Housing slump in US has just begun, says forecaster
Bloomberg 11 February 2009
Let’s say you own a US$1 million home in Santa Barbara, California. The house seemed like a steal when you bought it with that adjustable rate mortgage in 2005. You still love the white beaches and those yachts bobbing up and down in the harbour.
Then you awaken early one morning, troubled that your monthly payments will soon double. You go out to pick up your newspaper and see for sale signs on five houses on the street. One identical to yours just sold for US$500,000.
Are you going to pay the bank US$1 million plus interest for your place?
John Talbott, a former investment banker for Goldman Sachs, poses that hypothetical question in his latest book of financial prophecy, Contagion: The Financial Epidemic that Is Sweeping the Global Economy.... and How to Protect Yourself from It.
His answer: “I don’t think so.
“If I’m right, then this housing decline has only just begun.”
Mr. Talbott is an oracle with a track record: his previous books predicted the collapse of both the housing bubble and the technology-stock binge before it.
A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.
What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how house prices got so out of kilter with wages, rental prices and replacement values - the cost of buying a property and building a home.
“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.
Mr. Talbott’s latest predictions are sobering. The United States is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years. Adjustable rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time.
Bankers may “try to blame the crisis on poor Americans with bad credit histories, but that is not the real cause of the housing crisis”, he says. “The greatest home price appreciations and the homes most subject to price readjustment are in America’s wealthiest cities and its glitziest neighbourhoods.”
At the end of last year, a record 19 million homes stood empty, and home ownership sank to an eight-year low as banks seized homes faster than they could sell them, the census bureau said last week.
Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said.
By the time the crash ends, homeowners will have lost as much as US$10 trillion, with investors and banks worldwide losing almost US$2 trillion, Mr. Talbott predicts.
And just as the US starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption).
So, how far will the price of your home on the range fall? Citing historical data and trends, Mr. Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation.
Why 1997? A 120-year historical graph shows that real home prices stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.
A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006, in which banks were lending large amounts of money under poor supervision and aggressive terms”.
How did we get into this mess? Mr. Talbott blames everyone from the average Americans who caught “the greed bug” to hedge funds and credit default swaps.
The single biggest error was for US citizens to allow their national politicians to take large campaign contributions from big business and Wall Street, he says.
“This crisis was no accident,” Mr. Talbott says. It began because the government was “co-opted” into deregulating the financial industry. Politicians were “paid to deregulate industry”, taking billions of dollars each year in campaign contributions.
His investment advice for this prolonged recession: hang on to cash and invest in gold or Treasury inflation-protected securities.
If he had to invest in stocks, he would put his money in China.
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Housing slump in US has just begun, says forecaster
Bloomberg
11 February 2009
Let’s say you own a US$1 million home in Santa Barbara, California. The house seemed like a steal when you bought it with that adjustable rate mortgage in 2005. You still love the white beaches and those yachts bobbing up and down in the harbour.
Then you awaken early one morning, troubled that your monthly payments will soon double. You go out to pick up your newspaper and see for sale signs on five houses on the street. One identical to yours just sold for US$500,000.
Are you going to pay the bank US$1 million plus interest for your place?
John Talbott, a former investment banker for Goldman Sachs, poses that hypothetical question in his latest book of financial prophecy, Contagion: The Financial Epidemic that Is Sweeping the Global Economy.... and How to Protect Yourself from It.
His answer: “I don’t think so.
“If I’m right, then this housing decline has only just begun.”
Mr. Talbott is an oracle with a track record: his previous books predicted the collapse of both the housing bubble and the technology-stock binge before it.
A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.
What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how house prices got so out of kilter with wages, rental prices and replacement values - the cost of buying a property and building a home.
“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.
Mr. Talbott’s latest predictions are sobering. The United States is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years. Adjustable rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time.
Bankers may “try to blame the crisis on poor Americans with bad credit histories, but that is not the real cause of the housing crisis”, he says. “The greatest home price appreciations and the homes most subject to price readjustment are in America’s wealthiest cities and its glitziest neighbourhoods.”
At the end of last year, a record 19 million homes stood empty, and home ownership sank to an eight-year low as banks seized homes faster than they could sell them, the census bureau said last week.
Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said.
By the time the crash ends, homeowners will have lost as much as US$10 trillion, with investors and banks worldwide losing almost US$2 trillion, Mr. Talbott predicts.
And just as the US starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption).
So, how far will the price of your home on the range fall? Citing historical data and trends, Mr. Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation.
Why 1997? A 120-year historical graph shows that real home prices stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.
A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006, in which banks were lending large amounts of money under poor supervision and aggressive terms”.
How did we get into this mess? Mr. Talbott blames everyone from the average Americans who caught “the greed bug” to hedge funds and credit default swaps.
The single biggest error was for US citizens to allow their national politicians to take large campaign contributions from big business and Wall Street, he says.
“This crisis was no accident,” Mr. Talbott says. It began because the government was “co-opted” into deregulating the financial industry. Politicians were “paid to deregulate industry”, taking billions of dollars each year in campaign contributions.
His investment advice for this prolonged recession: hang on to cash and invest in gold or Treasury inflation-protected securities.
If he had to invest in stocks, he would put his money in China.
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