Whats that sound.. Popping bubbles ??

[LivinLOS]

As I have said a few times I think real estate is going to fall and the chances of a severe decline are stronger than a gentle one.. The leverage of zero down interest only mortgates and amount of morgate load per income is higher than ever seen before..

The article below (partial posted full is at the link) was on my email lists this am and collects a lot of data on the initial writing on the wall.. The implications of a housing market decline and the increased probability of a recession also have a knock on effect to us here on Phuket.. When people are pinched financially holidays are the classic luxury that can be downsized, or second holiday homes and retirements can be liquidated etc.

The world has had a 20 year boom and Phuket has had a 20 year period of stunning and accelerating growth. Is a global recession coming and of so what effect will that have on tourism and the fortunes of those involved in it.. Its not certain but its definately an increasingly possible outcome.

http://safehaven.com/article-5151.htm

The housing market in general. That some formerly hot markets are imploding is common knowledge by now. But it's still fun to see the numbers and hear the stories.

From the Honolulu Star Bulletin, May 6: Honolulu home sales down 41% year over year in April, and Maui condo sales off by 50%.

The New York Times, May 9: The inventory of homes for sale in the Fort Lauderdale area has quadrupled, year over year, to 20,000.

Dow Jones Newswire, May 8: "Preliminary reports from builders Hovnanian Enterprises Inc. (HOV) and Toll Brothers Inc. (TOL), whose quarters ended April 30, indicate demand is falling faster and more sharply than previously thought, and that the pullback is no longer confined to hot markets that had seen sharp home price run-ups in the past few years. Hovnanian's orders fell 20% in its fiscal second quarter - an about-face from the 5.5% order growth reported in its fiscal first quarter. Toll's orders declined 32%, which is steeper than the 29% dropoff posted in its fiscal first quarter.

For Toll, the order decline was across the board as all of its geographical regions reported year-over-year decreases in demand. Chairman Robert Toll attributed the declining demand to higher cancellations and to speculative buyers who are dropping out of the market and putting the homes they recently acquired up for sale. Although Toll said his company doesn't sell to speculators, 'we have certainly been impacted by the overall increase in supply.'"

According to real estate consultancy Majestic Research, new-home sales in all 40 markets it tracks fell during February and March. Some examples:

Washington, D.C., -22%
Tucson, Ariz. -50%
Phoenix -37%

The major homebuilders, instead of pulling back in the face of falling sales, are apparently trying to make it up on volume. According to Dow Jones, "Toll Brothers plans to open 80 communities during the next six months, and expects to wrap up fiscal 2006 with 295 subdivisions, up from 230 in fiscal 2005."

As all those adjustable rate mortgages ratchet up, it's getting harder for last year's marginal homebuyers to make ends meet. According to real estate consultancy RealtyTrac, "A total of 323,102 properties nationwide entered some stage of foreclosure in the first quarter of 2006, a 72 percent year-over-year increase from the first quarter of 2005 and a 38 percent increase from the previous quarter."

The California housing market. 80% of San Diego homebuyers chose adjustable rate mortgages in both 2004 and 2005. Home sales are down 46% in Sacramento, 30% in San Francisco, and 50% in Los Angeles/Long Beach, year-over-year. From the New York Times: "A house at 57 Marina Boulevard in San Rafael, across the bay from San Francisco, was originally listed at $1.45 million. The owner recently dropped the price to $949,000 when a competing house on the same street lowered its price to $959,000, from $989,000...In Marin County, the prices of about a quarter of all listings have been reduced....In Santa Cruz, inventories have tripled to 124 days, from 42 days."

As for the idea that California's population will keep growing because everyone wants to live there, real estate analyst Rich Toscano at Piggington.com notes that San Diego's population actually shrank in 2005. "But it's even worse than that, because much of the population growth of recent years has been due to births. Until Countrywide goes live with their Fetal Lending Division, we can probably just focus on migration: people moving in and out of San Diego (or, put another way, population growth with the effects of births and deaths removed)." Analyzed this way, it turns out that for three years running, more people have moved out of San Diego than have moved in -- and the trend is strengthening.

More from the New York Times: "For the first time in nearly a decade, you can smell the anxiety. The listing agent for a four-bedroom home on Scripps Trail in San Diego informed other agents in the multiple-listing service that a "very, very motivated seller will entertain all reasonable offers" and "will help with closing costs." The house was listed in September at $810,000. After a previous price cut, the seller is now willing to entertain offers as low as $685,000. But they didn't attract much interest...Inventories in the San Diego area have risen 25 percent in the last year, to more than 19,000 unsold homes, a record."

And on a personal note, my little town in northern Idaho is crawling with transplanted Californians. A neighbor (and recent immigrant from Sonoma) is a real estate appraiser, and says that the last five houses he's done have been for Californians moving in.

A final word from Rich Toscano: "There has been zero upward price pressure this spring, for the first spring in who knows how long. It looks like things are truly going to start falling apart."

Classic short. What does all this mean for banks? Well, since they make money by lending it out and getting paid back, a crash in home sales and a spike in defaults would seem to be a bad thing. As Fleckenstein Capital's Bill Fleckenstein put it in early April:

"It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won't get hurt). The lenders will bear the brunt of the pain, because in many cases, they loaned the entire purchase prices of many homes. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way."

[Red Bull]

Lil, I am nowhere near your knowledge in this stuff so just wondering if you think this decline will affect only the States or is it a global decline? Here in Vancouver, house sales have been seeing double digit growth for years now. Just curious if you think the decline in the States is just the pre-cursor to other countries or do you think it will be limited?

[LivinLOS]

I think it will be in many economies.. I am not as familair with news or data on Canada but I see the UK and Ireland being very ripe for a housing decline..

The worst hit will be the hottest markets like florida, california and NY IMHO, also the most leveraged markets where credit has been extended to people who would never have considered eligible for such amounts historically... I saw a graph in the last couple of days on one of my sites and cant now find it.. However it showed household morgate debt as a function of income.. In the last couple of years its just streaked off the scale compared with any time in US recent history.. All of the debt load of the 80's was nothing looking at this data and as interest rates rise so does forclosures and forced selling.. All the flippers and speculators playing with cheap credit and 0 down and interest only payments will really sting the market when forced to sell (buffet said something to this effect just a day or two ago).. All of this becuase of Easy Al's credit flooding the market.

Possible double digit interest rates and recession will be painful in all markets and global economies are so linked I can see it being felt globally but of course some more than others.. Canada being so close will almost certainly feel some effect but I am not aware of your markets.

America has a negative savings rate and unprecidented debt.. the whole economy has been propped up on the consumer but the consumer has just tapped that money in home equity refinancing leaving them even worse tapped out.. The sad facts are that the money they spent didnt remain entirely within the US economy but the trade deficits have taken all that cash to the Chinese.. The whole house of cards looks negative IMHO.

[LivinLOS]

http://www.kitco.com/ind/Galakoutis/may022006.html

I came across a mind-boggling statistic recently in a Washington Post article by Kirstin Downey that I thought I would share. It indicated that roughly two-thirds of all people who purchased homes in the Washington area in 2005 used adjustable rate interest-only or option mortgages, up from 2.2 percent in 2000.

Mortgage brokers are, not surprisingly, quite concerned about any regulation that might disturb this most surreal of relationships, not to mention their very profitable gravy train ride. They argue that borrowers are taking out these types of loans because it is the only way they can afford to buy a home. One broker quoted in the story went as far as to say that without these types of products homes could not be purchased, and any action to remove them would in fact precipitate a “disaster of epic proportions” in the housing market...


...The home for instance, throughout all of time the symbol of family and stability that most strived to own free and clear, has been reduced to nothing more than a vehicle of speculation by the so-called "flippers" as well as ordinary Americans; individuals whose actions one might argue are far removed from the great generation of Americans that built this country into a superpower. The Federal Reserve, enablers of this false prosperity by conditioning the populace to embrace credit and run up debts like drunken sailors, is revered by consumers that don't know any better, and cheered on by Wall Street pundits who continue to profit the further up the creek Americans paddle.

You hear many people argue that 'people always need a place to live' and that 'a home is more than a financial asset'.. However the last few years have seen that change as Americans have used thier home like an ATM machine financing a consumer lifestyle they cant afford by going further into debt.. Also historically a home has cost a certain multiple of earnings (lets face it people have to be able to buy homes and pay for them so it makes sense that house prices fit in like with price and wage inflation) where right now again house prices are off the scale if factored in against earnings.. Markets move in waves and from the highest peaks they usually go to the lowest troughs.

If I had real balls I would be shorting the home builders..

[LivinLOS]

Oh and just to add emphasis to that Washington stat about 2/3rds of homes mortgated on interest only credit vehicles.. This from the WP (not normally one for hyperbole)..

http://www.washingtonpost.com/wp-dyn...050501516.html

Sold -- or Not: When Home Buyers Walk
Some Will Give Up Thousands to Get Out of This Market

By Sandra Fleishman
Washington Post Staff Writer
Saturday, May 6, 2006; Page D01

As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits.

Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship -- more than double last year's rate, according to one research firm, and perhaps as high as one in three new-home buyers in some places. And nationally, some big builders are beginning to report cancellation rates upward of 25 percent...

Some commentary on this piece and Buffets comments http://www.capuchinomics.com/news/in...id=242&Itemid=

Sorry to those for whom this is not interesting and not Thailand related.. But money asset proterction and retirement effect how soon many can get here !!

[steve@thaib]

I've not read the articles, just what you have posted, but I can't see the UK going tits up in quite the same way. Our lenders have been burned once that way and are slightly more conservative these days.

Things have changed though, interest only mortgages are common and the multiples-of-income have been pushed up. I think our economy is pretty stable though and it's hard to see what could cause double-digit interest rates again. We would possibly have been vulnerable if we had joined the euro, but I think that has been put to bed now; hopefully for good.

We have a different problem in this country, in that there are not enough houses in the places where people need to live, and are trying to build our way out of it. Until we have enough houses I think the housing market will remain fairly buoyant.

[Mav]

Property market in Melbourne is pretty flat...although properties less than 10kms (not talking about apartments) are still bringing plenty of activity........l would be extremely surprised if the market would drop....apartments have a little, but bcoz there has been a lot built in the last 10 years.

Building industry has slowed down....but it had too.

Equities investing is definitely the way to go for the next 2/3 years l would think.

Oz economy is pretty bouyant with another massive surplus just announced by the Liberal Government.....decent tax cuts handed down.....recession here ?....can't see it...Reserve Bank did lift interest rates last week to make sure people slow down the spending....it has been out of control last few years.

[Sirgezza]

Many people in the UK now have fixed rate mortgages, so a hike in interest rates won't affect them until the fixed rate period finishes (3 or 5 year terms). However there is a tremendous amount of debt on credit cards, overdrafts and loans. A shift upwards in rates would may lead to defaults.

The UK economy has been pretty stable since Labour came in to power (amazingly), so the boom/bust of the Thatcher 80's has not been repeated.

The biggest threat to the housing market is if people lose jobs and cannot repay mortgages. The upside is as Steve said regarding the shortage of housing in the UK. This I feel will get worse as the number of people entering the UK is higher than the amount of emigration.

A fall in the price of properties will be a buying opportunity for buy to let developers (dependent on if interest rates rise).

[Red Bull]

Thanks for that Lil.

There are definately similarities to the Vancouver market. It has been cheaper for some people to buy rather than rent here for years now. People who could barely afford the low-rate mortgages were buying-in and soon as their terms are up, I can see many foreclosures.

I have been thinking for awhile that the market would slow down but it just keeps going... I got sick of where I was living so just bought my first place 1 month ago. I am watching with a little more interest these days...

[steve@thaib]

Originally Posted by gez

Many people in the UK now have fixed rate mortgages, so a hike in interest rates won't affect them until the fixed rate period finishes (3 or 5 year terms). However there is a tremendous amount of debt on credit cards, overdrafts and loans. A shift upwards in rates would may lead to defaults.

The UK economy has been pretty stable since Labour came in to power (amazingly), so the boom/bust of the Thatcher 80's has not been repeated.

The biggest threat to the housing market is if people lose jobs and cannot repay mortgages. The upside is as Steve said regarding the shortage of housing in the UK. This I feel will get worse as the number of people entering the UK is higher than the amount of emigration.

A fall in the price of properties will be a buying opportunity for buy to let developers (dependent on if interest rates rise).

We are still in solid buy-to-let situations in many areas; property can still yield 6-10% where I live so it's still pretty healthy I think, and people are still buying in.

I hear loads of items about big consumer debts with us owing an average of 20k in unsecured loans but, to me, that's just the media looking for a headline. They never break it down; take car loans out of there and it would tumble.

I think the average CC debt is more like 2k.

[Sirgezza]

I take your point that a lot of debt may be for car loans, but at the end of the day it is a debt. The reason why the person took on the loan is presumably because they do not have the cash to pay for the car. They are in effect living beyond their means. If interest rates go up, they are probably locked in, as the exit charges on the loans are pretty high. Also the cars could be worth less than what they owe due to depreciation.

I remember the property crash that started in 1989. All was rosy and then things turned. People had overstretched themselves with debt, interest rates started to rise, people lost their jobs, lenders repossessed homes, the whole thing was a spiral downwards.

However we have had low inflation for several years and this hopefully will help ensure that interest rates won't increase dramatically.

[marc26]

Originally Posted by gez

I take your point that a lot of debt may be for car loans, but at the end of the day it is a debt. The reason why the person took on the loan is presumably because they do not have the cash to pay for the car. They are in effect living beyond their means. If interest rates go up, they are probably locked in, as the exit charges on the loans are pretty high. Also the cars could be worth less than what they owe due to depreciation.

I remember the property crash that started in 1989. All was rosy and then things turned. People had overstretched themselves with debt, interest rates started to rise, people lost their jobs, lenders repossessed homes, the whole thing was a spiral downwards.

However we have had low inflation for several years and this hopefully will help ensure that interest rates won't increase dramatically.

gez,
to say that people take out car loans because they dont have the money to pay for the car. why would anyone, with interest rates so low, tie up 20-25k when they can earn interest on that money in other places?

[dawsey]

Originally Posted by marc26

gez,
to say that people take out car loans because they dont have the money to pay for the car. why would anyone, with interest rates so low, tie up 20-25k when they can earn interest on that money in other places?

Thats the whole point Paul. Interest rates are low ,but Gez is talking about people who buy cars without having the money to pay outright,hence buying on credit.If they had the money Im sure they would pay upfront without the need of a loan.

[Sirgezza]

Originally Posted by marc26

gez,
to say that people take out car loans because they dont have the money to pay for the car. why would anyone, with interest rates so low, tie up 20-25k when they can earn interest on that money in other places?

Interest rates on loans are higher than interest rates on savings accounts - that's how banks make their money

If you (or anyone else) knows it to be different, let me know - I'd make millions

[Rex7777]

So, how does one get into the business of borrowing money long term, from Japan, for zero interest or whateer, and then turning around and loaning it to the USA for, say, 5%?

Rex

[LivinLOS]

Your prepared for the currency risk ???

You would have been wiped out on that trade this year...

[marc26]

Originally Posted by dawsey

Thats the whole point Paul. Interest rates are low ,but Gez is talking about people who buy cars without having the money to pay outright,hence buying on credit.If they had the money Im sure they would pay upfront without the need of a loan.

i dont know anyone who would pay for a car upfront.

[marc26]

Originally Posted by gez

Interest rates on loans are higher than interest rates on savings accounts - that's how banks make their money

If you (or anyone else) knows it to be different, let me know - I'd make millions

in the states, car dealerships are begging you to take their cars
gmc has had plenty of 0% financing promotions in the last few years

you gusy in the UK buy your cars upfront?

[LivinLOS]

Thats America Paul..

We dont get nearly the same deals (unless the price is equally higher to compensate).. American debt based economic stystems are truly scary..

In the UK theres a far greater system of using company cars to achieve tax breaks and amortize costs.. I havent been in the corp sides in the states but in the uk a car as part of the package and what car grade your given are all a big part of the petty company structure thing..

I have never had any car on the slate.. From low end to super cars.. Every one paid for in cash.. Then again I am a cash on the nail kinda guy (and no one would employ me for a company car).. Was taught to be scared of debt and the drain of interest.

[Miami]

Originally Posted by marc26

i dont know anyone who would pay for a car upfront.

Well, you do now. But then, I'm not normal in a lot of ways.

[Sirgezza]

Originally Posted by marc26

in the states, car dealerships are begging you to take their cars
gmc has had plenty of 0% financing promotions in the last few years

you gusy in the UK buy your cars upfront?

LIL has covered company cars. The way of owning a car yourself is either to pay cash upfront (as I do) or get a car loan. I'm guessing that the best interest rate currently is no lower than 7%. The best deposit rate is probably around 5%.

There is no such thing as free money. If someone is offering you an interest free deal on a purchase, then they will have built in some form of interest charge. Companies cannot borrow money for nothing, so why would they give credit at no charge. I'm not convinced that it would be just to get the deal.

Apart from mortgages on my properties, I've never had a loan or debt. If you can't afford it, then live without it is my way of thinking. Served me well, 'cos at the age of 41 I'm looking at retirement in a couple of years.