On This Day
Winds Blow Round the Real-Estate House of Cards
by
findingDulcinea Staff
Signs that the economy is slowing down are making home owners nervous. House prices are set to drop, but the government may act to stop them plummeting.
30-Second Summary
In the first five years of this decade, U.S. house prices rose 50 percent. To the authors of an April 2005 federal agency report, such a steep rise had bubble written all over it. The market started to deflate a year and a half later.
The housing market slid in late 2006 as more and more borrowers defaulted on sub-prime mortgage payments. Foreclosures and evictions left a lot of new homes unsold and kept old ones vacant.
Since then, house prices have fallen 5 percent and so have sales, according to the Standard & Poor’s Case-Shiller home price index.
The bust is not unprecedented. Housing bubbles burst in Los Angeles in the early 1990s, San Antonio in the mid-1980s and Hartford at the end of the 1980s. The difference this time is scale: the housing market has slumped nationwide, even in places where the market was strong, such as Southern California, Arizona, Nevada and Florida.
If there is a wider economic slowdown, which seems likely because of soaring oil prices and the continuing credit squeeze, house prices will decline further. According to Moody’s Mark Zandi, residential real estates prices will drop 15–20 percent in 2008 unless the government intervenes. Many economists agree that prices will continue falling, but are less pessimistic about how much: the most common forecast is a decline of 5–10 percent.
The Fed cut interest rates three times in 2007 in an effort to prevent credit-squeezed borrowers from losing their homes. It set up an auction facility to provide emergency loans for embattled banks. Bush said Friday, Jan. 4, that his administration is preparing a package to boost the economy.
The housing market slid in late 2006 as more and more borrowers defaulted on sub-prime mortgage payments. Foreclosures and evictions left a lot of new homes unsold and kept old ones vacant.
Since then, house prices have fallen 5 percent and so have sales, according to the Standard & Poor’s Case-Shiller home price index.
The bust is not unprecedented. Housing bubbles burst in Los Angeles in the early 1990s, San Antonio in the mid-1980s and Hartford at the end of the 1980s. The difference this time is scale: the housing market has slumped nationwide, even in places where the market was strong, such as Southern California, Arizona, Nevada and Florida.
If there is a wider economic slowdown, which seems likely because of soaring oil prices and the continuing credit squeeze, house prices will decline further. According to Moody’s Mark Zandi, residential real estates prices will drop 15–20 percent in 2008 unless the government intervenes. Many economists agree that prices will continue falling, but are less pessimistic about how much: the most common forecast is a decline of 5–10 percent.
The Fed cut interest rates three times in 2007 in an effort to prevent credit-squeezed borrowers from losing their homes. It set up an auction facility to provide emergency loans for embattled banks. Bush said Friday, Jan. 4, that his administration is preparing a package to boost the economy.
Headline links: ‘Bush Ponders Move to Bolster Economy’
The Bush administration is considering ways to stimulate economic growth as oil prices continue to soar and the credit crunch continues. “I’m concerned about people losing their homes and paying a lot for gasoline,” Bush said in an interview with Reuters. He also said a stimulus package may be in the pipeline to help Americans keep their homes. New York Times’s Sheryl Gay Stolberg wrote that the package may include tax cuts.
Source: New York Times
U.S. home prices experienced their biggest monthly decline in October, according to the Standard & Poor's/Case-Shiller home price index.
Source: Guardian
Background: Three remedies, two failures.
In Dec. 11, the Fed slashed its key interest rate for the third time in 2007. The Fed members reversed an earlier decision not to reduce interest rates further because of concerns that conditions in the housing, credit and financial markets might worsen, according to Fed meeting minutes made public on Jan. 2. One Fed member said that another sign of impending economic weakness is modest spending by consumers over the holiday season.
Source: MSNBC
An increasing number of foreclosures may plunge the housing market into a yet deeper crisis and see big companies write down more of their assets. Cleveland is the primary sub-prime victim among U.S. cities. The BBC’s Steve Schifferes calls it the “sub-prime capital of the United States.” Jim Rokakis, the County Treasurer for Cleveland's Cuyahoga County is quoted by the BBC as saying, “Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city.” And Cleveland is not alone. Sub-prime lending is a nationwide phenomenon. According to the BBC, one in five mortgages in the United States falls into the sub-prime bracket.
Source: The BBC
Opinion & Analysis: Grim predictions for the housing market and the economy
In the coming year, tightened credit will make it increasingly difficult for homeowners to meet mortgage payments. The loses may continue for financial giants, who collectively own $1 trillion in sub-prime debt. Mark Zandi, an economist at Moodey's, attributes these present difficulties to several factors. Relaxed lending criteria allowed people to buy more than they could afford. Property speculation drove up demand and, in response, builders built too many homes.
Source: The BBC
There are good reasons why people are forecasting a recession, writes Peter Goodman and Vikas Bajaj of The New York Times. A credit crunch, a bursting housing bubble, slow job growth and high oil prices point in that direction. But despite a December surge in consumer spending, flat unemployment and a temporary bailout for financial giants, there are too many unknowns to predict the economy’s trajectory with any certainty. The numbers in the housing market are disheartening: there are more unsold homes today than there have been at any point in the past two decades, according to Moody’s Mark Zandi. Around 2.1 million homes remain unsold nationwide.
Source: The New York Times
“House lust,” a tendency to invest in property and home improvements that are beyond one’s means, is what drove the housing bubble, writes author Daniel McGinn in a new book reviewed by Mark Egan of Reuters. The housing slump came in the wake of an increased number of defaults on sub-prime mortgages and even though Americans’ have controlled their appetites a little, debt will not scare this generation of buyers as much as it did their parents. McGinn likens Americans’ frenzy over expensive housing to the frenzy over dot.com stocks in the 1990s.
Source: Reuters
As early as mid-November 2007, Morgan Stanley warned that the U.S. economy might be heading for recession. In a report released on Nov. 12 last year, the bank said that the ailing housing market will harm business investment and consumers and that financial institutions have taken a harder hit than previously estimated.
Source: The Daily Telegraph
Reference: Prices, busts and casualties
The Federal Deposit Insurance Corporation issued a report that defined a housing “boom” as a house price increase of 30 percent or more over three years. They define a “bust” as a sustained decline of the same size. The report found that based on historical evidence price booms far outnumber price busts, and concluded that busts do not inevitably follow booms. Post-boom, house prices usually register modest ups or downs. However, poor economic health can tip the outcome of a boom toward a bust. Booms are particularly vulnerable to economic shocks, as the busts in cities with substantial oil and gas industries showed. The current boom is especially vulnerable to the rapid growth of sub-prime mortgage lending. Sub-prime borrowers are usually people with poor credit who couldn’t otherwise afford to buy homes. Sub-prime mortgages are more likely to end in foreclosures than conventional loans, while sub-prime borrowers are more vulnerable to economic volatility.
Source: FDIC
In its third quarterly House Price Index (HPI) report from November 2007, the Office of Federal Housing Enterprise Oversight (OFHEO) said the HPI was 0.4 lower than in the second quarter. This is the first quarterly decline for home prices in 13 years. The most recent and past HPI reports can be found on OFHEO’s website.
Source: OFHEO
Standard & Poor’s Case-Shiller home price index is a popular housing market measure that provides comprehensive information on house price changes nationwide. It also provides free of charge separate studies on home sales, tiered prices and quarterly recaps on the housing market.
Source: Standard & Poor’s Case-Shiller Home Price
In 2005, blogger Angry Bear calculated the effects of previous housing busts and predicted that slowly declining prices and reduced home sales nationwide after the burst of the latest bubble. According to the blogger the coastal markets will be hit hardest.
Source: Angry Bear
Financial giants were among the primary victims of the sub-prime crisis. Big banks and securities firms have lost or written down upward of $66 billion in sub-prime investment.
Source: findingDulcinea
Related links: Manhattan escapes the housing slump
Manhattan home figures defy the national trend, The New York Times’s Christine Haughney reports. Sales are up 3.2 percent while property prices increased 17.6 percent. Wealthy buyers have boosted Manhattan’s housing market health. However, realtors say the trend is unlikely to continue in 2008.
Source: New York Times
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