Housing boom will not end in a crash, says Harvard

[Pale Blue Dot]

http://news.moneycentral.msn.com/provider/providerarticle.asp?Feed=FT&Date=20060613&ID=5790548

To bridge the gap between sluggish earnings growth and speedy house price growth, ever more Americans have been tempted by riskier flexible-rate mortgage products. More than a third of loans last year were at adjustable rates and may rebound on their holders if interest rates continue to climb. Even more reckless buyers, about 10 per cent last year, opted for payment-option mortgages – which do not require full payment of the interest costs.

So why will non-home-owners be deprived of the crash they have been waiting for?

The strongest underlying support for the market comes from accelerating household formation. Demand is being driven not only by population growth but by household fragmentation, as couples divorce or children leave home.

Immigration has been a still stronger force – over the past decade 12.6m new households were formed in the US. Over the next 10 years the pace of household formation will accelerate to 14.6m, according to the Joint Center for Housing Studies.

"Even if America decided to close the borders now, we would still see the lagged effects of previous waves of immigration," said Mr Retsinas. "Many of those that came to America earlier are only now in a position to buy property. As it is, we don't believe there will be any slowdown in immigration."

...

There's more, but it mostly seems like B.S.

[the other one]

1. I agree. No housing price crash.

That doesn't mean that it won't get very uncomfortable to be a homeowner.

But logistically, home prices don't crash. They erode in bad markets, but it could take 10 years for the average price to drop 40%. That is poor performance, maybe even a bear market, but not really a crash.

I think the reason is that most people cannot sell their houses for a loss. They will be forced to hold on to the property, stuck with making payments that are far higher than the value of the house. The hardest part will be property taxes, which could rise as local governments seek income. People will be stuck paying taxes on a property with a high-appraisal value, but they could not sell it for close to that price.

[Warpy]

2. It'll be a slow slide, agreed

and anyone who tries to sell a house at "prevailing market price" will find himself paying the mortgage on the place for a very long time. It will be a buyer's market, and that means anyone with a house to sell faces an uncomfortable choice: pour money into the place to make it look like a show house, or drop the price a few notches to entice a buyer for a quick sale.

The problem with eroding prices is that lenders are often uncomfortable with outstanding mortgage principals that are larger than the value of the house, especially when the paper is a 30 year fixed mortgage under 6%. Another problem is that holders of capped ARMs can sell that paper to another lender with a higher cap.

The real losses will be the vanishing construction jobs as the market cools and more people are locked out of it by higher interest rates plus the ripple effect that a lack of new houses to furnish will create. That's where the real housing bust is.

[Virginia Dare]

5. The real losses will be the vanishing construction jobs....

I've been thinking about that as well, what happens to all the immigrants who are doing those jobs when they disappear? Do they pack up and go home?

:shrug:

[Bob3]

3. you tend to see this kind of stuff right before a crash.

This isn't fact, they have no way of knowing what home sales will do - this is, to quote the late JK Galbraith, "organized reassurance". They want to reassure people on the brink of cutting and running that cutting a running isn't the right idea, that is is a temporary lull in growth or at worst a minor correction.

I mean really how many immigrant households are buying the Mc Mansions i see popping up where ever there is an inch of space? Stuff like this sounds impressive, numbers and all but when you think about it, it makes no sense.

[melnjones]

4. Exactly...

The beauty is that if and when the market DOES crash, there will be a lot of renters who for the first time will be able to afford to buy a house. In my town the housing market is unbelievably cheap, so it's not a good place to come and invest in a nice expensive house. On the other hand, buying a run-down house is an EXCELLENT alternative to renting, and with do-it-yourself repairs, you can actually increase the sale value of your house because you bought it for $20,000. One thing is certain in just about any circumstance- renting sucks.

[RogueBandit]

12. $20,000?

You can buy a house for $20,000 where you are? Where are you?

Looking for a nest.

John

[melnjones]

16. :-)

It cracks me up when I hear people talk about the housing market crashing, because they have no idea what it is like where I live. (which, by the way, is Anderson Indiana. If you want cheap houses, come here.) Let me tell you about my house...it was on the market for $15,000. Before I made an offer, it dropped to $12,900. I made an offer quickly! Insurance wouldn't cover it b/c of the roof and because the furnace and water heater had been stolen out of the basement, so the bank that owned it agreed to fix those problems and raise the price. The final price was under $25,000 for an 1,800 sq ft house. Yes, I had to do work on it after I got it so I could live in it...my dad fixed a lot of the plumbing, I finished half of the floors (still have some work to do there), things like that, but once we put in the toilet, sink, and lighting fixtures (that had also been stolen), the house was pretty livable and is where I live right now. Mortgage, insurance and taxes included, I pay $350 a month. A house across the street from me is going for $10,000 right now. Yeah, the neighborhood is a little ghetto, but no one's been injured in any shootings as far as I know...only shot at:-) I love my neighborhood, love my neighbors, and wouldn't trade it for the world. The "crash" of the housing market in my city has actually helped me financially. I'm young, single, in grad school, working part time jobs, and own my home. It's fantastic.

[Virginia Dare]

6. I agree, this could just be rhetoric to calm the market...

it has taken a very noticeable turn downward here in the D.C. area in the last year. Lots of houses just sitting there. We've haven't seen that for about 6 years now.

[natrat]

7. if rates keep rising along with inflation,

and job growth declines, some of these arm folks will have to sell /forclose---so its just a numbers game as to how many are crushed and what effect that has on the mkt, no?

[Psephos]

8. Well, that's going to bum some people out around here

Heh heh.

Peace.

[stepnw1f]

11. No... Instead We'll Have People Accuse Others of Doing So Instead

[ozone_man]

9. OK, call it a sharp decline then.

Or a major adjustment. The equity bubbles in real estate and the stock market are about to see major declines. It's really just a simple function of personal and national debt that we've accumulated over the past 5 years. Borrowing is coming to an end as rates go up and home owners have tapped their home equity at inflated prices. The consumer part of GDP (2/3) is about to hit a wall.

[displacedtexan]

10. This study was funded by... (Cue Drum Roll)... The HIC

Harvard's 'The State of the Nation’s Housing' Study is Funded by The Housing Industrial Complex

HP'er Panicearly did some easy digging, and yup, Harvard's Joint Center for Housing Studies, who issued the report? Bought and sold by every major member of the corrupt REIC. Harvard is their bitch, and the report is a big wet kiss to their donors. Don't worry, masses, there is no bubble, there is no meltdown underway. Support our sponsors - Beazer, Centex, Countrywide, the corrupt Fannie Mae, etc etc etc.

So writes Bubble Meter.

I checked out some addresses at zillow.com yesterday and found bubbles bursting
in PA last November and one in Baltimore this April.

Also of note, DC housing prices are way over their actual values.

And, it's the inventory. craigslist.com had over 600 DC listings yesterday.

[PeaceProgProsp]

13. I'm not sure if this logic makes sense.

First, economic immigration is sensitive to, surprise, THE ECONOMY. Household formation due to increased immigration in the past is, certainly, caused by a growing economy, which we had in the 90s (due to increased employment and stock prices) and since 2000 (thanks to inflated housing values).

If the real estate market starts to drop, there might be a (downward) spiral effect -- if there is less money in the economy that was ultimately rooted in housing values (eg, construction, real estate brokers fees, or even just personal consumption financed by a home equity load) it's not likely that we'll keep up the flow of immigrants (and, in fact, many might leave the US).

As for divorce, I think it's very possible that if a marriage has only one major asset -- a house -- and if a couple can't reasonably sell that house and then finance a new start, you're going to find a lot of marriages that might not end up in divorce because the misery of being divorced and without any assets might be less appealing than being together, unhappy, but with a roof over your head.

I'm pretty sure that I know people in the last couple years for whom divorce became a reasonable option because they say that the equity in their home could possibly give them a better life apart. I'm not sure if some of those people would have gotten divorced if not for that pot of gold.

[ckramer]

14. Not according to Bob

In the coming months, I predict we'll see an increase in people dumping real estate they can't afford. They'll be forced to sell because they'll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators -- if you can't afford to feed the property every month, it eats you.

http://finance.yahoo.com/columnist/article/richricher/5766

[Porcupine]

17. People getting eaten every day here in Chico CA

disclaimer: I work for a large property management firm.

Our local housing market has been going up some 20% per year for the past 6 years. As a result many of the local buildings being built are purchased for speculation and immediately rented. That means that $350K homes are being rented out at $1400 monthly. That may sound like a lot but it doesnt' come close to covering PITI, management fees, maintenance and taxes.

Very, very soon it will occurr to a lot of fat cats that they are going to get reamed. Their cash flow already doesn't cover expenses and the town has a substantial number of rentals that sat empty all last winter.

A giant whack on the head to the investor class says I.

[sendero]

15. Astounding..

... "more than a third of loans last year were at adjustable rates".

Rates are STILL near historic lows and 1/3 of folks buying a house are willing to gamble that they will go down more or stay down.

When the Fed has just printed 3 trillion dollars, that is not a very good bet.