Tuesday, January 31, 2006

Savings Rate: Lowest since great depression

The savings' rate for the year is down to the lowest level since the Great Depression.
To finance the increased spending, Americans dipped further into their savings, pushing the savings rate for all of 2005 into negative territory at minus 0.5 percent. That was the lowest annual savings rate since a decline of 1.5 percent in 1933, a year in which the country was struggling to cope with the Great Depression.

Housing trends: Contra Costa County

Thursday 01/30/2006: Inventory Check! The decline in inventory appears to be seasonal. The inventory level started to rise again right after the New Year. As of the end of business day yesterday, there were 6,811 units of listing for sale in Alameda and Contra Costa counties. That's an increase of 913 units from the January 3rd low of 5,898.

01/30/2006: Withdrawn/Cancelled listings were staying on the market longer in December 2005 than the same month in 2004. The average number of days on the market had reached 47 days after it made a sharp turn upward in October.

Sunday, January 29, 2006

Bay Area exotic loans

Exotic loans

For those who couldn't land an affordable unit, the path toward homeownership increasingly involves an adjustable mortgage.
Roughly 80 percent of home purchases in the Bay Area were financed using adjustable-rate mortgages, which tend to be riskier than fixed-rate mortgages because the interest rate floats up or down after an initial period.
Among the most popular types of loans in 2005 were interest-only mortgages -- a subject of ever more debate in economic circles. These loans carry lower initial payments, which allow borrowers to pay only interest for a fixed period of time. Their monthly payments jump when they must start paying principal. If interest rates have also risen during that timeframe, payments rise dramatically.
San Francisco mortgage research firm Loanperformance.com found A whopping 50 percent of buyers in the Bay Area this year used interest-only loans, compared with 45 percent of borrowers statewide and 31 percent nationwide.
Also popular are negative-amortization loans, sometimes called payment-option loans, which allow borrowers to defer even interest payments, and therefore hold the possibility of an increasing loan balance.
At the same time these mortgages are opening the door to homeownership to many, however, federal regulators are growing worried these exotic loans may pose threats down the road.

History of Japan's housing bubble

Published: Jan. 30th, 2006
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.

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.
"The biggest lesson from Japan is not to fall into the same state of denial that existed here," said Yukio Noguchi, 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.
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
"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.
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. Akio Makabe, 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."

Sonoma County Trends: Not good

Sonoma County prices drop 3 months in a row
Sonoma County Affordability has sunk to all-time lows. Only 7 percent of households could afford a median-priced home in Sonoma County at year's end compared with 12 percent a year ago. Across California, 14 percent could afford a median-priced home compared with 19 percent a year ago.As sales have slowed, the number of homes on the market has grown to a three-year high.

Bay Area housing Bubble