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The Death of the "New Economic Model":

As reported here at the VC, last March a realtor told the N.Y. Times that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." The realtor also predicted that "a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely."

Today, St. Joe Co., a leading real estate developer in Florida, announced terrible first quarter earnings. The South Florida condo market, meanwhile, is moribund.

More generally, over the last few days, Hovnanian, Beazer, Centex, and other homebuilders have also announced poor earnings and, more important, prospects. Even the Washington Post, which has been extremely lax in reporting bubble deflation (for example, carrying on article a week ago wondering what would happen "if the huge price increases of the last five years suddenly come to a standstill," as if they hadn't already) has caught on.

Though prices continued to rise for a few more months, I officially nominate nominate March 25, 2005, when the Times saw fit to publish the comment noted above, as the peak of the bubble. (Others will no doubt be partial to June 12, 2005, when the Wall Street Journal carried a story about sellers' market power, including an anecdote about an owner of an expensive San Francisco home who required purchasers to contractually agree to feed her backyard squirrels:

Indeed, when Susan Butler was negotiating to buy Ms. Gao's San Francisco property, she was resigned to the feeding schedule. "At that point, I said, 'Yeah, what the hell, I'll feed the squirrels,'" she said. She signed a contract in April, paying $815,000 — or $116,000 over the asking price.")

Anderson (mail) (www):
The term "new economic model" should be enough to make anybody put his checkbook back in his pocket.
5.2.2006 6:04pm
Steve:
You call it a new economic model. We call it Manhattan.
5.2.2006 6:15pm
anonassociate:
Professor Bernstein, to the extent that you continue to post items on the housing bubble, it seems fair that you also acknowledge your own personal pecuniary interest in the matter (if I recall correctly, you are a Northern Virginia renter explicitly waiting for the bubble to burst so you can purchase a home).
5.2.2006 6:32pm
Art O'Persuasion (mail):
Thank you for not calling anyone stupid, disingenuous, or hypocritical in this entire post. Your restraint is admirable.
5.2.2006 6:34pm
Anderson (mail) (www):
You forgot "anti-Semitic," Art. DB can indeed be quite readable when not on a hobbyhorse.
5.2.2006 6:39pm
davidbernstein (mail):
Hmm, anon, I've read dozens of articles on the housing market in the past few years, and I can't recall any reporter or commentator revealing whether they were owners or renters. I can't even recall economists quoted being asked whether they consult for the real estate industry, as I know one of the Post's main sources does. Maybe I should set an example, but why should I look like the "biased" commentator?
5.2.2006 6:44pm
anonassociate:
That's a fair point if you were a reporter; in this case I think the more apt analogy is to a commentator appearing on CNBC, in which case your biases would generally be disclosed (i.e. if you or your brokerage house provided investment banking services to the company you were speaking about). I note that you did not deny my characterization of your biases (here's mine: I have owned a house in Arlington for a number of years) and I'm happy to leave it at that. Regards.
5.2.2006 7:04pm
Shangui (mail):
You forgot "anti-Semitic," Art. DB can indeed be quite readable when not on a hobbyhorse.

I often disagree with Professor Bernstein and to be honest often (but certainly not always) find his posts to be lacking in intellectual heft. But I also find that he is VERY hesitant to call someone an anti-Semite without strong evidence. Yes, he is very pro-Israel, but he does not equate being anti-Israel with being anti-Semitic.

More importantly, why be so insulting, Art and Anderson, when there's nothing in this particular post to merit it?
5.2.2006 7:04pm
gab (mail):
"Pecuniary" - Hah, good word! I nominate July 20, 2005, the day the S&P 500 Homebuilding Index topped.
5.2.2006 7:05pm
Anderson (mail) (www):
More importantly, why be so insulting, Art and Anderson, when there's nothing in this particular post to merit it?

Actually, my 1st comment went to the merits, as I was happy to see DB writing a nice, normal post. Art chimed in &omitted the most glaring deficiency in DB's posting; I don't think my comment responding to Art was "insulting," though I daresay other comments I've made in other threads have reached that level. DB at any rate has no problem deleting my comments if they annoy him (he's done it), so what the hell.

Anyway, DB's is the last laugh, because I'm obviously reading the darn things.
5.2.2006 7:12pm
Tracy Coyle (mail) (www):
Since the beginning of the year, foreclosures have been soaring nationwide. Specific counties may have different results, but for us in So. Wisconsin, the numbers are as low as a 15% increase over last year to a high of 92% over last year. Indications are the average is 35-50% increase over last year. If the bubble isn't popped, it sure is deflating.

See my post on foreclosures here
5.2.2006 7:17pm
SenatorX (mail):
Popped bubbles or deflated balloons, it amounts to the same thing. DB is right about the market, bad times ahead for a lot of people. Peoples whose jobs depend on the housing boom, those with ARM loans, and late investors to the game will get crunched.

I just moved from Vegas to Florida a few months ago. To buy a home of all things. Vegas was HORRIBLE. I know many people personally who took interest only loans for 350k boxes that all look alike.

In any case I, and I have to figure any other home buyer with a normal IQ, are not going to buy right now. Home sale signs galore with nothing moving in central Florida. I have been browsing central and north Florida for 2 months now and its all high prices and nothing selling. Inventory will continue to increase at an accelerated rate and then prices will drop. How sharply and how low I don't know. I would advise anyone in any of these areas to sell if they are holding an investment property. Sell it now and sell at a single large discount.

Of course if you can bear the monthly (through a recession...) you can of course just hold on to decent property and sell it next time around.
5.2.2006 8:48pm
Kazinski:
I think it is a very regional effect. Some markets have definetly burst, others are still rising, and still others haven't even started to take off yet. And in the markets most in decline, I think they are suceptible to an interest rate rally. If rates start to decline prices will at least slow their fall if not start to rise slowly again.

In Seattle where I live the market has been robust the last 3 years and it is still going up, albeit not as fast as previously. The main reason is that prices are still significantly below the other urban centers on the west coast and there is a lot of translocation between Seattle and California. I've owned my primary residence 13 years and it has "only" tripled in value in that time. The value of my vacation home in California has sextupled since 2000. I think it has stopped rising for now, but I haven't seen any slippage in prices.
5.3.2006 1:14am
SenatorX (mail):
Kazinski, I agree with you that region makes a huge difference. I don't think you will see a decline in interest rates though. Regardless of how high they rise it is doubtful they will come down in any near term. There are many people who will still make money through the coming bust but it won't be those hoping for interest rates to drop. I would expect your Seattle market to flatten out while the California market falls hard. The price correction in Seattle might not be too bad but you can expect prices to drop a couple hundred thousand on real estate throughout most of California.

The problem is there would be a correction anyway because of the overvaluing of real estate assets. A peak because of building and increasing inventory. Add to this environment the Feds allowed the interest rate to get too low and the market got flooded with exotic, variable interest rate mortgages.

Prices are going up, period. Gas is up, food is up, and the value of the dollar is going down. The dollar going down means the cost of imports is going to go up which in our current market means all that cheap Chinese Wal-Mart junk will start costing more.

Wages are going up but slowly and not really for those that need them most. Those that hope the employment rate and wage increases will help soft land the housing market are deluding themselves. Sure it helps that specialist jobs are getting paid more. Does it help more than all the jobs tied with the declining housing boom? Not even close.

Interest rates going up increases monthly cost to variable interest home owners (some 70% of all 2005 home buyers...) while at the same time costs on everything else is going up for them too and wages off income are not. And this is the rub. Even a flattening of the housing market that you see now will cause inventory to rise quickly. Add this to the foreclosures and bailing investors and we will see such an over supply that the prices (value) of property MUST COME DOWN.

I guess the question for you is what is your debt:asset ratio and your monthly costs. And how much of your house have you been considering in your asset group. I would knock 30% and/or 50% off total real estate asset values and see what that does to your monthly. How long can you bear that? Clearly people that didn't pull equity out of their homes and don't have to sell will be ok. I just know a lot of people that got ambushed by all the great refinancing offers. The money they pulled out spent on either home improvements or "stuff".
5.3.2006 11:28am
SenatorX (mail):
I worded that last bit wrong. I didn't mean so much that losing value in your property will change your monthly(it actually might help). I was thinking more about how much debt people have leverages against their homes. Basically that a lot of people will find the value evaporate (for a while) and be left holding the largest debt they have had for nothing. People with enough assets or income to keep paying the monthly increases for living till the next upswing comes around will be fine though. I feel bad for people that get upside down though and cannot afford the increasing costs. Not a good time to lose a job for example.

I guess if i was a home owner (debt free) or had a lot of equity in a home I would be most worried about my neighborhood going south to renters and whatnot.
5.3.2006 11:44am
Anon1ms (mail):
Several points:

The St. Joe Company is primarily located in the north Florida panhandle, an area (exepting waterfront, of course) that has the most affordable housing in Florida. Moreover, much of St. Joe's residential properties are rather specialized -- resort communities where units are individually owned, but rented out for most of he year.

In Florida there are moves afoot to counter a perceived housing slump (which in South Florida will probably manifest itself in stagnant, but not significantly reduced, prices). The ill-conceived Save Our Homes initiative, that capped property tax increases to 3 percent annually for homesteaded residences has had the effect of making moving out of one's house more expensive -- a new purchase means paying the property tax at current assessed value.

People wanting to downsize would end up paying more monthly, with the larger tax bill, than they had previously. Not surprisingly, many people sit tight, or remodel rather than purchase another home.

If the SOH is made portable, this will make a new purchase more affordable for existing homeowners and you will see an increased demand in Florida with higher prices, no doubt.

Finally, I also doubt that certain built-out, highly desirable areas -- South Florida, Manhattan, SF, etc. -- will see their bubble burst. A little leaking, maybe, but there are just too many peole who want to live in these places for housing prices to go down significantly.
5.3.2006 5:11pm