Tuesday, January 29, 2008

Home Prices Decline at Record Rates

Courtesy of WSJOnline.com
January 29, 2008 12:37 p.m.

A closely watched gauge of U.S. home prices shows they are falling sharply at record rates as a deepening slump in the housing market threatens to damp consumer spending.

Home prices in 10 major metropolitan areas in November were down 8.4% from a year earlier, according to the S&P/Case-Shiller home-price indexes, released Tuesday by credit-rating firm Standard & Poor's. In October, they fell 6.7%, exceeding the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession.

November was the 11th consecutive month of negative annual returns and the 24th straight month of decelerating returns.

Robert Shiller, chief economist at MacroMarkets LLC and co-developer of the index, said, "We reached another grim milestone" in November, as 13 of the 20 metro areas in the 20-city index, all of which have data dating to 1991, hit record price drops as well.

The indexes include some places most affected by the fast-growing home-price bubble during the past few years. Miami home prices were down 15% in November from a year earlier, while prices fell 13% in San Diego, Las Vegas and Detroit.

The expanded 20-city index, which dates back to 2001, fell 7.7% from a year earlier and 2.1% from October. Portland and Seattle are the only two metro areas with year-over-year increases - 1.3% and 1.8%, respectively.

The Case-Shiller Index is now one of the most closely watched measures of home prices. But some economists argue that it paints an overly bleak picture.

Columbia University economist Charles Calomiris has noted that the Case-Shiller Index does not cover the entire U.S. market, "and the omitted parts of the U.S. market seem to be doing better than the included parts."

Mr. Calomiris said an alternative measure -- compiled by the federal Office of Federal Housing Enterprise Oversight -- doesn't show as deep a decline and that may be representative of all markets in the U.S. The Ofheo index, however, only tracks houses with mortgages under $417,000, the ceiling on loans that can be purchased or guaranteed by government-sponsored mortgage giants Fannie Mae or Freddie Mac.

Ofheo said at the end of November that, for the first time in nearly 13 years, U.S. home prices fell. A seasonally adjusted index that tracks value of homes purchased and refinanced was 0.4% lower in the third quarter than in the previous quarter, though it was 1.8% above year-ago levels.

Rising home prices plus refinancing options and home-equity loans previously allowed homeowners to squeeze money out of their homes to finance their spending - an important trend because consumer spending fuels about 70% of economic growth. Economists now worry that falling home prices will prompt consumers to pull back on spending enough to slow growth or even tip the economy into recession.

Nevertheless, people who bought their homes several years ago typically are sitting on sizable gains in most of the country. Home sales began to slow in mid-2005. Prices leveled off then started declining in 2006. During the past year, mortgage defaults have soared, leading to rapid growth in foreclosures.

Write to Kathy Shwiff at kathy.shwiff@dowjones.com and Kevin Kingsbury at kevin.kingsbury@dowjones.com

Sunday, January 20, 2008

Home Resales Probably Fell in December: U.S. Economy Preview

By Courtney Schlisserman

Jan. 20 (Bloomberg) -- Sales of existing homes in the U.S. probably fell in December, capping the biggest yearly slump in almost a generation, economists said before a report this week.

Purchases fell 1 percent last month to a 4.95 million rate, the fewest since comparable records began in 1999, according to the median forecast in a Bloomberg News survey ahead of the National Association of Realtors' report due Jan. 24.

Falling property values and tougher borrowing rules will lead to more foreclosures and keep the real-estate market in recession for most of this year, economists said. A housing- related slump in consumer spending poses the biggest risk to the economic expansion in coming months.

``We're still on the way down in housing,'' said Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The first half of the year is going to be crucial to determining whether we have a recession.''

Sales of existing homes probably dropped 13 percent last year, the most since 1989, according to a forecast by the real- estate agents group.

The same day as the sales report, the Labor Department is scheduled to release its weekly figures on first-time jobless claims. Filings for unemployment benefits probably increased to 320,000 from 301,000 the prior week, according to the survey median.

An unexpected decline in the number of claims in recent weeks caused many economists to question whether the government has accurately monitored the situation. It's often difficult for the Labor Department to adjust the data during holidays, adding to volatility in the readings, economist said.

Claims May Rise

Economists are expecting to see a pickup in claims to confirm the labor market has weakened. The jobless rate jumped up to 5 percent in December.

``We've been a little puzzled by the continued strength of the overall labor market, particularly claims,'' Peter Hooper, chairman of the American Bankers Association's Economic Advisory Committee, said at a press conference on Jan. 18. ``Our sense is the labor market is likely softening.''

Hooper is chief economist at Deutsche Bank Securities Inc.

The deepening housing slump is one of the reasons the job market has deteriorated. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage-backed bonds, said last week it will eliminate 1,300 jobs in the firm's fourth round of cuts resulting from the collapse of the mortgage market.

Lehman, the fourth-largest U.S. securities firm, cut 2,450 jobs last year by shutting its subprime-mortgage unit.

Construction Drops

Builders broke ground in December on fewer houses than forecast, making last year's decline in homebuilding the worst in almost three decades, a report from the Commerce Department last week showed. For all of 2007, starts were down 25 percent, the biggest decline since 1980.

Spending on residential construction projects will drop 21 percent this year after declining 17 percent in 2007, according to a forecast by Lehman economists.

Federal Reserve Chairman Ben S. Bernanke said earlier this month that the central bank would take ``substantive'' action in response to the increasing risk of slower growth. Central bankers will cut interest rates by at least half a percentage point when they meet this month, according to futures trading.

President George W. Bush last week proposed a growth package of as much as $150 billion to counter escalating risks to the economic expansion.

``The biggest issue we have in our economy is housing,'' Treasury Secretary Henry Paulson told reporters on Jan. 18. The stimulus proposals will help the economy ``better withstand and weather effects that are coming about largely as a result of this decline in home prices and the housing slump.''

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
Initial Claims ,000's 1/24 Jan. 20 301 320
Cont. Claims ,000's 1/24 Jan. 13 2751 2728
Exist Homes Mlns 1/24 Dec. 5.00 4.95
Exist Homes MOM% 1/24 Dec. 0.4% -1.0%
To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: January 20, 2008 08:52 EST

Tuesday, January 15, 2008

Subprime Nation

By Patrick J. Buchanan

Since it began to give credit ratings to nations in 1917, Moody's has rated the United States triple-A. U.S. Treasury bonds have been seen as the most secure investment on earth. When crises erupt, nervous money seeks out the world's great safe harbor, the United States. That reputation is now in peril.

Last week, Moody's warned that if the United States fails to rein in the soaring cost of Social Security, Medicare and Medicaid, the nation's credit rating will be down-graded within a decade.

Our political parties seem oblivious. Republicans, save Ron Paul, are all promising to expand the U.S. military and maintain all of our worldwide commitments to defend and subsidize scores of nations.

Democrats, with entitlement costs drowning the federal budget in red ink, are proposing a new entitlement – universal health coverage for the near 50 million who do not have it – another magnet for illegal aliens. Moody's is telling America it needs a time of austerity, while the U.S. government is behaving like the governments we used to bail out.

California has already hit the wall. With an economy as large as a G-8 nation, the Golden State is looking at a $14 billion deficit in 2009 and a $3 billion shortfall in 2008. Gov. Schwarzenegger has called for slashing prison staff by 6,000, including 2,000 guards, early release of 22,000 inmates, closing four dozen state parks and a 10 percent across-the-board cut in all state agencies. The Democratic legislature is demanding tax hikes, which would drive more taxpayers back over the mountains whence their fathers came.

Meanwhile, Washington drifts mindlessly toward the maelstrom. With the dollar sinking, oil surging to $100 a barrel, the Dow having its worst January in memory, foreclosures mounting, credit card debt going rotten, and consumers and businesses unable or unwilling to borrow, we appear headed into recession.

If so, tax revenue will fall and spending on unemployment will surge. The price of the stimulus packages both parties are preparing will further add to the deficit and further imperil the U.S. credit rating. This all comes in the year that the first of the baby boomers, born in 1946, reach early retirement and eligibility for Social Security.

To stave off recession, the Fed appears anxious to slash interest rates another half-point, if not more. That will further weaken the dollar and raise the costs of the imports to which we have become addicted. While all this is bad news for the Republicans, it is worse news for the republic. As we save nothing, we must borrow both to pay for the imported oil and foreign manufactures upon which we have become dependent.

We are thus in the position of having to borrow from Europe to defend Europe, of having to borrow from China and Japan to defend Chinese and Japanese access to Gulf oil, and of having to borrow from Arab emirs, sultans and monarchs to make Iraq safe for democracy.

We borrow from the nations we defend so that we may continue to defend them. To question this is an unpardonable heresy called "isolationism."

And the chickens of globalism are coming home to roost.

We let Europe to get away with imposing value-added taxes averaging 15 percent on our exports to them, while they rebate that value-added tax on their exports to us. Thus, the euro has almost doubled in value against the dollar in the Bush years, as NATO Europe begins to bail out on Iraq and Afghanistan.

We sat still as Japan protected her markets and dumped high quality goods into ours and China undervalued its currency to suck jobs, technology and factories out of the United States. Now, China and Japan have $2 trillion in cash reserves. The Arabs have an equal amount of petrodollars. Both are headed here to spend their depreciating dollars snapping up U.S. assets – banks, ports, highways, defense contractors.

America, to pay her bills, has begun to sell herself to the world.

Its balance sheet gutted by the subprime mortgage crisis, Citicorp got a $7.5 billion injection from Abu Dhabi and is now fishing for $1 billion from Kuwait and $9 billion from China. Beijing has put $5 billion into Morgan Stanley and bought heavily into Barclays Bank.

Merrill-Lynch, ravaged by subprime mortgage losses, sold part of itself to Singapore for $7.5 billion and is seeking another $3 billion to $4 billion from the Arabs. Swiss-based UBS, taking a near $15 billion write-down in subprime mortgages, has gotten an infusion of $10 billion from Singapore.

Bain Capital is partnering with China's Huawei Technologies in a buyout of 3Com, the U.S. company that provides the technology that protects Pentagon computers from Chinese hackers.

This self-indulgent generation has borrowed itself into unpayable debt. Now the folks from whom we borrowed to buy all that oil and all those cars, electronics and clothes are coming to buy the country we inherited. We are prodigal sons, and the day of reckoning approaches.

Thursday, January 10, 2008

Mortgage-Meltdown Upside: Lower Rates

Brett Arends writes R.O.I., or Return On Investment, daily for the Online Journal, dissecting where personal finance meets current affairs, and how the latest news can make you money."

A lot of the time, that comes from going against the herd.

Brett has spent his life rifling through department store bargain bins in London, Boston and New York, and that's pretty much the same way he views markets. A good stock-market panic yields the cheapest deals. And there's only one thing better: a scandal. That's when you get a firesale. R.O.I. will be looking for bargains anywhere, and for opportunities on the spending side as well.

It isn't really true that $1,000 saved is just $1,000 earned. If you're in the top income-tax bracket, it's $1,500 earned. And salted away for 30 years in a tax-deferred account, $1,000 saved is nearly $9,000 towards your retirement. That's some return.

Mortgage-Meltdown Upside: Lower Rates
January 10, 2008 7:23 p.m.

The doom and misery enveloping Wall Street brings with it a cheerier by-product: Cheaper mortgages.

The rate on standard 30-year, fixed-rate loans has "fallen about half a percentage point in the last two weeks owing to the dour economic outlook," says Greg McBride, senior analyst at Bankrate.com.

If you are borrowing less than $417,000, the limit backed by Federal housing agencies, and you are making a down payment of 20% or more, you can get a 30-year loan mortgage for well under 6%.

Bankrate.com, which surveys lenders, says the average rate is now 5.88%. As our chart shows, that's well below levels of nearly 7% seen as recently as last summer.

And you can find better if you shop around. Some loans are as low as around 5.5%, including fees.

Of course, everybody's mortgage decision is going to involve a lot of independent variables, including the size of the loan and the down payment, and whether to get a fixed or variable rate. Interest rates are higher on "jumbo" loans of more than $417,000, and where the down payment is less than 20% of the home's value. There's no such thing as one-size-fits-all advice.

The reason mortgage rates have fallen so far isn't hard to find: Deepening fears over the economy.

Nervous investors have shifted their money from riskier assets into U.S. government bonds, bidding up the price of the bonds and thereby lowering the yield. And that brings down the cost of long-term capital for other loans, including mortgages.

Ten-year Treasurys now pay a measly 3.79%, compared to 5.3% earlier last year. The yield on the 30-year has fallen from 5.4% to 4.32%.

Given these declines in Treasury yields, mortgage rates should probably be even lower. But the lending industry's obvious crisis has gummed up the works.

Are mortgages rates going to fall further? Should you wait to refinance?

Maybe. But rates right now are very cheap by historic standards. The law of mean reversion would suggest they are more likely to rise from this point than to fall further.

Anything from a boost in economic sentiment to fears about inflation would be likely to raise long-term interest rates.

You can usually have it both ways -- sort of. You can generally pay a fee to lock in a good interest rate for a period. If rates fall still further, you surrender the fee, but you can then take advantage of the lower rate.

Overall, cutting your cost of capital is probably the easiest way to boost your net worth. On a $400,000 loan, cutting your interest rate from 6.8% to 5.5% will save you about $4,000 a year before tax -- or about $120,000 over 30 years.

Of course, to make sure switching mortgages is worthwhile you need to factor in fees, points and other costs as well as the interest rate.

Write to Brett Arends at brett.arends@wsj.com

Lennar's New Homes Fetch 60% Less as U.S. Market Slump Deepens

By Bob Ivry

Jan. 10 (Bloomberg) -- Lennar Corp.'s November sale of 11,000 properties in eight states set a price that may mark the bottom for the U.S. housing market: 40 cents on the dollar.

That's how much Morgan Stanley Real Estate paid for an 80 percent stake in the 32 communities, 60 percent less than the price at which the properties were valued just two months earlier. That's also what some investors say they would pay for distressed land, condominiums, homes and whole developments, whether it's now or later this year.

``If you're an opportunistic buyer with enough cash and credit, it will be one of the best opportunities for acquiring property in our lifetime,'' said Jack McCabe, whose McCabe Research & Consulting LLC in Deerfield Beach, Florida, advises hedge funds and other investors on real estate sales.

As the U.S. housing slump drags into its third year, sellers will start cutting prices as much as it takes to find buyers, said Marcel Arsenault, a self-described ``vulture investor.'' Properties will be available to buyers with the financial strength to ride out the slide. Now that a price has been set, all that's left is the waiting.

Arsenault, based in Broomfield, Colorado, bought real estate during the savings-and-loan collapse of the early 1990s. He said he has put together a $200 million fund he expects to expand to $800 million this year to buy distressed condos.

`Eroding by the Minute'

``We're watching Denver, Phoenix, Austin and Tucson, but South Florida is our principal focus,'' said Arsenault, 60. ``If you're a vulture, Florida has more carrion. This stuff is lying on the ground. It's lost life. Some of the stuff in Phoenix is still breathing. Perhaps not for long.''

Arsenault said he and his three partners may buy a block of about 50 new, unsold condominiums in Orlando, Florida. They have a price in mind and they're willing to wait until they get it: 40 cents on the dollar.

``There's a risk to buying too early in the downturn, but buying too expensive is our biggest pitfall,'' he said.

Companies such as Miami-based Lennar, the biggest U.S. homebuilder by revenue, need to generate cash to make up for slowing home sales, especially this time of year, said Vicki Bryan, a Friendswood, Texas-based senior high-yield debt analyst for Gimme Credit LLC.

``They sold land at 40 cents on the dollar and they're happy to get it,'' Bryan said. ``The value of land is eroding by the minute.''

$10,000 an Acre

New-home sales fell to a 12-year low in November as rising foreclosures, increased credit restrictions and a swelling inventory of unsold houses have persuaded potential buyers to wait.

More than half of all U.S. home sales occur in April, May and June, according to Frank Nothaft, chief economist at McLean, Virginia-based Freddie Mac, the No. 2 U.S. mortgage buyer.

About 150 so-called real estate opportunity funds have been formed to buy distressed properties and other assets, a 21 percent increase over the number this time last year and an all- time high, according to Real Estate Alert, a trade publication based in Hoboken, New Jersey.

Fort Worth, Texas-based D.R. Horton Inc., the biggest U.S. homebuilder by market value, sold 20,000 lots on 6,884 acres outside Phoenix to Wolff Co., a closely held real estate investment and development company based in Scottsdale, Arizona, and Langley Properties of Gilbert, Arizona, in November.

The price, $70 million, or about $10,000 an acre, was lower than the sale price for the same land that Horton had in escrow six months ago, said Wolff Co-President Tim Wolff.

Land Inventory

``We are going to wait for as long as it takes the market to recover and figure it out from there,'' Wolff said.

The sale reduced the amount of time D.R. Horton calculates it would take to sell off all its land by about six months, to five years, Chief Executive Officer Donald Tomnitz said in a November conference call with analysts.

``We're going to be looking to sell land opportunistically,'' Stacey Dwyer, the company's executive vice president and treasurer, said in the call.

Standard Pacific Corp., the worst-performing of the 15 companies in the Standard & Poor's Supercomposite Index of Homebuilders last year, sold more than 2,500 home lots, some ready for building and some raw, in the San Antonio area earlier this week.

``Standard Pacific is reviewing a number of ways to adjust our business to changing market conditions,'' the company said in an e-mailed statement. ``As a part of our plan, we sold most of our excess land in San Antonio and will continue to explore ways to optimize our business, while continuing to provide our customers with high quality homes at an excellent value.''

`Aggressive Right Now'

The buyers were Cleveland-based Forest City Enterprises Inc. and closely held Covington Capital Corp. The price wasn't disclosed.

``We're very aggressive right now because the homebuilders are in survival mode,'' said Ken Sheer, chief executive officer of Santa Monica, California-based Covington. ``Like any other business group that has some softness, everybody is scrambling to survive. The guys left standing are the guys who are going to be kings of the hill.''

Lawrence Gottesdiener, chairman of Northland Investment Corp. in Newton, Massachusetts, pounced last week when New York- based Tarragon Corp. offered five apartment complexes in Florida and another in South Carolina for $156 million.

``I could say I bought for 50 cents on the dollar of last year's price, because I did, but I think that's a little bit of hyperbole because last year's price was last year,'' Gottesdiener said.

`Portfolio Optimization'

Orleans Homebuilders Inc. of Bensalem, Pennsylvania, sold 1,400 lots to nine different buyers in December for $32 million. The book value of the properties was $86 million, the company said in a statement. Orleans also anticipates receiving about $20 million to $25 million in federal income tax refunds as a result of the sales, the statement said.

Most of the lots, which represented about 18 percent of the land the company owned, were in weaker performing communities in Florida, Illinois and Arizona, said Garry Herdler, the company's executive vice president and chief financial officer. Orleans is keeping properties in the Northeast and the Carolinas, areas where prices have held up well on a relative basis, he said.

``We call this strategy portfolio optimization,'' Herdler said in an interview. ``These sales provided cash to repay bank debt, reduced operational costs and allowed us anticipated significant federal tax refunds.''

John Levy, a real estate investment banker in Richmond, Virginia, said he's passed up opportunities in the past to join forces with homebuilding companies. Now he said he's planning a joint venture with a national builder to buy communities abandoned by bankrupt developers in the middle of construction.

``That's where you can buy at the biggest discount,'' Levy said.

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net .

Last Updated: January 10, 2008 00:24 EST

Tuesday, January 08, 2008

U.S. Economy: Pending Sales of Existing Homes Fell in November

By Joe Richter

Jan. 8 (Bloomberg) -- The number of Americans signing contracts to buy previously owned homes fell more than forecast in November, signaling further deterioration in housing.

The National Association of Realtors' index of pending home sales decreased 2.6 percent to 87.6, following a 3.7 percent gain in October that was larger than previously estimated, the group said today in Washington.

The figures underscore Treasury Secretary Henry Paulson's forecast that the housing recession will continue, posing the biggest risk to economic expansion. Economists said more stringent lending practices following the collapse in subprime mortgages and prospects that home prices will keep falling are deterring buyers.

``There is no evidence it is bottoming,'' Paulson said today about the housing market. He added that a plan designed to stem a wave of foreclosures may need to be expanded beyond subprime homeowners.

Economists predicted the index of signed contracts for existing homes would fall 0.7 percent following a previously reported 0.6 percent October increase, according to the median of 33 projections in a Bloomberg News survey. Estimates ranged from a drop of 3 percent to a 0.3 percent increase.

Compared with a year earlier, the index was down 19 percent.

`Further to Fall'

``We'll probably see more weakness in existing home sales given that inventories are so high,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Prices may keep dropping for a while.''

The housing slump is likely to last well into 2008, hurting economic growth and prompting Federal Reserve policy makers to lower interest rates, analysts said.

Stocks extended gains following the report and later dropped, led by a slump in financial shares. Treasury securities were little changed. The benchmark 10-year note yielded 3.85 percent at 11:54 a.m. in New York, compared with 3.83 percent late yesterday.

Today's figures showed pending resales fell in three of four regions. Purchases decreased 13 percent in the Northeast, 4.1 percent in the Midwest and 2.1 percent in the West. Sales rose 2.3 percent in the South.

KB Home Loss

KB Home, the fifth-largest U.S. homebuilder, today reported a fourth-quarter loss as tumbling demand for new homes forced the company to write down land values. Los Angeles-based KB Home operates in 13 states, including California, Florida, Nevada and Arizona.

The bigger gain in October than previously estimated suggested the market may be stabilizing, according to Lawrence Yun, the NAR's chief economist.

``Although there could be some minor slippage in the first quarter, existing home sales should hold in a narrow range before trending up,'' Yun said in a statement. ``The exact timing and the strength of a home-sales recovery is a bit uncertain.''

Paulson, speaking on CNBC television during a visit to New York, said evidence shows the housing decline ``has further to run.''

The Treasury chief indicated the outlook may prompt an expansion of the plan Bush administration officials brokered with mortgage lenders last month. The initiative was designed to make it easier to negotiate affordable loans and freeze some adjustable-rate mortgages at current rates.

``One thing we will consider is maybe expanding this beyond subprime borrowers to other borrowers,'' Paulson said.

Unsold Homes

There was a 10.3 months' supply of previously owned homes on the market in November at the current sales pace, compared with an average 6.5 months in 2006 and 4.5 months a year earlier.

That excess is one reason property values are dropping. Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, based on the S&P/Case-Shiller home- price index. The decrease, reported last month, was the biggest since the group started keeping year-over-year records in 2001.

The Realtors association estimates 5.7 million homes will be sold in 2008, little changed from an estimated 5.65 million last year. Purchases of new homes will fall to 669,000 from 773,000.

While traders anticipate the Fed will lower its benchmark rate by at least a quarter point this month, Philadelphia Fed Bank President Charles Plosser said he hasn't made up his mind yet.

Fed's Plosser

``A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy,'' Plosser said in a speech in Gladwyne, Pennsylvania.

Boston Fed chief Eric Rosengren, who last month dissented from the majority in voting for a larger rate cut, said in a speech today that ``The continued decline in residential investment has heightened the risk of a more significant downturn in the overall economy.''

The real-estate agents' group began reporting pending home resales in March 2005 and has supplied historical data back to February 2001. The gauge is considered a leading indicator because it tracks contract signings. The group's existing-home purchases report tracks closings, which typically occur a month or two later.

To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net

Last Updated: January 8, 2008 11:58 EST

Friday, January 04, 2008

Owning vs. Renting: Still Not Close

By Greg Ip
From The Wall Street Journal Online

U.S. house prices "likely would have to fall considerably" to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.

The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

Related Links

Econ Blog: Houses, Rents and Bubbles

Manhattan Prices Still Surging -- but Will It Last?

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.

Of course, the link between house prices and rents can remain out of whack for years.

The U.S. study is by Morris Davis, an economist at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed; and Andreas Lehnert and Robert F. Martin, staff economists at the Fed.

The authors' methodology was based in part on previously published work by Fed economist Joshua Gallin. The same approach is used by many other analysts, including the Congressional Budget Office, which arrived at similar conclusions.

In an interview, Mr. Davis said lower long-term interest rates can explain only a small part of the drop in the ratio. "To justify current price levels, you need rapid growth in rents." But it's hard to imagine the scenario that would justify such rapid growth in rents, he added. Indeed, it's possible rents will grow more slowly than 4%, reflecting the overhang of unsold homes that might be rented out.

Mr. Davis said the authors postulated a five-year horizon for the rent/price ratio to return to normal by looking at previous downturns. "When a downturn begins, it will last for a while."

Email your comments to rjeditor@dowjones.com.

Tuesday, January 01, 2008

Happy 2008! Buckle-up, this is going to be one scary ride down.....

I read this article over at the Wall Street Journal Online and made a few comments, along with many others who commented as well. Everyone is trying to figure out how and when housing is going to land. I am concerned by those same issues, but I consider housing to be but one of the major economic issues we need to think about. Housing is the fuse, the question in my mind is when will the bomb blow-up and what other components of the economy will be destroyed along with the housing bubble?


My post from the WSJ Online:

"Some macro-trends that very few seem to be considering as it relates housing demand and valuations:

1. Retiring baby-boomers and their changing requirements for housing. In my opinion, likely to only further aggravate and put downward pressure on single family residences.

2. Recession? Stagflation? One or both are underway. A lot of consumer spending activity will dry up from the combination of evaporating equity in real estate in conjunction with higher costs for everything from gasoline to simple commodities and food products. Also need to factor in the prospect of severly declining employment levels as corporate earnings fall short and companies start adjusting workforce levels in an effort to prop up earnings and better align capacity with falling demand. I’m sorry, but I don’t believe that increasing exports will materially offset declining domestic demand.

For what its worth, my personal projection (primarily based on midwest perspective) is that a bottom won’t be seen until deep into 2009 at best, and that assumes no recession/stagflation/inflation impacts. If any or a combination of those occur, we could easily be looking at a scenario where real estate markets don’t begin to significantly recover until well after 2010."

I may be somewhat more of a pessimist on this than many others, but I do believe the mainstream Wall Street media has a lot invested in fooling the innocents into thinking that things are not as bad as they really are. I am simply trying to read between the lines to obtain a more balanced perspective of just how much potential trouble we are facing. I personally do not expect politicans and Wall Street professionals to be sincere and honest in their perspectives.

Let me know your thoughts.

Vito Boscaino