity reduction due to the rising Fed funds rate. This is why, I believe, the Fed rate hikes have had limited impact so far.

Mr. Greenspan has been expressing worries about asset prices. However, he is not addressing the issue with sufficient actions, in my view. If the Fed either raised interest rates more quickly or expressed the intention to target asset prices, the bubble would burst. Raising interest rates slowly is not effective when the risk appetite is rising in tandem. The momentum in risk appetite will eventually require the Fed to raise interest rates higher than otherwise to achieve the same effect.

Of course, the global bubble is more than just about the Fed. The Bank of Japan has increased money supply dramatically since the Asian Financial Crisis through quantitative easing. The monetary growth did not reflate the Japanese economy, as Japanese people were still too scarred by the bubble of the late 1980s. Instead, Japanese financial institutions kept buying treasuries, which pegged the treasury to JGB and the yen to the dollar. How Japan has behaved is an important factor in how dollar and treasury yield have behaved, i.e., the monetary policy of the BoJ has increased liquidity in the US.

Why Is the Oil Bubble Resilient?

Economists have been confounded by the limited impact of skyrocketing oil prices on the global economy. There are already some visible negative effects in Asia (see ‘Business Cycle Likely to Resume Downward Trend’, August 26, 2005). But, the effect is limited in relation to the tripling of the oil prices in the past few years. The strength of the global economy, the strong demand for oil, and the rampant speculation in the oil market are all related to the global liquidity boom and the rising risk appetite.

Commodity is the asset class with most bubbles in history, especially during the 19th century. From grain to silver, every commodity has seen bubbles. Oil now is probably the biggest commodity bubble in history. It seems that there is some excuse to push up the price everyday. The oil price chart resembles the NASDAQ chart from five years ago.

Oil is one of the most important inputs in the global economy. The tripling of its price should have had a major impact on the global economy. But it has not. The reason is that the liquidity behind the oil speculation has also been pushing up property and stock prices. The wealth increase from property and stock appreciation has vastly exceeded the increase in oil costs. The oil bubble is one aspect of the global liquidity bubble.

The Ending Scenarios

Bubbles burst when few expect them to. In 2000, the tech bubble burst when many long-term skeptics were converted into believers. This one is likely to burst at an unexpected time. Most investors I talk to accept that there is a bubble, but believe that it will not burst for several years. Investors tend to think like this in every bubble. Such thinking tends to prolong the bubble as nobody wants to leave the game while the going is still good.

The most important support for the global economy is the property market, in particular, the US property market. The global property bubble could exceed $15 trillion – the value appreciation above income growth. The US property market is not yet close to the extremes that we have observed in Australia or Asia. So it is possible that the US property market could last for a couple of more years. This scenario is essentially the status quo: there would be periodic growth scares, but speculators would always return.

An alternative scenario is that the US property market stops going up but does not decline either. In such a scenario, the world would experience slow growth but not burst. Oil prices would collapse to give the world a tax cut, which would stabilize growth. This would be a soft landing scenario.

Asia could be the trigger for a global adjustment. If the hot money in Asia (over US$700 billion) is scared of something like 1998, it could rush out of Asia and into the US. The dollar would strengthen and the US bond yield would decline. The combination could prop up the US property market and the US economy. The world would look like it did in 1998.

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India: Industrial Growth Pickup: How Sustainable Is It?

Chetan Ahya (Mumbai) and Mihir Sheth (Mumbai)


The latest monthly industrial production data show a strong acceleration of growth to a nine-year high of 10.8%. However, we believe this acceleration is increasingly at the cost of escalating the macro risks. We have been a strong propagator of the likely acceleration in India’s overall growth in the long term driven by structural factors such as demographics and the gradual but positive direction of reforms initiated by the government. However, we believe that over the last two years a significant part of the acceleration in growth has been premised on support of unsustainable drivers. A large of the IP growth has been driven by a low real interest rate-sponsored consumption boom. We maintain our view that industrial growth is heading for a slowdown and further continuation of the strong consumption driven growth only raises the risk of tougher times later.

IP Growth: Structural or Cyclical?

Although there is a general perception that India’s current strong IP growth is premised on structural factors, we believe a large part of the growth acceleration has been driven by a low real interest rate-sponsored consumption boom. Unlike the 1993-1996 growth cycle (which also coincided with the emerging markets cycle), the current growth recovery has been premised on an out-of-proportion share of consumption. The 1993-96 cycle was driven by major structural reforms and matching excitement amongst entrepreneurs resulting in investments being the anchor of growth. Whilst the share of consumer goods in IP growth at the peak of the 1993-1996 cycle averaged only 34%, it is currently at 58%. Indeed, the consumer goods sector grew at a 10-year high of 23.7% in June 2005 compared with 10.8% growth in capital goods.

The current cycle has also been marked by a sharp slowdown in the reform process. Some of the long pending widely expected reforms such as privatization, labour reform, increasing foreign investment limit for sectors such as banking, insurance and telecom, and structurally correcting the fiscal deficit by reducing subsidies or expenditure have all been deferred by the government. Indeed, public finances continue to remain poor as the government’s decision to subsidize oil prices has resulted in an off-budget burden of US$8.3 billion (1.1% of GDP) during F2006 (assuming average WTI crude oil price of US$ 60/barrel). In addition, the recent decision to implement the Employment Guarantee Act resulted in an annual burden of 0.7% of GDP on the government. We believe that government not performing the productive role of the public sector is one of the key reasons for the current skewed growth trend in India.

So What’s Wrong with Consumption Driven Growth?

Whilst initially this consumption growth supported by borrowings was good as it helped improve domestic capacity utilization, we believe that since the end of 2003, a rising proportion of this consumption is being met through imports. In other words, incrementally every rupee of consumption boosted by borrowing is not generating the same positive impact on domestic output and corporate operating earnings as it did when the capacity utilization was low. Not surprisingly, corporate revenue and operating profits have already witnessed deceleration in growth.

More importantly, a continued push in consumption driven growth could significantly increase the macro risks. Firstly, this consumption boom has already pushed the credit-deposit ratio to a 19-year high of 63%. Although India’s credit-deposit ratio and credit to GDP ratios appear to be low on an absolute basis, the aggregate leveraging in the system is now not low compared to other Asian countries as the government debt level in India is very high. Our broad measure for leveraging, which includes government debt plus bank loan advances to corporate and households indicates a huge spike up in borrowing in the past 6 years. The total of these two has shot up to 119% of GDP as of March 2005 (estimated to rise to 124% by March 2006) from 87% of GDP in March 1999. We believe that this total is still understating the overall debt in the system as it excludes external borrowings by corporates and loans funded by non-banking financial entities. We believe that this current high level of leverage in the system is clearly not a comfortable starting point if the country has to pursue aggressive manufacturing and infrastructure capex from now onwards. Pursuing an aggressive capex cycle at this stage will only increase the risk of a huge interest rate shock on the system.

Secondly, even as the private corporate investments as % of GDP is close to 12-year lows, the government and households have leveraged considerably (primarily for consumption) above the fair the levels of debt. Our banking sector research team believes that there is a rising credit risk building in the system as Indian households have leveraged significantly above the fair level that is supported by the current trend in per capital income. Even the Central Bank has conveyed its concern on sharp growth in consumer credit by increasing the risk weighting related to consumer credit lending, housing loans, commercial real estate and capital market related advances.

Thirdly, a further rise in external imbalances poses an additional macro risk. Due to global trade integration, a pick-up in domestic demand when capacity utilization is running high and import protection is low is resulting in a higher trade deficit rather than adding to inflationary pressure. In other words, with the investment cycle (i.e. new capacity creation) remaining weak, a higher consumption-oriented growth push supported by low real interest rates has been a key factor pushing the trade deficit to an all-time high of US$11.5 billion (5.6% of GDP, annualized) during the quarter ended June 2005. However, unlike China, which has used global liquidity for creating capacity that has allowed it to increase market share in global exports and sustain higher growth trend, India has used the external monetary stimulus for consumption. Our analysis shows that a large part of the sharp widening in the trade deficit over the last two years was driven by consumption. 12-month trailing imports to GDP have risen to 16.0% as of May 2005 from 12.2% in May 2003. Out of this only 9% of the increase is due to capital goods. Oil accounted for 27% of the increase and the balance 65% is due to non-oil non-capital goods imports (read consumption). This widening trade deficit has only increased the country dependence on less stable capital inflows like FII equity investments and external commercial borrowings.

Rising Risk of Significant IP Growth Deceleration

There are many signs of risks emerging out of current over-stretched consumption growth. The credit-to-deposit ratio is close to a 19-year high of 63%, household debt is significantly above fair levels supported by India’s per capital income, government debt to GDP is at all time high of 80%, the rupee is overvalued by about 9% and the trade deficit has risen to an all-time high of 5.4% while the balance of payments has been boosted by less stable foreign capital. The good news is that India’s foreign exchange reserves are high at US$143 billion and the balance sheet of the corporate sector is looking very healthy. Hence, while there is vulnerability in terms of a potential significant rise in real interest rates and a significant deceleration in consumption (i.e. GDP) growth, we believe a crisis is unlikely. However, we believe that rising interest rates, slowing exports and a sharp rise in global oil prices are likely to trigger a significant slowdown in industrial growth over the next few months. We maintain our view that industrial growth will decelerate to 5-6% from the current 10.8% over the next 4-6 months time, weighing on corporate revenue and operating profit growth.

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Monday, August 29, 2005

It's RIP for the housing boom

Supplies of new and existing homes are growing. Add in wild condo speculation and gullible people buying land sight unseen. My conclusion: The housing bubble is about to burst.

By Bill Fleckenstein

Last Tuesday saw the release of July existing-home sales that were slightly below expectations. For the housing market, one piece of data in the National Association of Realtors report portends the end of ever-higher prices: The supply of homes on the market now stands at 2.75 million -- the highest since May 1988.

A Commerce Department report Wednesday adds weight to the evidence: New-home inventories have grown about 15% since July 2004, to 460,000, the highest level since the Commerce Department started tracking new homes in 1963.

Housing ATM: RIP
Given all the multiple-property buying that's occurred, the accounts in the media (I'll share two of them below) and what readers of this column have observed with their own eyes, this news is somewhat surprising. However, it was inevitable that inventory would start piling up at some point. The time, as it turns out, is now.

That excess inventory, together with the further supply now in various stages of coming on stream, makes me feel more strongly than ever that this summer will be seen, with benefit of hindsight, to have been the top. In essence, Time Magazine's cover early last June -- "Home $weet Home: Why We're Going Gaga Over Real Estate" -- will more or less have marked the peak.

There's no point dwelling on the ramifications of an out-of-order housing ATM, as regular readers know: the end of consumer spending, weakening economic activity and the resumption of the bear market for stocks. What's left will be decelerating economic activity and plenty of bad debt, though none of that is today's business.

Condo-mania made kosher
For a look at how gullibility, not apprehension, is the order of the day, let's turn now to the Aug. 18 Wall Street Journal. In a Page 1 story headlined "Behind Zooming Condo Prices: New Demographics, or a Bubble?" this onetime leading-edge, high-quality and now watered-down consensus business publication actually entertained the notion of a bubble-boosting phenomenon called "new demographics."

Since its inclusion in the paper's headline dictates capitalization, it's not possible to tell if the Journal plans to dignify "new demographics" by capitalizing it everywhere (just as it did in "New Economy," which it fell for hook, line and sinker). I suppose that will depend on how long the condo market holds together.

To judge by the writers' sentiments, which ranged from slightly sanguine to downright bullish, that appears to be a long time. They noted one Greg Deman, owner of a warehouse-distribution company in Sioux City, Iowa, who recently bought three condos in the same building in Omaha (for prices ranging from $250,000 to $350,000). Now, Deman wants to buy more. "I might be guessing right, or I might be guessing wrong," Deman told the Journal. "But I think this area's going to grow." Oh, by the way, that same fellow is interested in "investing" in Phoenix and Las Vegas.

I believe the writers (and perhaps the Journal) tip their hand in this summation: "The market is drawing baby boomers and investors, some of whom are using letters of credit instead of cash downpayments to reserve preconstruction units… Local real-estate agents say these buyers are requesting larger-than-average units, such as condos that take up the whole floor of a building."

Apparently not realizing that this is, in fact, the bear case, the writers conclude with this quote from a Florida real-estate agent: "The market down here is extraordinary. … Since (Hurricane) Ivan, people were worried that properties were going to drop, but they've gone up every month."

CPA moms to the rescue
Perhaps some of them have been counting on a little help from "Mom." If it wasn't enough that "liar loans" are ubiquitous (though the need to lie hardly exists, because seemingly anyone can borrow any amount necessary), it turns out that with a mere mouse-click onto CPA Moms Unlimited, one can apply for a CPA letter to "verify" one's net worth. (Their motto: "CPA Moms specialize in cleaning up messes at a price you can afford!")

Maybe I'm overreaching when I say the Journal is bullish on real estate. The paper has also run a few critical stories. Maybe the Journal is just bullish on the vehicle of the easiest speculation -- condos.

Part and parcel of a bubble
There was another sign of the times in "Bidders win unseen lands, discover they bought trouble," a story in the Aug. 17 edition of my Seattle Times. The story details how buyers are clamoring after what can only be described as dubious properties, held by an outfit called Auction Acres. That doesn't sound like someone you'd want to do business with, especially when you read the fine print, which the writer (with the assistance of a real-estate attorney) describes as follows:

"Unlike a traditional real-estate sale, where the buyer gets the title while paying off the loan, the Auction Acres contracts give buyers use of the land, but the seller keeps the title until the full sales price is paid off. ... So the contract allows the company to keep the land -- and all the previous payments -- if a buyer defaults, no matter how much they've paid. The auction company can also borrow against the land."

A match made in (mania) heaven
Not surprisingly, the article chronicled how people who thought they were getting bargains wound up instead with "basketball-court-sized" lots in floodplains. Of course, it appears that none of the buyers who got bagged bothered to do any research whatsoever.

This was a case of unquestioning, gullible buyers dealing with a company that banked on their ignorance, as it cashed in on the phenomenon. (A picture that accompanied the article showed a crowd of 2,000 people attending a recent auction for 220 parcels of vacant land.) As the rising tide of higher real-estate prices goes out and exposes what we don't know, given what we do know, it will be truly mind-boggling. Joe Public is buying land sight-unseen without doing any due diligence. If that isn't a top, I don't know what one would look like.

The housing boom will cool, but investors need to show caution.

Houston Chronicle

On their weekly NPR radio show, The Motley Fool , brothers David and Tom Gardner play a game they call, "What Did the Fed Chief Say?" Contestants are awarded token prizes if they can decipher the pronouncements of Federal Reserve Board Chairman Alan Greenspan and translate them into statements that ordinary Americans can understand.

When a congressman once told Greenspan that he understood something the chairman had said, Greenspan responded, "Then I must have misspoken."

Approaching retirement from office next year, Greenspan addressed a Fed symposium Saturday in Jackson Hole, Wyo. Uncharacteristically, the chairman was fairly straightforward in his economic prognosis for the nation:

In sum, Greenspan predicted that several problems would work themselves out without heavily damaging the economy. Market forces would cause the housing boom to cool. When it did, consumer spending would drop and U.S. savings � now nonexistent for many households � would increase. When that happened, according to the chairman, the nation's disturbing trade deficit and dependence on foreign borrowing would decline.

Americans must hope Greenspan is right, as he has been on many important questions during his tenure as the nation's central banker. He is certainly correct on another issue he discussed:

The government's fiscal policy is unsustainable. Without spending cuts or revenue increases or both, the skyrocketing deficits of recent years will only grow worse as baby boomers retire and receive Social Security and Medicare benefits.

What did the Fed chief say? There is some reason for optimism, but a need for caution in business and investment. And if the deficits are not brought under control, all bets for a strong economy are off.

Sunday, August 28, 2005

Housing bubble evidence abundant

One indicator shows some huge deviations from 35-year average

Universal Press Syndicate

Like the old real estate adage, "location, location, location," we have only one question these days. We just ask it in different ways.

"Are we in a housing bubble?"

"Will home values decline?"

"Did I pay too much?"

The attention is no surprise: Housing is our most widely owned asset. We're all stakeholders in this. Another reason is the incredible stories coming out of places like San Diego, Northern California, Western Florida and Miami. Last week a Florida reader wrote to tell me about the options he had on Florida condos and how he wouldn't go near anything as dangerous as the stock market again because he had been so badly burned in the Internet bubble.

What that tells me, even if it escapes him, is that his habits of investing haven't changed, but the venue has. To me, California, Florida and much of New England look like a replay of Texas in the '80s. Back then we had savings and loans financing "see-through" buildings, condos and houses being sold with buy-down mortgages, and a long oil-bust recession.

Littered with repos

By the time it was over, the spine of Texas, Interstate 35, was littered with manufactured home repos from Dallas to San Antonio. Virtually every financial institution in the state was busted. Dallas, Houston and Austin condo prices plummeted: There is no market when you ask people to pay cash because there are no lenders.

So here's a question: If the stories and magazine covers aren't enough, is there any broad statistical evidence of excess?

Yes. One indicator, cited in a recent issue of Grant's Interest Rate Observer, is the dollar volume of home sales divided by gross domestic product. The figure for 2004 was a near record, nearly three standard deviations greater than the average of the last 35 years.

Others can be found in a regular report from the Federal Reserve, the "Balance Sheet of Households and Non-Profit Institutions," one of the many sections of the quarterly Flow of Funds.

If you examine these figures, you learn that our collective net worth declined from 1999 (no surprise there) and bottomed in 2002. You also learn that we had fully recovered by 2003 and that we've gained $9.4 trillion in net worth — nearly 25 percent — from the 2002 bottom.

The largest source of gain? Home values, up $4 trillion. This compares with a $1.3 trillion gain in the value of corporate equities and a $1.3 trillion gain in the value of mutual funds.

As I said, we're all stakeholders in this.

Disturbing data

But let's go back further.

Examining the same data back to 1952, I found that:

•Residential homes are the highest percentage of our collective net worth they have ever been, 36.3 percent.
•We have been borrowing at a prodigious rate, with mortgages equal to 43.7 percent of home value. That's only a bit less than the record 44.2 percent set in 2004.
•We reached a record for the value of homes compared with the value of our financial assets, 48.5 percent.
Compared with the median values of the last 50 years, these are big shifts. Viewed statistically, values are at extremes. The median value of houses as a percent of net worth was 26.8 percent. That's 2.6 standard deviations from the current 36.3 percent value.

What does that mean in English?

Try this. You can be a member of Mensa, the high IQ society, if your intelligence quotient is at least two standard deviations higher than the median, or normal, IQ. That's an unusual score because it puts you in the top 2 percent of the population. To find a community of peers you'd have to live on campus at Cal Tech.

Way off historic medians

And that's where current home values are relative to everything else — about two standard deviations up from the medians of the last half-century.

The bottom line: Collectively, we're heavily mortgaged in a period of extreme prices. The return to more normal prices could be as painful at the Great Texas Real Estate Crash.

Sharks in the Housing Pool

Business Week

Deed thieves, property flippers, equity strippers -- these con artists are duping banks and homeowners, and there are lots of them

By most measures, Matthew B. Cox would appear to be a mortgage lender's dream customer. The 36-year-old former Tampa resident had once worked in the mortgage business, so he understood intimately what it took to qualify for a loan. And Cox threw plenty of business at mortgage lenders in Florida, and then Georgia: An aspiring real estate investor, Cox took out $3.7 million in mortgages to finance his apparently ever-growing stable of houses.

But in reality, Cox was the industry's worst nightmare. Federal law enforcement officials say that Cox -- a.k.a. Michael Shanahan, David Freeman, and Gerald Cugno -- along with his girlfriend, Rebecca M. Hauck, masterminded a massive mortgage fraud that ensnared at least 10 different lenders, including Bank of America (BAC ) and SunTrust Banks (STI ). Using nearly a dozen stolen identities, the pair forged "deeds of satisfaction" to convince banks that they had paid off loans for -- and thus owned -- homes that, in fact, they were renting from the true owners.

DARK SIDE. With these fake documents, Cox then persuaded banks to lend him millions beginning in 2002 and into 2004 -- millions he and his girlfriend subsequently absconded with. So brazen was Cox that he left some of the mortgage brokers who closed his loans in Florida a copy of his novel-in-progress, titled The Associates -- little more than a barely fictionalized account of his escapades.

Cox and his girlfriend are now on the lam, their faces plastered on wanted posters distributed to bankers, mortgage brokers, and real estate agents. "We want to catch him so we can put him on trial," says David E. Nahmius, U.S. Attorney for the Northern District of Georgia.

Welcome to the dark side of the housing boom. While the plunge in interest rates has triggered an explosion of housing and mortgage activity, allowing millions of Americans to buy and refinance houses, it has also given rise to an unprecedented wave of fraud.

CUTTING CORNERS. The FBI says the number of suspected fraud incidents reported by federally chartered banks, which underwrite roughly half of all mortgages, has soared nearly fivefold since 2000, to 17,700 last year, and is set to top 20,000 cases this year. No one has exact figures on how much the fraud is costing banks and homeowners, but analysts say the losses could well amount to more than $2 billion a year.

And here's the rub: With the property market at last showing signs of cooling off in some parts of the country, the banks may suddenly find themselves less insulated from mortgage scams. Says William Matthews of the Mortgage Asset Research Institute: "In a flat or declining market, the bodies are going to rise to the surface more quickly."

Why the rise in fraud? Chalk it up in large part to the sheer number of mortgages banks are handling nowadays. The plunge in rates has goosed mortgage volume from roughly $800 billion a year in the mid-1990s to more than $2.6 trillion now. To meet demand, lenders hired tens of thousands of inexperienced staffers at the same time they were working feverishly to cut the time needed to close loans. As a result, experts say lenders sometimes cut corners on the due diligence that could have caught some of these frauds.

"SCARED TO DEATH." Compounding matters is that lenders, to cut costs, have outsourced the origination of most mortgages to independent mortgage brokers, who now initiate more than two-thirds of all home loans -- meaning that banks don't know borrowers the way they did in decades past.

Banks "aren't meeting the borrower face to face anymore," says Arthur J. Prieston, chairman of Prieston Group, a Novato (Calif.) provider of fraud insurance and training. "There has been less concern for the quality of the loan and more for the quantity."

At the same time, con artists have become more sophisticated in their tactics -- through their use of identity theft or their ability to detect vulnerabilities in the mortgage process. For instance, some have exploited the logjams that have occurred in overworked county deed offices. Ownership titles that took days to be recorded now take weeks or months, and fraudsters know this leaves lenders confused about who the true owner is.

In Douglasville, Ga., a fraud ring refinanced a property in quick succession with three different lenders before selling it. As a result, four lenders now claim rights to the first lien -- and the title insurers, which include Fidelity National Title Insurance Co., could be on the hook for the losses. "We're scared to death" of the potential for similar frauds elsewhere, says Fidelity counsel Robbie J. Dimon.

ON THE HOOK. Some scams use sophisticated rings of buyers who flip a property at inflated prices among themselves before absconding with the loan proceeds. That was the case in Stone Mountain, Ga., an Atlanta suburb, where a 15-person fraud ring -- a group that included corrupt mortgage brokers, closing attorneys, fake buyers, and an identity thief -- flipped at least 100 houses in three neighborhoods over a three-year period, pilfering roughly $20 million in bank funds before being busted last year.

The problem could get worse for banks before it gets better. As long as prices were rising sharply in housing hot spots such as Boston, Washington, D.C., and Southern California, banks duped by fraudsters were often able to cut their losses -- or even come out whole -- by reselling the defaulted property back into a rising market.

But it's unlikely that banks can count on rising valuations to bail them out of bad loans. And while the banks have been securitizing their mortgages and selling them to third parties, they are still on the hook for part of the loan if it goes bad.

"ROAD MAP FOR SCAMMERS." Homeowners are taking it on the chin, too. In Utah, some state officials believe rampant fraud has compelled lenders there to boost mortgage rates by an extra quarter-point to help cover their losses. When property-flipping scamsters drive up house prices, property-tax hikes aren't far behind.

And when scams come unraveled, home values can plummet. By the time the Stone Mountain fraud ring was busted in 2004, property values had plunged from an average of $280,000 to $180,000 -- and several of the flipped houses remain vacant, their lawns covered in weeds. "These are homes with no love," says Ann D. Fulmer, a mom-turned-fraud-hunter who helped authorities bust the gang (see BW Online, 8/25/05, "The Accidental Mortgage Detective").

In parts of the country where housing prices have risen especially quickly, homeowners have become direct targets of an increasing range of scams. There has been an explosion of "equity stripping" schemes, in which elderly or blue-collar homeowners who have fallen behind on their mortgage payments and are facing foreclosure are preyed on by scammers, who often get their leads from the mortgage-default notices that banks are required by law to file with the local courts. These legal notices "just provide a road map for scammers," says Manuel Duran, a Los Angeles lawyer who has represented fraud victims.

JUST SIGN HERE. In these scams, the con artists approach homeowners, offering to help them refinance -- and thus stave off foreclosure. But their real intent is to steal the equity that these homeowners have built up over the years -- either by duping the owner into signing papers in which they transfer ownership or by charging tens of thousands of dollars in exorbitant fees.

The former happened to Michelle Roberts-Taylor, a 40-year-old transit supervisor who lives near Washington, D.C. After falling behind on her mortgage last year, Roberts-Taylor received a phone call from a mortgage broker who promised to help her refinance the mortgage at a lower rate. It was when Roberts-Taylor received an eviction notice that she realized she had unwittingly signed over her home to the broker. This fraud, unlike most others, had a relatively happy ending: Roberts-Taylor hired an attorney who was able to win an $85,000 settlement last December from the broker.

Will the fraud wave recede if the housing market cools off? Perhaps over time, but the banks could be in for a rough ride in the short term. Besides the potential hit from slowing home prices, an end to the boom also could prompt scammers to cash out. And some of these guys have a lot of skin in the game.

Earlier this summer, a grand jury in Springfield, Ill. indicted two men for taking out fraudulent, inflated mortgages on more than 150 properties. The scheme cost lenders $8 million in losses. And they know there are plenty of other big scams out there just waiting to hit.

Good News, Bad News: Your Loan's Approved

ADAM GARDNER wasn't going to let limited resources stop him from buying a house. A 28-year-old appraiser's apprentice from Reno, Nev., he extended his search all the way to a new development 20 miles north of downtown. When he finally found a place - a two-bedroom, three-bath house - he took out two loans to finance 90 percent of the $253,850 price tag. And to keep his monthly payments within budget, he obtained what's known as an interest-only adjustable-rate mortgage.

"I moved out of Reno to find something I could afford. Even then I needed an interest-only adjustable mortgage," said Mr. Gardner, who closed on his new home in April. "First-time home buyers are being pushed out of the market entirely."

Actually, many first-time home buyers are being pushed into the embrace of creative financing. As the housing boom lifts the median home price way beyond the budget of huge numbers of Americans, middle-income home buyers like Mr. Gardner are increasingly turning to such mortgages - a decision that could well come back to haunt both them and the banks behind the loans later on.

The newfangled mortgages have been heralded in the industry as useful tools for buyers who would otherwise be shut out of the surging real estate market. That's because they reduce borrowers' monthly payments by allowing them to pay only interest initially while charging a lower interest rate that remains fixed for a few years before starting to adjust annually for the rest of the term, typically 30 years.

But critics say they are riskier than standard mortgages, as they are prone to two payment spikes - one when the interest-only period expires and another when the fixed-rate period ends and the borrower faces potentially much higher interest rates.

Critics also worry that offering extra-risky financial products that permit financially vulnerable buyers to get ever bigger mortgages is particularly perilous now, when many experts say the housing bubble may be near a breaking point.

"We are in uncharted territory," said Susan M. Wachter, professor of real estate at the Wharton School of the University of Pennsylvania. "On the one hand, it is the case that these mortgages enable purchases of homes by higher-risk, poor-credit households who otherwise wouldn't be able to own a home. But on the other hand, they are riskier products, and we don't have historical data to know how risky they are."

Mr. Gardner, for one, is not especially worried. He said homes like his had already appreciated substantially, in his case making him a paper gain of tens of thousands of dollars. By the time the interest rate on this 30-year mortgage starts adjusting and his mortgage starts amortizing - in five years - he expects to have either sold or refinanced the home.

If he cannot, however, he may have to dish out a lot more money to pay his mortgage. How much more? If interest rates on his mortgage rose by a mere, say, two percentage points, to 7.25 percent from 5.25 percent, his mortgage payments in five years would increase by about $500 a month - to some $1,560 from about $1,060, according to estimates by Cathie Jackson, who owns Mortgage Options, the broker who arranged Mr. Gardner's loan. But if rates spiked to 10.25 percent, as they did in the late 1980's, he could end up paying almost $1,000 more a month.

UNTIL recently, interest-only mortgages were the preserve of more affluent borrowers, people with solid or "prime" credit histories and substantial resources, including high incomes relative to the size of their total debt payments. They mostly used I.O. mortgages, as they are called, to refinance and extract cash from their homes.

But as home prices have continued to soar, lenders have aggressively pushed interest-only mortgages down-market. According to the Mortgage Bankers Association, typical home buyers using interest-only adjustable-rate mortgages could afford to borrow some $50,000 more than they could with standard 30-year fixed loans - and still make the same initial monthly payments. So banks are offering the new products as an instrument of choice for potential buyers who could not otherwise afford a home.

In the subprime market - where borrowers have low credit scores, higher debt-to-income ratios and, often, little cash to make a down payment - interest-only loans soared from virtually nothing two years ago to about a quarter of all new mortgages in the first half of this year.

"The most direct contributor to this is housing prices," said David Liu, a mortgage strategist at UBS, the investment bank. "Average income definitely did not keep pace with home-price appreciation. The only way for buyers to afford a house is to get a bigger loan."

One of the first banks to take the I.O. mortgages down-market was First Franklin, a unit of the National City Corporation in Cleveland. Its specialty is what it calls the nonprime market, essentially home buyers with better credit ratings than typical subprime borrowers but who cannot afford a down payment.

First Franklin has had success selling interest-only mortgages that it promotes as a way to "reduce monthly payments, reduce debt-to-income ratios and boost loan amounts." Today, such loans are more than half of its new mortgages, up from 27 percent two years ago.

First Franklin offers 100 percent financing that its Web site suggests is "ideal for first-time and low-cash buyers," and even 103 percent financing for buyers "to shrink their out-of-pocket expenses or to maximize purchase power."

John Gellhausen, vice president for consumer finance at National City, who is in charge of the First Franklin unit, said customers using interest-only loans were not necessarily financially troubled. They just have better things to do with their money, he said, than make a down payment on a home or pay the principal on the mortgage.

Maybe so. But many First Franklin customers also use interest-only mortgages to push their borrowing and buying power as far as it will go. On average, they borrow 94 percent of the value of their homes, mostly through a second fixed-rate loan for the down payment. Even though they are paying only interest, they devote a whopping 45 percent, on average, of their income to debt service.

By comparison, according to a UBS analysis, subprime borrowers using 30-year fixed-rate mortgages borrow, on average, slightly more than 75 percent of the value of their home and devote a more manageable 38.8 percent of their income to debt payments.

As these new products proliferate at the bottom end of the housing market, the risk is that borrowers will extend themselves, chasing houses higher and higher up the price scale. That would be somewhat akin to a low-income dishwasher buying stocks on margin at the height of the dot-com bubble.

Buyers using interest-only subprime loans have decidedly riskier profiles. They typically borrow a bigger percentage of the value of their homes, and earmark a larger slice of income to pay their debts. Most of these mortgages keep the interest rate fixed and allow interest-only payments for just two or three years, according to UBS.

That could soon expose borrowers to higher mortgage payments. In fact, interest rates - especially the short-term rates that determine the rate on adjustable-rate mortgages - are already rising sharply. If house prices take a nose dive, these buyers may find themselves squeezed between growing debt payments and a devalued asset.

"They are selling it to you because it is a stretch for you to make the payment on a traditional mortgage," said Kathleen Keest, senior policy counsel at the Center for Responsible Lending in Durham, N.C. "That means that you are looking at more home than you can afford. When, five years down the road, the loans switch to amortizing, which is likely to be at the same time that interest rates are rising, you are going to be hit by a payment shock."

Nonetheless, both buyers and their financiers seem sanguine about the risk. Most buyers trust that they will have sold or refinanced their home before the payment shock kicks in, taking advantage of appreciation to build equity and to land a new mortgage on better terms. "Very few people will still have these mortgages by the time the adjustment occurs," said Ms. Jackson, who is also president of the Nevada Association of Mortgage Professionals.

Besides, for many middle-income buyers, the choice is often between an interest-only adjustable-rate mortgage and not getting the home. In California, for example, one needs to earn $125,870 a year to qualify for a standard mortgage to buy a median-priced home, which currently costs $542,720. Only 16 percent of Californians make that kind of money.

Kristi Borean, who owns Highland Financial, a mortgage broker in Murphy, Calif., noted that the price of an entry-level home in her area was rising above $300,000, up from a $90,000-to-$120,000 range 10 years ago. Not surprisingly, she said, the profile of the first-time home buyer has radically changed. To qualify for a standard loan for an entry-level house, Ms. Borean said, a household must have no other debt and needs at least "two decent jobs - say a teacher and a policeman."

"Ten years ago, entry-level buyers were waitresses and gas station attendants," she added. "Today they are out of the picture. They will rent until their parents die and leave them their house."

First-time home buyers are stretching the most. Nationwide, the typical first-time buyer earns only about 70 percent of the income needed to qualify for a standard mortgage to buy a typical entry-level home with 10 percent down, according to the National Association of Realtors.

For Mr. Gardner in Reno, the interest-only mortgage was essential. The total monthly payment of $1,300, including taxes and homeowners' fees, was about a third of his and his wife's monthly income. Had he sought a standard, fixed-rate mortgage, he estimates, it would have been about $300 higher, and he might not have qualified for the loan.

NEARBY, in Carson City, Erica Hall splits her time between full-time study at the local community college and a $1,300-a-month job in the reservations department at Harrah's Casino Hotel. She recently closed on a $135,500 condo but she said she could not have afforded it with a standard mortgage. Ms. Hall, who is 20, managed to close the deal with a 30-year mortgage that is interest-only for 10 years. That pulled down the monthly mortgage payment to just over $600. And while she said she expects to be able to refinance before her rate starts fluctuating and her amortization payments kick in, she acknowledged that her finances were already "a teeny bit stretched."

Many home buyers may be overconfident in their ability to refinance their way out of a future mortgage squeeze. Their assumption is a rosy one - that home prices will continue on their upward path, or at least not decline, and that interest rates will not rise too far.

But if the housing market tanks, as a growing number of skeptics expects, refinancing or selling into a falling market with higher interest rates won't be easy. As Bette Dobkin, a real estate agent for Coldwell Banker in Arcata, Calif., noted: "Everyone's fear is what happens when rates go up and people are stuck."

So is the market poised for a wave of home repossessions? For the moment, interest-only mortgages are performing splendidly, even among subprime borrowers, showing lower delinquency rates than those of standard fixed-rate loans. But few of these interest-only loans have hit the payment shocks of amortization or higher interest rates.

While there is no exact parallel for the current explosion of creative mortgages in the subprime market, there are precedents that might give bankers some pause. "We have had high default outcomes associated with instruments that were heavily used by low-income people," said Ms. Wachter of Wharton.

She recalled two programs started by Congress in 1968 to stimulate low-income homeownership through mortgages that required only symbolic down payments and had very low, subsidized interest rates. Of nearly one million mortgages issued through the two programs, nearly 18 percent defaulted.

But if the latest doomsday forecasts are right - and house prices dive while interest rates soar- there may be a silver lining of sorts for homeowners with interest-only adjustable-rate mortgages.

Bob Tremble, who owns Fairview Mortgage, a small mortgage broker in the upscale gated community of Coto de Caza, near Mission Viejo in Orange County, California, observes that buyers who finance 100 percent of their homes with interest-only mortgages are likely to have no financial stake in the homes. If rates rise and the homes are repossessed, they will lose nothing.

"The really big risk is on the part of the lender," Mr. Tremble said. "Lenders have more to lose than borrowers."

Friday, August 26, 2005

But don't let me burst your bubble

By Bill Maher

August 26, 2005

You don't have to remember history, but you do have to remember Thursday. The bursting of the Nasdaq bubble was only five years ago. People lost a trillion dollars. And here we are today with real estate prices across the country that could aptly be compared to Courtney Love: irrationally high and about to collapse.

I don't want to say there's a housing bubble, but I had a refrigerator delivered this morning and a homeless guy offered me $3 million for the box. Not to burst your bubble, but all bubbles do burst. And we learned this recently. It's not just that grandma was alive the last time it happened. You were alive. Eminem was on the radio. Just like now because, again, it wasn't that long ago.

You know, one argument hurled against marijuana use is that it affects your short-term memory. You know, one argument hurled against marijuana use is that it affects your short-term memory. If that's true, then a) Americans, or b) the real estate market, must be pretty high.

But let me correct one thing: not all Americans. This bubble isn't all across the country. Score one here for the red states, because it's apparently only in the savvy, liberal do-gooder coastal blue areas that greed and stupidity have taken over.

When real estate collapses, people will go bankrupt, which will take down the banks, which all along have really owned their homes, which will bring down the markets and then the dollar. And the GOP will win an election based on renaming Amtrak the Jesus Choo Choo and the whole thing will fester to the point where Plan B is to live in caves and barter.

Luckily for me all my money is tied up in Google, sunscreen and guns.

We're a nation swimming in debt, and when we reach our credit limits we artificially inflate the prices of our homes and borrow more. People are refinancing -- borrowing on the equity that doesn't really exist and will soon go down -- to treat themselves to extravagances, like a full tank of gas.

And do you know who holds most of our national debt? Asians. The only thing standing between us and foreclosure is the fact that Angelina Jolie is holding most of their children.

But I digress. The point was about how supposedly intellectual, superior coastal elites are the ones dumping thousands into mortgages they can't afford, proving once and for all how much people will pay not to live in Kansas.

Well, that is kind of true. In a recent survey here in my beloved adopted state of California, nine out of 10 people said they had or would give up everything to live somewhere where they might see porn stars at the gas station.

And people are so impressed with themselves about the prices: "Wow, you bought a home in Stockton 20 years ago and now it's worth $1 million? You're Nostradamus!" Except this Nostradamus is the guy who lost a fortune in 2000 when went belly-up.

What don't Americans get about "you're only rich on paper?" If there's one thing that Republicans schooled in the ways of Wall Street have taught us, it's this: Don't spend money you don't have; spend money other people don't have.