New York Times, December 25, 2005
By MARTIN FACKLER
KASHIWA, Japan - Fourteen years ago, Yoshihisa Nakashima looked at this sleepy suburb an hour and 20 minutes from downtown Tokyo and saw all the trappings of middle-class Japanese bliss: cherry-tree-lined roads, a cozy community where neighbors greeted one another in the morning and schools within easy walking distance for his two daughters.
So Mr. Nakashima, a Tokyo city government employee who was then 36, took out a loan for almost the entire $400,000 price of a cramped four-bedroom apartment. With property values rising at double-digit rates, he would easily earn back the loan and then some when he decided to sell.
Or so he thought. Not long after he bought the apartment, Japan's property market collapsed. Today, the apartment is worth half what he paid. He said he would like to move closer to the city but cannot: the sale price would not cover the $300,000 he still owes the bank.
With housing prices in the United States looking wobbly after years of spectacular gains, it may be helpful to look at the last major economy to have a real estate bubble pop: Japan. What Americans see may scare them, but they may also learn ways to ease the pain.
To be sure, there are several major differences between Japan in the 1980's and the United States today. One is the fact that property prices rose much faster and more steeply in Japan, partly because speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
Another difference is that the biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating.
Still, for anyone wondering why even the possibility of a housing bubble in the United States preoccupies so many economists, it is worth looking at how the property crash in Japan helped to flatten that economy, which is second only to that of the United States, and to keep it on the canvas for more than a decade.
And as American homeowners contemplate what might happen if their property values fell -particularly if they fell hard - there are lessons in the bitter experiences of their Japanese counterparts like Mr. Nakashima.
JAPAN suffered one of the biggest property market collapses in modern history. At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.
Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough, from which they are only now starting to recover.
Now the land in Japan is worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.
Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan's six largest cities, residential prices dropped 64 percent from 1991 to last year. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.
Their experiences contain many warnings. One is to shun the sort of temptations that appear in red-hot real estate markets, particularly the use of risky or exotic loans to borrow beyond one's means. Another is to avoid property that may be hard to unload when the market cools.
Economists say Japan also contains lessons for United States policy makers, like Ben S. Bernanke, who is expected to become chairman of the Federal Reserve at the end of January. At the top of the list is to learn from the failure of Japan's central bank to slow the rise of the country's real estate and stock bubbles, and then its failure to soften their collapse. Only recently did Japan finally find ways to revive the real estate market, by using deregulation to spur new development.
Most of all, economists say, Japan's experience teaches the need to be skeptical of that fundamental myth behind all asset bubbles: that prices will keep rising forever. Like their United States counterparts today, too many Japanese homebuyers overextended their debt, buying property that cost more than they could rationally afford because they assumed that values would only rise. When prices dropped, many buyers were financially battered or even wiped out.
"The biggest lesson from Japan is not to fall into the same state of denial that existed here," said Yukio Noguchi, a finance professor at Waseda University in Tokyo who is perhaps the leading authority on the Japanese bubble.
"During a bubble, people don't believe that prices will fall," he said. "This has been proven wrong so many times in the past. But there's something in human nature that makes us unable to learn from history."
In the 1980's, Professor Noguchi said, the frenzy in Japan reached such extremes that companies tried to outbid one another even for land of little or no use. At the peak, an empty three-square-meter parcel (about 32 square feet) in a corner of the Ginza shopping district in Tokyo sold for $600,000, even though it was too small to build on.
Plots only slightly larger gave birth to bizarre structures known as pencil buildings: tall, thin structures that often had just one small room per floor.
As a result, Japan's property market in the 1980's was much more fragile than America's today, Professor Noguchi said. And when the market fell, it fell hard. Because of all the corporate speculation, the collapse wiped out company balance sheets, crippled the nation's banks and gave the overall economy a blow to the chin.
Since 1991, Japan has spent 11 years sliding in and out of recession. It is only now showing meaningful signs of recovering, with the World Bank forecasting that Japan's economy will grow by a solid 2.2 percent this year
Despite the differences, Professor Noguchi said he also saw parallels between Japan then and America now. Last year, as a visiting professor at Stanford, he said he read real estate articles in local newspapers that sounded eerily familiar. Houses were routinely selling for $10 million or more, he said, with buyers saying they felt that they had no choice but to buy now, before prices rose even further.
"It was déjà vu," Professor Noguchi said. "People were in a rush to buy, and at extraordinary prices. I saw this same haste psychology in Japan" in the 1980's. "The classic definition of a bubble," he added, "is people buying on false expectations about future prices, and buying with the hope of selling in the future."
Economists and real estate experts see other parallels as well. In the 1980's, the expectation of rising real estate prices made many Japanese homebuyers feel comfortable about taking on huge debt. And they did so by using exotic loans that required little money upfront and that promised low monthly payments, at least for a short time.
A similar pattern is found today in the United States, where the methods include interest-only mortgages, which allow homebuyers to repay no principal for a few years. Japan had its own versions of these loans, including the so-called three-generation loan, a 90- or even 100-year mortgage that permitted buyers to spread payments out over their lifetimes and those of their children and grandchildren.
But when property prices dropped in Japan, homeowners found themselves saddled with loans far larger than the value of their real estate. Many fell into bankruptcy, especially those who lost their jobs or took pay cuts as declining property prices helped to incite a broader recession. From 1994 to 2003, the number of personal bankruptcies rose sixfold, to a record high of 242,357, according to the Japanese Supreme Court, which tracks such data.
Even many of those who avoided financial collapse found themselves marooned in homes that they never intended as lifelong residences. For many Japanese homebuyers in the 1980's, land prices had risen so high that the only places they could afford were far from central Tokyo. Many went deep into debt to buy tiny or shoddily built homes that were two hours away from their offices.
Now, after years of tumbling land prices have made Tokyo more affordable again, few people are shopping for homes in the distant suburbs. That has led to severe declines in property values in these outlying areas, leaving many people with homes that are worth less than the balance on their mortgages from a decade or more ago.
Mr. Nakashima, who bought the apartment here in Kashiwa, said it would take him at least another decade to whittle down his loan to the point that he could pay it off by selling his home. And this assumes that the apartment does not drop further in value - a real possibility, because lower prices in Tokyo have led to a recent boom in construction of newer apartments in neighborhoods closer to downtown.
"We can't sell and get something better because we'll take such a huge loss," said Mr. Nakashima, a serious man who recounts his story with careful precision, sometimes pausing to check dates. "The collapse of the bubble robbed us of our freedom to choose where we can live."
He rues the idea that homes came to be seen as just another investment. "Homes should be different from stocks," he said. "They shouldn't be the object of speculative investing. If home prices move too much, they can ruin your life."
Mr. Nakashima says he is resigned to spending the rest of his days in Kashiwa. It is peaceful here, after all, he said. There is also a bit of history: he pointed to two tree-covered mounds in a corner of the apartment complex that are said to contain the severed heads of samurai killed in a battle here five centuries ago.
Some economists say that there are probably millions of people like Mr. Nakashima, trying to make the best of life in homes that are distant from work and for which they grossly overpaid. "There is a whole generation of homebuyers stuck out in far suburbs," said Atsushi Nakajima, chief economist at the research arm of the Mizuho Financial Group in Tokyo. "It's sad, but Japan has basically forgotten about them, and is moving on. They are just left out there."
Mr. Nakajima said he had barely missed being stuck out there himself. In 1991, he was looking at a 100-square-meter apartment (1,080 square feet) for about $600,000 about two hours outside Tokyo. He said his wife stopped him. Six years later, he spent the same amount to buy a more spacious house in a downtown neighborhood. "Maybe my wife should be the economist," he said.
Now that Japan's real estate market is finally showing signs of recovering from the 1991 collapse, economists say it offers a lesson for Americans in how to end - and not to end - a long slide in property prices.
For years after the real estate bubble burst, the Japanese government tried to resuscitate the market and other parts of the economy with expensive public works projects, but they were so poorly planned that they succeeded only in inflating the national debt.
NOT until the late 1990's did the government try a new tack: deregulation. To kick-start the economy, Tokyo started loosening restrictions on the financial industry. While most of this effort was aimed at reviving the banking industry, it also allowed investors to create real estate investment trusts, essentially mutual funds that invest in commercial property. A few years later, the government also eased building codes, such as height limits, and cut approval times for building permits.
Economists and real estate executives credit these changes with bringing new money into the market, and with making redevelopment easier. The results are visible in a boom that is dotting the Tokyo skyline with cranes and new high-rises.
They are also visible in statistics. Residential home prices in Tokyo rose 0.5 percent in the 12 months through July, the first gain in 15 years, the government said in September. Nationwide, land prices are still down, but the pace of decline has slowed to a crawl, the government said.
"Deregulation revived the Tokyo land market," said Toshio Nagashima, executive vice president at Mitsubishi Estate, one of Japan's largest real estate companies. He said the changes were one reason that his company committed to spend $4.5 billion by 2007 to build six skyscrapers in the central Marunouchi financial district.
Japanese economists say the United States is not likely to suffer a decline that is as severe or long-lasting as Japan's, because they see a more skilled hand at the tiller of the American economy: the Federal Reserve. Japan's central bank, the Bank of Japan, failed to curb the stock and real estate bubbles until mid-1989, when it was too late and prices were sky-high, they said.
When it did take action, it moved faster and more drastically than Japan's overinflated land and stock markets could handle, raising its benchmark interest rate to 6 percent from 2.5 percent over 15 months. Economists say that this pulled the rug out from under both markets at the same time.
Akio Makabe, a finance professor at Shinshu University in Matsumoto, says the Fed has been more deft in handling the rise in America's property market, which he believes is definitely in a bubble. He praised the Fed for apparently learning from Japan's mistakes, tightening more gradually and taking the economy's pulse as it does so.
"Japan shows the importance of avoiding a hard landing," Professor Makabe said. "Avoid big shocks. That is the biggest lesson of Japan's bubble."
25 December 2005
17 December 2005
'Seller Subsidy' Adds Big Value to the Deal
Washington Times, December 16, 2005
By M. Anthony Carr
You're reading through a real estate Web site, searching for houses that might meet your criteria. As you're reading the fine print -- and I suggest reading the fine print -- you start seeing words such as "will help with closing costs," "$5,000 to buyer for closing," "decorating allowance," "Seller to assist buyer up to 3 percent."
These items are referred to as "seller subsidies." If you're looking for a good deal, seek out seller subsidies before you look for "price reduced." A seller subsidy interprets into real, big dollars in the buyer's pocket upfront. Sometimes a $5,000 subsidy means more to the buyer than a $10,000 price reduction. It can be more beneficial to you as a buyer to go for larger subsidies instead of a price reduction. The ultimate win for a buyer would be to get both.
As you develop your strategy on your offer, remember that the best time to get a seller subsidy is in the fall and winter market. Although it means the buyer could be looking over smaller inventory than in the spring, winter sellers might be softer in their terms and more willing to negotiate when only a few buyers are visiting the house. In addition, the market is slowest in the fall and winter. Sellers with their homes on the market are serious about moving forward. Just a note to sellers: If you're planning to stay in the same area, list in the fall and winter. You'll have more serious buyers, and, yes, you may have to negotiate downward, but then you'll save a lot on the upward purchase.
When you're looking for the "ripe" properties to work on subsidies and price reductions, look to the DOM -- days on market. The higher the number of days, the more chances you'll have to getting subsidies from the seller. Funny thing about days on market: It's the first indicator that a seller has overpriced the house. The challenge for the seller is that if prices are dropping quickly, waiting even a few weeks to get the price in order could cost thousands of dollars. Price it right upfront.
Have your agent go over comparables from the neighborhood to determine your offer (sellers do the same thing). You want to make sure you're taking advantage of the speed of your market before making an offer. If other sellers are giving up $10,000 in the community, then you can easily take your offer elsewhere if the seller balks at handing over money to the buyer. Keep in mind, there are very few rules to how much subsidy is allowed.
Most times the limit is between 3 to 6 percent. This limitation is usually from the lender, who wants to see some money from the buyer put into the house. A buyer who places his or her own money into the house is less likely to default on the loan. While this amount may not sound like a lot, just multiply it out -- 6 percent on a $400,000 property is $24,000. That can do a lot of redecorating. Keep in mind, though, that how you name the cash left at the table determines if it is a seller subsidy. If, for instance, after the home inspection it's determined the house needs a new roof and the seller agrees to fix it, this is generally not called a "subsidy." The seller is just agreeing to bring the house up to par.
However, if the buyer requests $10,000 for a decorating allowance and then spends it on the roof, they have just negotiated a subsidy from the seller. The wording and agreement in exchange of money is important. The timing of the money spent also may determine if it's a seller subsidy or a seller's own expense. If the seller agrees to paint the interior and gets it done before settlement day, then that's not necessarily a seller subsidy. The seller is painting his own house and then handing it over to the buyer for the agreed-upon price. If you find a flexible seller, during the home inspection you should note the fix-ups you want versus the subsidies you want, because it could affect your financing if you wrongly label the cash being spent.
By M. Anthony Carr
You're reading through a real estate Web site, searching for houses that might meet your criteria. As you're reading the fine print -- and I suggest reading the fine print -- you start seeing words such as "will help with closing costs," "$5,000 to buyer for closing," "decorating allowance," "Seller to assist buyer up to 3 percent."
These items are referred to as "seller subsidies." If you're looking for a good deal, seek out seller subsidies before you look for "price reduced." A seller subsidy interprets into real, big dollars in the buyer's pocket upfront. Sometimes a $5,000 subsidy means more to the buyer than a $10,000 price reduction. It can be more beneficial to you as a buyer to go for larger subsidies instead of a price reduction. The ultimate win for a buyer would be to get both.
As you develop your strategy on your offer, remember that the best time to get a seller subsidy is in the fall and winter market. Although it means the buyer could be looking over smaller inventory than in the spring, winter sellers might be softer in their terms and more willing to negotiate when only a few buyers are visiting the house. In addition, the market is slowest in the fall and winter. Sellers with their homes on the market are serious about moving forward. Just a note to sellers: If you're planning to stay in the same area, list in the fall and winter. You'll have more serious buyers, and, yes, you may have to negotiate downward, but then you'll save a lot on the upward purchase.
When you're looking for the "ripe" properties to work on subsidies and price reductions, look to the DOM -- days on market. The higher the number of days, the more chances you'll have to getting subsidies from the seller. Funny thing about days on market: It's the first indicator that a seller has overpriced the house. The challenge for the seller is that if prices are dropping quickly, waiting even a few weeks to get the price in order could cost thousands of dollars. Price it right upfront.
Have your agent go over comparables from the neighborhood to determine your offer (sellers do the same thing). You want to make sure you're taking advantage of the speed of your market before making an offer. If other sellers are giving up $10,000 in the community, then you can easily take your offer elsewhere if the seller balks at handing over money to the buyer. Keep in mind, there are very few rules to how much subsidy is allowed.
Most times the limit is between 3 to 6 percent. This limitation is usually from the lender, who wants to see some money from the buyer put into the house. A buyer who places his or her own money into the house is less likely to default on the loan. While this amount may not sound like a lot, just multiply it out -- 6 percent on a $400,000 property is $24,000. That can do a lot of redecorating. Keep in mind, though, that how you name the cash left at the table determines if it is a seller subsidy. If, for instance, after the home inspection it's determined the house needs a new roof and the seller agrees to fix it, this is generally not called a "subsidy." The seller is just agreeing to bring the house up to par.
However, if the buyer requests $10,000 for a decorating allowance and then spends it on the roof, they have just negotiated a subsidy from the seller. The wording and agreement in exchange of money is important. The timing of the money spent also may determine if it's a seller subsidy or a seller's own expense. If the seller agrees to paint the interior and gets it done before settlement day, then that's not necessarily a seller subsidy. The seller is painting his own house and then handing it over to the buyer for the agreed-upon price. If you find a flexible seller, during the home inspection you should note the fix-ups you want versus the subsidies you want, because it could affect your financing if you wrongly label the cash being spent.
14 December 2005
NAR Anticipates Near Record Sales in 2006
Published: December 13, 2005
By Realty Times Staff
WASHINGTON -- The housing market for 2005 is headed for a fifth consecutive annual record, and sales activity in 2006 is expected to be the second best year in history, according to the National Association of Realtors®.
David Lereah, NAR's chief economist, said that market conditions are still favorable for housing. "The slowdown amounts to a tapping of the brakes on a hot market," said Lereah. "Home sales are coming down from the mountain peak, but they will level-out at a high plateau -- a plateau that is higher than previous peaks in the housing cycle. This transition to a more normal and balanced market is a good thing."
The 30-year fixed-rate mortgage should trend up modestly and reach 6.6 percent during the second half of 2006.
Existing-home sales, expected to rise 4.7 percent to 7.10 million this year, are likely to decline 3.7 percent in 2006 to 6.84 million. New-home sales, projected to increase 7.0 percent to 1.29 million this year, are forecast to drop 4.8 percent to 1.23 million in 2006 -- also the second best on record. Total housing starts for 2005 should grow 5.8 percent to 2.06 million units, the highest since 1972, and then decline 4.8 percent to 1.92 million next year.
NAR President Thomas M. Stevens from Vienna, Va., said that housing has always been the soundest investment for most families. "As the old saying goes, homeownership beats the heck out of a drawer full of rent receipts," said Stevens, senior vice president of NRT Inc. According to the Federal Reserve Survey of Consumer Finances, the median net wealth of a homeowner household is 36 times higher than a renter household.
Stevens said that the national median home price has never declined since good record keeping began in 1968. "Although there can always be a temporary decline in a given area if jobs are weak and there is an oversupply of homes on the market, people who stay in their homes for a normal period of homeownership generally see healthy returns over time. There are no guarantees, but there are very good odds."
The national median existing-home price for all housing types, which is experiencing a surge estimated at 12.7 percent to $208,800 for 2005, is expected to rise another 6.1 percent in 2006 to $221,400. The median new-home price is likely to rise 5.5 percent to $233,100 in 2005, and then grow by 7.3 percent next year to $250,100 as higher construction costs impact the market.
The U.S. gross domestic product should grow 3.7 percent for 2005 and 4.1 percent next year. The unemployment rate is expected to decline to 4.9 percent by second quarter of 2006, and then stabilize.
The Consumer Price Index is projected to rise 3.4 percent for 2005, and 2.9 percent next year. Inflation-adjusted disposable personal income is forecast to increase 1.4 percent in 2005 and 4.5 percent in 2006.
By Realty Times Staff
WASHINGTON -- The housing market for 2005 is headed for a fifth consecutive annual record, and sales activity in 2006 is expected to be the second best year in history, according to the National Association of Realtors®.
David Lereah, NAR's chief economist, said that market conditions are still favorable for housing. "The slowdown amounts to a tapping of the brakes on a hot market," said Lereah. "Home sales are coming down from the mountain peak, but they will level-out at a high plateau -- a plateau that is higher than previous peaks in the housing cycle. This transition to a more normal and balanced market is a good thing."
The 30-year fixed-rate mortgage should trend up modestly and reach 6.6 percent during the second half of 2006.
Existing-home sales, expected to rise 4.7 percent to 7.10 million this year, are likely to decline 3.7 percent in 2006 to 6.84 million. New-home sales, projected to increase 7.0 percent to 1.29 million this year, are forecast to drop 4.8 percent to 1.23 million in 2006 -- also the second best on record. Total housing starts for 2005 should grow 5.8 percent to 2.06 million units, the highest since 1972, and then decline 4.8 percent to 1.92 million next year.
NAR President Thomas M. Stevens from Vienna, Va., said that housing has always been the soundest investment for most families. "As the old saying goes, homeownership beats the heck out of a drawer full of rent receipts," said Stevens, senior vice president of NRT Inc. According to the Federal Reserve Survey of Consumer Finances, the median net wealth of a homeowner household is 36 times higher than a renter household.
Stevens said that the national median home price has never declined since good record keeping began in 1968. "Although there can always be a temporary decline in a given area if jobs are weak and there is an oversupply of homes on the market, people who stay in their homes for a normal period of homeownership generally see healthy returns over time. There are no guarantees, but there are very good odds."
The national median existing-home price for all housing types, which is experiencing a surge estimated at 12.7 percent to $208,800 for 2005, is expected to rise another 6.1 percent in 2006 to $221,400. The median new-home price is likely to rise 5.5 percent to $233,100 in 2005, and then grow by 7.3 percent next year to $250,100 as higher construction costs impact the market.
The U.S. gross domestic product should grow 3.7 percent for 2005 and 4.1 percent next year. The unemployment rate is expected to decline to 4.9 percent by second quarter of 2006, and then stabilize.
The Consumer Price Index is projected to rise 3.4 percent for 2005, and 2.9 percent next year. Inflation-adjusted disposable personal income is forecast to increase 1.4 percent in 2005 and 4.5 percent in 2006.
13 December 2005
Fed Boosts Interest Rates: Big Yawn?
Real estate loan rates to remain low, experts predict
Inman News, December 13, 2005
By Janis Mara
Federal Reserve head Alan Greenspan and his colleagues hiked the federal funds rate to 4.25 percent today, the 13th increase since June 2004. With all eyes on the Fed, the burning question arises: So what?
Real estate industry professionals have been wringing their hands ever since the Fed began raising the federal funds rate in 2004. They feared that as the overnight bank rate went up, so would interest rates on 30-year fixed mortgages.
But interest rates on such mortgages still hover around 6.6 percent – not a high rate at all. What gives?
The federal funds rate is the interest rate banks charge each other for overnight loans. Conventional wisdom says that as that rate goes up, so do long-term rates. But obviously, it ain't necessarily so.
In other words: though there has long been a relationship between the bank rate and long-term interest rates, the two are not exactly locked in a passionate embrace. Maybe it's more like a cousin and an uncle.
"The fact that short-term interest rates are rising while long-term interest rates are not rising simply underscores that there is little direct relationship between what the federal funds rate might be and what mortgage rates might be," said Keith Gumbinger, vice president of New Jersey-based financial publisher HSH Associates.
In fact, Gumbinger and other industry experts said long-term interest rates might actually drop.
"It's not unreasonable to think that as the Fed raises short-term interest rates and, by doing so, helps quell any inflationary threat, that long-term interest rates might be stable or perhaps even decline," the vice president said.
"Long-term rates are reflective of the price of money plus an inflation premium. Little inflation means little premium," Gumbinger said.
Even better news: "It's certainly possible that interest rates for fixed-rate mortgages in 2006, while higher than in 2005, may not be much higher than current levels, provided inflation remains tame," according to Gumbinger.
If interest rates remain low, with inventory growing and prices softening in some areas, could another real estate boom be in the making? Alas, that's going a bit too far, according to Gumbinger and others.
"We don't have the conditions necessary to create a new boom," Gumbinger said. "Booms are created as interest rates continually decline over a longish period of time."
But Gumbinger had good news for the mortgage industry.
"There's a very good likelihood that adjustable-rate mortgages that are coming due for their first or continuing adjustments in 2006 will find holders of those products looking at alternatives including refinancing to fixed-rate mortgages," Gumbinger predicted. "Activity levels of refinancings are likely to be pretty solid."
Marcus Ortega, a senior investment executive with the J.P. Turner brokerage, agreed with Gumbinger that mortgage interest rates aren't necessarily on the way up.
"The higher the Fed raises the bank rates, the more the Fed calms foreign investors about inflation," hence keeping rates low, Ortega said.
Many folks currently on the real estate scene have never seen interest rates higher than 8 percent. But, Ortega pointed out, in the early 1980s, interest rates were in double digits.
"In 1981, the U.S. was trapped in an inflation spiral. Paul Volkner, who was the chair of the Federal Reserve, boosted the Federal funds rate to 18 or 19 percent and that broke the inflation spiral," Ortega explained.
"That made the bond market happy, we didn't have to worry about inflation and erosion to our bond principal. Bond prices rallied from 1981 up until now," Ortega said.
The executive sees the 10-year note as "a great barometer for a general sense of where mortgage rates might go." The 10-year bond is now at 4.5 percent interest, Ortega said.
The executive said, "People are worried about mortgage money going back to 7 percent. But that's not a disaster. Back in 1992 and 1993, 7 percent mortgage money was cheap. A 7 percent interest rate for a 30-year fixed mortgage is in the lower 20th percentile historically."
Industry experts surveyed by Inman News have said that only if interest rates reach 8 percent will the market be affected.
"At 6 and 7 percent we still see upward movement or, at worst, sideways-moving price projections," said Michael Sklarz, chief valuation officer for Fidelity National Financial. "But at 8 percent, some markets have prices falling."
As long as the Fed doesn't continue to raise interest rates, Mitchell Grashin, a loan broker with Oakland, Calif.-based Holmgren Associates, is optimistic, he said.
"They really need to slow down those raises," Grashin said. "This is the last hurrah for Greenspan. They are going to let him go out on his terms with his raises and the new guy next year will do a little diminishing of those raises and maybe flatten them out."
Grashin was referring to the fact that Greenspan is retiring, with his successor Ben Bernanke slated to take the reins in 2006. Greenspan's final Fed meeting is on Jan. 31.
A number of economists believe that the Fed's interest hikes are coming to an end, with one final quarter-point increase expected at the Jan. 31 meeting. Even those who expect Greenspan's successor Bernanke to do some rate raising don't foresee the federal funds rate going above 5 percent.
"Most banks are expecting the Fed to slow down their raises next year," Grashin said. "They released the minutes of their September meeting and they were talking about 'maybe we're going overboard with these raises. Maybe next year we'll slow it down a bit.' This is why rates have stayed low."
Inman News, December 13, 2005
By Janis Mara
Federal Reserve head Alan Greenspan and his colleagues hiked the federal funds rate to 4.25 percent today, the 13th increase since June 2004. With all eyes on the Fed, the burning question arises: So what?
Real estate industry professionals have been wringing their hands ever since the Fed began raising the federal funds rate in 2004. They feared that as the overnight bank rate went up, so would interest rates on 30-year fixed mortgages.
But interest rates on such mortgages still hover around 6.6 percent – not a high rate at all. What gives?
The federal funds rate is the interest rate banks charge each other for overnight loans. Conventional wisdom says that as that rate goes up, so do long-term rates. But obviously, it ain't necessarily so.
In other words: though there has long been a relationship between the bank rate and long-term interest rates, the two are not exactly locked in a passionate embrace. Maybe it's more like a cousin and an uncle.
"The fact that short-term interest rates are rising while long-term interest rates are not rising simply underscores that there is little direct relationship between what the federal funds rate might be and what mortgage rates might be," said Keith Gumbinger, vice president of New Jersey-based financial publisher HSH Associates.
In fact, Gumbinger and other industry experts said long-term interest rates might actually drop.
"It's not unreasonable to think that as the Fed raises short-term interest rates and, by doing so, helps quell any inflationary threat, that long-term interest rates might be stable or perhaps even decline," the vice president said.
"Long-term rates are reflective of the price of money plus an inflation premium. Little inflation means little premium," Gumbinger said.
Even better news: "It's certainly possible that interest rates for fixed-rate mortgages in 2006, while higher than in 2005, may not be much higher than current levels, provided inflation remains tame," according to Gumbinger.
If interest rates remain low, with inventory growing and prices softening in some areas, could another real estate boom be in the making? Alas, that's going a bit too far, according to Gumbinger and others.
"We don't have the conditions necessary to create a new boom," Gumbinger said. "Booms are created as interest rates continually decline over a longish period of time."
But Gumbinger had good news for the mortgage industry.
"There's a very good likelihood that adjustable-rate mortgages that are coming due for their first or continuing adjustments in 2006 will find holders of those products looking at alternatives including refinancing to fixed-rate mortgages," Gumbinger predicted. "Activity levels of refinancings are likely to be pretty solid."
Marcus Ortega, a senior investment executive with the J.P. Turner brokerage, agreed with Gumbinger that mortgage interest rates aren't necessarily on the way up.
"The higher the Fed raises the bank rates, the more the Fed calms foreign investors about inflation," hence keeping rates low, Ortega said.
Many folks currently on the real estate scene have never seen interest rates higher than 8 percent. But, Ortega pointed out, in the early 1980s, interest rates were in double digits.
"In 1981, the U.S. was trapped in an inflation spiral. Paul Volkner, who was the chair of the Federal Reserve, boosted the Federal funds rate to 18 or 19 percent and that broke the inflation spiral," Ortega explained.
"That made the bond market happy, we didn't have to worry about inflation and erosion to our bond principal. Bond prices rallied from 1981 up until now," Ortega said.
The executive sees the 10-year note as "a great barometer for a general sense of where mortgage rates might go." The 10-year bond is now at 4.5 percent interest, Ortega said.
The executive said, "People are worried about mortgage money going back to 7 percent. But that's not a disaster. Back in 1992 and 1993, 7 percent mortgage money was cheap. A 7 percent interest rate for a 30-year fixed mortgage is in the lower 20th percentile historically."
Industry experts surveyed by Inman News have said that only if interest rates reach 8 percent will the market be affected.
"At 6 and 7 percent we still see upward movement or, at worst, sideways-moving price projections," said Michael Sklarz, chief valuation officer for Fidelity National Financial. "But at 8 percent, some markets have prices falling."
As long as the Fed doesn't continue to raise interest rates, Mitchell Grashin, a loan broker with Oakland, Calif.-based Holmgren Associates, is optimistic, he said.
"They really need to slow down those raises," Grashin said. "This is the last hurrah for Greenspan. They are going to let him go out on his terms with his raises and the new guy next year will do a little diminishing of those raises and maybe flatten them out."
Grashin was referring to the fact that Greenspan is retiring, with his successor Ben Bernanke slated to take the reins in 2006. Greenspan's final Fed meeting is on Jan. 31.
A number of economists believe that the Fed's interest hikes are coming to an end, with one final quarter-point increase expected at the Jan. 31 meeting. Even those who expect Greenspan's successor Bernanke to do some rate raising don't foresee the federal funds rate going above 5 percent.
"Most banks are expecting the Fed to slow down their raises next year," Grashin said. "They released the minutes of their September meeting and they were talking about 'maybe we're going overboard with these raises. Maybe next year we'll slow it down a bit.' This is why rates have stayed low."
03 December 2005
Facts Left out of Talk about Bursting Bubble
Washington Times, November 25, 2005
By M. Anthony Carr
My ears hurt from all the squealing I hear about the impending bursting of the "real estate bubble." Sometimes I feel like the lone voice of reason crying out in the wilderness. The real estate bubble naysayers whine about the "bubble" as if the whole national real estate market were nothing more than another overinflated stock exchange.
Folks, it is not. Like politics, real estate is local, and I wish those journalists scaring buyers with quotes from their stock market experts would just stop and consider some real facts:
• The top hot U.S. real estate markets are also the top hot job markets.
• Houses are where the jobs go at night.
• Although there are pockets of overinflated real estate, without enough houses in a hot job market, your housing inventory will escalate in price.
• You have to live somewhere, and it's never in a stock portfolio.
Whether renting or buying, there is an automatic necessity for the ownership of real estate, either by a homeowner or an investor. There is no built-in necessity for owning stocks, so there is no real comparison between the two.
In the hot markets across the country -- where the squeals are loudest -- investors must look to the local economy to determine their risks. In the Washington area, the Northern Virginia Association of Realtors (www.nvar.com) looks at those numbers every year at its annual economic summit held at George Mason University.
Unfortunately, most of the press gives it cursory coverage. I think it was especially so this year, because the economists did not dance to the sky-is-falling mantra of bubble theorists. (In the interest of full disclosure, I once worked as NVAR's director of communications). The NVAR's latest monthly Update reported on the summit.
"In a nutshell, you couldn't be in a better market," says Dr. Stephen Fuller, director for the Center for Regional Analysis and School of Public Policy at George Mason University (www.cra-gmu.org). "If you're worried about some bubble, or slowdown, or something that's evil, just put yourself in any other market. They envy us."
To put it bluntly, we're going to have a housing problem in the future, but it's not the bursting kind. Rather, it is the how-can-I-make-$60,000-a-year-and-not-have-to-live-out-of-my-car" kind. In the Washington area and other hot job market areas, housing is climbing in value simply because there is not enough of it.
Mr. Fuller reports that the regions surrounding Washington have drawn 287,000 jobs to the area in the last five years. However, the Washington region is not providing houses for all these people.
This year, there's a deficit in housing in this region of 463,300 units. That means that while people can take jobs here, they won't be able to live near them. They'll have to commute from a couple of hours away.
The numbers don't get any better, Mr. Fuller says. By 2030, he projects a shortfall of housing in the Washington area of 716,100 units. So, squealers, where's the bubble? The term being used by journalists is left over from the stock market's inexplicable rise in value when nothing but hype drove the market. Companies were raising lots of venture capital and creating products they couldn't sell, meaning that they ate through the borrowed funds and finally burst. In hot real estate markets, there's no hype.
There are real jobs being created by real companies, creating real products and selling them to real consumers. Real money is being made, and these real companies need real employees to make it happen. We need real houses to put them in. If you want to quell the fear, build more houses.
Now, would all the squealers please stop? You're giving me a headache.
By M. Anthony Carr
My ears hurt from all the squealing I hear about the impending bursting of the "real estate bubble." Sometimes I feel like the lone voice of reason crying out in the wilderness. The real estate bubble naysayers whine about the "bubble" as if the whole national real estate market were nothing more than another overinflated stock exchange.
Folks, it is not. Like politics, real estate is local, and I wish those journalists scaring buyers with quotes from their stock market experts would just stop and consider some real facts:
• The top hot U.S. real estate markets are also the top hot job markets.
• Houses are where the jobs go at night.
• Although there are pockets of overinflated real estate, without enough houses in a hot job market, your housing inventory will escalate in price.
• You have to live somewhere, and it's never in a stock portfolio.
Whether renting or buying, there is an automatic necessity for the ownership of real estate, either by a homeowner or an investor. There is no built-in necessity for owning stocks, so there is no real comparison between the two.
In the hot markets across the country -- where the squeals are loudest -- investors must look to the local economy to determine their risks. In the Washington area, the Northern Virginia Association of Realtors (www.nvar.com) looks at those numbers every year at its annual economic summit held at George Mason University.
Unfortunately, most of the press gives it cursory coverage. I think it was especially so this year, because the economists did not dance to the sky-is-falling mantra of bubble theorists. (In the interest of full disclosure, I once worked as NVAR's director of communications). The NVAR's latest monthly Update reported on the summit.
"In a nutshell, you couldn't be in a better market," says Dr. Stephen Fuller, director for the Center for Regional Analysis and School of Public Policy at George Mason University (www.cra-gmu.org). "If you're worried about some bubble, or slowdown, or something that's evil, just put yourself in any other market. They envy us."
To put it bluntly, we're going to have a housing problem in the future, but it's not the bursting kind. Rather, it is the how-can-I-make-$60,000-a-year-and-not-have-to-live-out-of-my-car" kind. In the Washington area and other hot job market areas, housing is climbing in value simply because there is not enough of it.
Mr. Fuller reports that the regions surrounding Washington have drawn 287,000 jobs to the area in the last five years. However, the Washington region is not providing houses for all these people.
This year, there's a deficit in housing in this region of 463,300 units. That means that while people can take jobs here, they won't be able to live near them. They'll have to commute from a couple of hours away.
The numbers don't get any better, Mr. Fuller says. By 2030, he projects a shortfall of housing in the Washington area of 716,100 units. So, squealers, where's the bubble? The term being used by journalists is left over from the stock market's inexplicable rise in value when nothing but hype drove the market. Companies were raising lots of venture capital and creating products they couldn't sell, meaning that they ate through the borrowed funds and finally burst. In hot real estate markets, there's no hype.
There are real jobs being created by real companies, creating real products and selling them to real consumers. Real money is being made, and these real companies need real employees to make it happen. We need real houses to put them in. If you want to quell the fear, build more houses.
Now, would all the squealers please stop? You're giving me a headache.
Slowdown is a Return to Balance
Washington Times, December 2, 2005
By Chris Sicks
Making predictions about the Washington-area housing market isn't easy. For several years, market watchers, including me, kept predicting that the market was just about to cool off.
We were wrong about 2003 and 2004; 2005 was the year when the market finally did cool down, with a sudden drop in sales and a sharp rise in supply. So, how will 2006 look? Do I dare to make any predictions? I do, but I also will call in an expert to back me up.
Next year won't be the on-fire seller's market of recent years, but it also won't be the cool, leisurely buyer's market of mid-1990s. What we'll have is something in between.
"It's what I call a 'normal market,' " says David Rathgeber, principal broker of Your Friend in Real Estate in Potomac Falls, Va. "Most of us don't even know what a normal market looks like because we went through it so quickly last time." Mr. Rathgeber is referring to 1998-99, when the market quickly shifted gears from a buyer's market to a seller's market. Sales climbed and inventory fell, and that combination began a rise in home prices that didn't peak until this spring. "Next year's normal market will mean that buyers will be able to take a little time to think about their purchase," Mr. Rathgeber says. "Many will find they don't have to fight off other buyers, and so they will be a lot happier."
"Sellers will find they can't just stick any old price on a home and sell it in two days. They will have to carefully analyze their home's value before listing it. After they've done that, they will be able to sell their property in a reasonable amount of time for a decent price."
Next year's sellers should be as happy as the buyers, although some may grumble. Homes won't sell as quickly in 2006 as they did this year, but they will sell. Profits will be large, too, because of the incredible rise in home values during the past several years.
Real estate agents also will be happy with next year's normal market. In a frantic seller's market, agents have to baby-sit frustrated buyers who make offer after offer, only to be outbid by other buyers.
The opposite is true in a plodding buyer's market such as we had from 1991 to 1997. Back then, sellers were the ones who needed hand-holding as they waited month after month, hoping someone would come along and even make an offer on their home. Next year should be a much healthier market. Home values won't go through the roof, which will disappoint anyone who bought recently.
Remember, however, that we only experienced that kind of appreciation because the market was so imbalanced. Inevitably, balance had to be restored, and that's what I believe we'll see in 2006. A little more balance, a little normalcy. Won't that be refreshing?
The statistics in this story reflect a metro area that includes the Maryland counties of Montgomery, Prince George's, Anne Arundel, Howard, Charles and Frederick; the Virginia counties of Arlington, Fairfax, Loudoun, Prince William, Spotsylvania and Stafford; the city of Alexandria; and the District.
By Chris Sicks
Making predictions about the Washington-area housing market isn't easy. For several years, market watchers, including me, kept predicting that the market was just about to cool off.
We were wrong about 2003 and 2004; 2005 was the year when the market finally did cool down, with a sudden drop in sales and a sharp rise in supply. So, how will 2006 look? Do I dare to make any predictions? I do, but I also will call in an expert to back me up.
Next year won't be the on-fire seller's market of recent years, but it also won't be the cool, leisurely buyer's market of mid-1990s. What we'll have is something in between.
"It's what I call a 'normal market,' " says David Rathgeber, principal broker of Your Friend in Real Estate in Potomac Falls, Va. "Most of us don't even know what a normal market looks like because we went through it so quickly last time." Mr. Rathgeber is referring to 1998-99, when the market quickly shifted gears from a buyer's market to a seller's market. Sales climbed and inventory fell, and that combination began a rise in home prices that didn't peak until this spring. "Next year's normal market will mean that buyers will be able to take a little time to think about their purchase," Mr. Rathgeber says. "Many will find they don't have to fight off other buyers, and so they will be a lot happier."
"Sellers will find they can't just stick any old price on a home and sell it in two days. They will have to carefully analyze their home's value before listing it. After they've done that, they will be able to sell their property in a reasonable amount of time for a decent price."
Next year's sellers should be as happy as the buyers, although some may grumble. Homes won't sell as quickly in 2006 as they did this year, but they will sell. Profits will be large, too, because of the incredible rise in home values during the past several years.
Real estate agents also will be happy with next year's normal market. In a frantic seller's market, agents have to baby-sit frustrated buyers who make offer after offer, only to be outbid by other buyers.
The opposite is true in a plodding buyer's market such as we had from 1991 to 1997. Back then, sellers were the ones who needed hand-holding as they waited month after month, hoping someone would come along and even make an offer on their home. Next year should be a much healthier market. Home values won't go through the roof, which will disappoint anyone who bought recently.
Remember, however, that we only experienced that kind of appreciation because the market was so imbalanced. Inevitably, balance had to be restored, and that's what I believe we'll see in 2006. A little more balance, a little normalcy. Won't that be refreshing?
The statistics in this story reflect a metro area that includes the Maryland counties of Montgomery, Prince George's, Anne Arundel, Howard, Charles and Frederick; the Virginia counties of Arlington, Fairfax, Loudoun, Prince William, Spotsylvania and Stafford; the city of Alexandria; and the District.
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