Saturday, June 17, 2006

How You Can Prevent the Coming Real Estate Collapse

Write your local congressman and ask them for Land Value Tax reform.

As I’ve blogged about previously, all major economic downturns follow a specific pattern and this pattern is driven by the speculation of land.

In the news this past week talking about land speculation:

Shiller: Real estate is risky business

“In justifying his pessimism, he pointed out that price increases have far out paced rises in construction costs, rents and income. In addition, inventory levels are up, as are interest rates and real estate holdings as a percentage of the gross national product”


“This latest one, says Shiller, is a speculative boom. "It's an uncertain situation," he says. "It looks like a down cycle that might continue down or it may bounce around. I will not make a forecast but this pattern suggests risk."

Real estate boom grows

“Just two weeks into the month, the average cost of a home in Calgary has skyrocketed more than $16,000, earning the typical local homeowner over $1,150 a day in June.”

The analysts seem to be in happy go lucky denial

“During the record-setting months of April and May, residential realty increased an average of $500 a day, but the latest figures indicate prices are climbing at rates never seen before.

"The real estate market is completely reflective of the economy," said CREB president Kevin Clark.

"I'd be surprised if this wasn't happening."

As well as Harvard analysts

Housing boom 2.0

The study rides on a major and wrong assumption: that value in home appreciation is permanent.

Booming household growth. The nation will add 1.37 million new households this year. Part of this is natural population increase but this has also been bolstered by foreign migrants.

And then

The Harvard researchers downplay the risk in mortgages with adjustable rates and easy downpayment requirements. Those loans introduce uncertainty, some worry: if interest rates rise, owners could find themselves with much higher monthly payments and that could result in a big jump in foreclosures and forced sales, adding to home inventory and hurting prices.

The Harvard researchers don't expect that to happen, though. Most owners with risky loans have already seen their home values grow substantially. "Having significant home equity is the best protection against foreclosure because homeowners can sell at a profit if they cannot cover their mortgage payments."

As the rate of construction increases, this will drive down the marginal rate of rent. With increasing interest rates and decreasing rental value the opportunity cost of owning real estate will become greater. Investors will leave the housing market depressing the value of homes. When the marginal AIM mortgage owners begin to default, this will spiral out of control and where it stops no one knows.

The Harvard study goes on to say:

“Even if home prices fall in the next few years, the drops are unlikely to erase all the equity of the great majority of homeowners, the Harvard researchers predict. And the interest rate declines that usually accompany such price drops would enable many borrowers to refinance their homes at favorable terms. All this should help prevent large price drops.”

Those who were on the margin will default and those who were near the margin will suddenly be on the margin. With a major amount of defaults the available amount of credit will dry up and banks will be much more hesitant to lend out new funds and those new marginal players will suddenly find themselves in a tight position. With the inevitable dry up of new construction, and with it the jobs, will come an economic downturn.

Speculation in companies who specialize in construction have lost half of their value

Housing's engine -- low rates -- losing steam

“Stocks in the sector have fallen dramatically. Hovnanian, for instance, is trading near $30 a share, down from its 52-week high of $73.40. Rival Toll Brothers trades around $27 a share, down from a 52-week high of $58.67.”

and projects are now being cancelled

“Developers have started canceling projects. Plans were scrapped last week for a 4,400-unit Las Vegas condo resort complex that had been backed by actor George Clooney and nightclub owner Rande Gerber. The development company for the project said rising construction costs and slow sales forced it to rethink the plan.”

As I blogged about previously, one of the big indicators that we are near a sudden land market crash is when land speculators start buying large tracts of undeveloped land.

What's really happening on 13th Street?

“The other jaw of the vise is represented by private developers who have been attracted to the street by relatively inexpensive property that has a million-dollar view overlooking Newport's basin with a Cincinnati skyline that could have been painted as a backdrop for a Hollywood set.”

And finally, to close this:

U.S. housing boom is biggest since 1890

“Increase in home prices may have been psychological, economist says”

And what happened just after that real estate mania?

Panic of 1893

Write your congressmen and help me compile a list of politicians who are LVT friendly and will work towards an LVT future.