by mannfm11 » Fri Jun 25, 2010 6:34 am
John, believe it or not, I was one of the first to bring up when the housing bubble started. I can probably find the post in my archives, back from 2007. I was using that long term chart on Calculated Risk to bring up that housing starts and new home sales were not down in 2007, but at historically high levels. The arguments I got back were there is more population today. But, there has been few times in history of the US that there was more demand for new SFR units than the late 1970's to early 1980's when the huge boomer generation was coming of age and lifestyles in general were changing. Household formation has slowed significantly since then.
I filed away a lot of data out of those charts and other material I dug up out of government websites. I know that the 1977 high of 819K units sold for new homes stood as a record until 1997 and the only year close was the 817K in 1978. Those were wild speculative years, as I was in the residential business during those summers. You could list a house and sell it in 10 days or less. In fact, if you had a customer, you had to drive the neighborhoods to watch for signs or the homes would be gone. Prices were marked up ever few weeks.
The other record that stood was the roughly 4 million existing home sales. I can understand this figure would grow because there are more units today than in the late 1970's, but all the same those bubble years stood for roughly 20 years. Existing sales fell to 2 million in the high interest recession of 1981 and generally fluctuated between 3 and 4 million annually. What is left out of the news is we still are in a bubble, as existing sales never dropped to 4 million, much less below that figure, even though new home sales collapsed. We are about to see bloodshed in housing like few have imagined and save going back to government guaranteed subprime where a pulse gets you qualified, regardless of credit or income, they won't stop it. The only other choice would be to make risky loans to speculators, moving the excess on the market forward, as has already been done.
Going back to where I started, I have been widely read as a poster and much of what I have posted has been copied and pasted around the net for close to 10 years. On Prudent Bear, I usually had an audience and some guy kept debating me about what was going to be the bottom in home sales. I looked at that 401K bottom in 1981 and figured that would be a bottom, but that we wouldn't be out of the bubble until they fell below 800K minimum. It was easy to see when the bubble started, because the old record stood until 1997. 1996, 1997 is the marking of all the bubbles, stocks and housing. There was still enough of a counterbalance in interest rates to stop housing though. Much of the source of both bubbles was the decline in long term rates that came with the start of the 1990's. I spent the entire decade of the 1980's around or in the residential business, mostly as a mortgage guy. The DFW market collapsed in the mid to late 1980's and we had a wave of foreclosures roughly equal to any we have had this time so far. Rates fell from 11% in 1990 to around 7% in 1993. The entire world refinanced or moved up during that time and that created a massive amount of money on the equity in houses and raised consumer spending power. It also made homes more affordable. Much of the 1975 to 1984 trend had been restored by 1997. Mortgage rates were still over 7% for most of the late 1990's and the move down in 2001 moved affordability to a new high. The rest was history, as the trend followers moved from stock to real estate and the high cash balances chased the returns. Unlike stocks, you could get high leverage on real estate and the subprime stuff allowed for the purchase of new homes, not for rental or holding, but for flipping. Thus one didn't need any real money, nor did they ever really need to close a loan if they could assign the contract to another.
The reason interest rates don't have the same effect is we really aren't at a new low. You might have forgotten about the pay option ARM's and other things. But the real reason is the very chart you posted shows an excess fupply of about 7 million homes sold over the 10 years between 1997 and 2007. The curve is no longer being shifted against tight supply, but against loose supply. The same happened in DFW when the town was overbuilt in 1983-1984 and never recovered for the rest of the decade. There are more problems, as the demand was created with financing no longer available and the trend has been broken. To boot, the move in/move up chain has also been broken as the years of lost appreciation have removed the automatic downpayment from the old house for the new on. Also, real estate was the collateral for all the good cash that was added to the system. This collateral is gone and won't come back any time soon. This is why Bernanke is pushing on a string. Also, Bernanke is confusing liquidity with solvency. We are about to see a depression from hell and they better get busy finding a way to settle all the bad debt out there or we might see the end of the modern world. Bernanke and Obama should have taken the time they bought to figure out a haircut/bankruptcy plan. More debt isn't going to fix this as it has gone from being inflationary to adding to the future deflation.
John, believe it or not, I was one of the first to bring up when the housing bubble started. I can probably find the post in my archives, back from 2007. I was using that long term chart on Calculated Risk to bring up that housing starts and new home sales were not down in 2007, but at historically high levels. The arguments I got back were there is more population today. But, there has been few times in history of the US that there was more demand for new SFR units than the late 1970's to early 1980's when the huge boomer generation was coming of age and lifestyles in general were changing. Household formation has slowed significantly since then.
I filed away a lot of data out of those charts and other material I dug up out of government websites. I know that the 1977 high of 819K units sold for new homes stood as a record until 1997 and the only year close was the 817K in 1978. Those were wild speculative years, as I was in the residential business during those summers. You could list a house and sell it in 10 days or less. In fact, if you had a customer, you had to drive the neighborhoods to watch for signs or the homes would be gone. Prices were marked up ever few weeks.
The other record that stood was the roughly 4 million existing home sales. I can understand this figure would grow because there are more units today than in the late 1970's, but all the same those bubble years stood for roughly 20 years. Existing sales fell to 2 million in the high interest recession of 1981 and generally fluctuated between 3 and 4 million annually. What is left out of the news is we still are in a bubble, as existing sales never dropped to 4 million, much less below that figure, even though new home sales collapsed. We are about to see bloodshed in housing like few have imagined and save going back to government guaranteed subprime where a pulse gets you qualified, regardless of credit or income, they won't stop it. The only other choice would be to make risky loans to speculators, moving the excess on the market forward, as has already been done.
Going back to where I started, I have been widely read as a poster and much of what I have posted has been copied and pasted around the net for close to 10 years. On Prudent Bear, I usually had an audience and some guy kept debating me about what was going to be the bottom in home sales. I looked at that 401K bottom in 1981 and figured that would be a bottom, but that we wouldn't be out of the bubble until they fell below 800K minimum. It was easy to see when the bubble started, because the old record stood until 1997. 1996, 1997 is the marking of all the bubbles, stocks and housing. There was still enough of a counterbalance in interest rates to stop housing though. Much of the source of both bubbles was the decline in long term rates that came with the start of the 1990's. I spent the entire decade of the 1980's around or in the residential business, mostly as a mortgage guy. The DFW market collapsed in the mid to late 1980's and we had a wave of foreclosures roughly equal to any we have had this time so far. Rates fell from 11% in 1990 to around 7% in 1993. The entire world refinanced or moved up during that time and that created a massive amount of money on the equity in houses and raised consumer spending power. It also made homes more affordable. Much of the 1975 to 1984 trend had been restored by 1997. Mortgage rates were still over 7% for most of the late 1990's and the move down in 2001 moved affordability to a new high. The rest was history, as the trend followers moved from stock to real estate and the high cash balances chased the returns. Unlike stocks, you could get high leverage on real estate and the subprime stuff allowed for the purchase of new homes, not for rental or holding, but for flipping. Thus one didn't need any real money, nor did they ever really need to close a loan if they could assign the contract to another.
The reason interest rates don't have the same effect is we really aren't at a new low. You might have forgotten about the pay option ARM's and other things. But the real reason is the very chart you posted shows an excess fupply of about 7 million homes sold over the 10 years between 1997 and 2007. The curve is no longer being shifted against tight supply, but against loose supply. The same happened in DFW when the town was overbuilt in 1983-1984 and never recovered for the rest of the decade. There are more problems, as the demand was created with financing no longer available and the trend has been broken. To boot, the move in/move up chain has also been broken as the years of lost appreciation have removed the automatic downpayment from the old house for the new on. Also, real estate was the collateral for all the good cash that was added to the system. This collateral is gone and won't come back any time soon. This is why Bernanke is pushing on a string. Also, Bernanke is confusing liquidity with solvency. We are about to see a depression from hell and they better get busy finding a way to settle all the bad debt out there or we might see the end of the modern world. Bernanke and Obama should have taken the time they bought to figure out a haircut/bankruptcy plan. More debt isn't going to fix this as it has gone from being inflationary to adding to the future deflation.