TOO MANY REAL ESTATE AGENTS

Too many mortgage bankers, too many loan officers, too many investment bankers. This is another reminder of why a "bubble" is not about price appreciation, it's about the massive misallocation of real resources. Bill Gross:

Take a gander at the remarkable Chart II displayed below. It shows that real estate, not manufacturing, has been the economic impetus in recent years in terms of net growth. Once price momentum slows or ceases for home prices, job growth will slow or disappear in the sector as well. How many more mortgage brokers or real estate agents do we really need or can we legitimately support? At least one more than our total of portfolio managers and investment bankers you might say, and to that I’d say "touché," but it only reinforces my point! Once the cautionary momentum begins, job and wage growth will not support a continuing housing boom, leading to further caution and an economic slowdown at the minimum.

http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO+September+2005.htm
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REAL ESTATE According to Merrill Lynch: from 1955 to 1995 housing prices kept pace with inflation, appreciating 0 percent in real terms. From 1996 to 2005 housing prices have appreciated nationwide 45 percent.

THE REAL OC It's better than even the TV show portrays:

But it can't be disputed that the OC coast comes off as one big Mediterranean-styled resort filled with beautiful people living in new mansions, wearing designer clothes and driving flashy cars. It's a place where the sun always shines, cell phones are a necessary accessory and shopping is a respected pastime.

Many people I know have cried foul, that our town is not all monied-up, that the country will get the wrong impression of us.

The thing is, they're wrong; the show has us pretty much pegged. We're a spot that in the past few decades has gone from BBQs on the beach to toddies on the terrace, and more times than not those terraces embrace Mediterranean architecture. And new resort/spas like Laguna Beach's Montage, Monarch Beach's St. Regis, Huntington Beach's Hyatt Regency and the soon-to-be developed Pelican Hill Inn, have inspired state tourism officials to market us as the "new Riviera." Consider the fact that the nation's average home price is just over $200,000; the average Newport Beach home price is over $1 million. Like it or not, we are not a beach town any longer, we are a cosmopolitan destination that turns the rest of the country money-green with envy.

It's not a crime. It's just a matter of perspective. If you're rich enough to call your home a villa, your terrace a loggia and stock a private wine cellar, you call the last decade a Renaissance of fine dining, high culture and upscale shopping. If you're still working a paycheck, you call it an invasion of skin-toned stucco, and wax nostalgic for the days when you could get parking at the beach and afford to eat out. But come on, who wouldn't take the big house with the entertainment center? Or even the guest house, for that matter?

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BEN BERNANKE: What housing bubble?

The increase in house prices has recently received much attention in the media. While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom. These fundamentals include low mortgage rates, rising employment and incomes, a growing population, and limited supply of homes or land in some areas. For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices. The Administration will continue to monitor these developments. However, our best defenses against potential problems in housing markets are vigilant lenders and banking regulators, together with perspective and good sense on the part of borrowers.

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http://www.whitehouse.gov/cea/20050712.html

REAL ESTATE BUBBLE

Excellent comments in today's Wall Street Journal on the ridiculous real estate market and America's consumer debt accumulation:

If you borrow $350,000 with an interest-only mortgage that carries a fixed rate of roughly 4.8% for the first five years, here's what you will pay:

-The monthly payment on the loan would be $1,403 during the initial period.

-Even if interest rates don't rise, the monthly payment would jump to $2,008 after five years.

-If rates jump by two percentage points instead, the monthly payment would jump by 73% to nearly $2,500.

[...]

In California, where home-price growth has been sizzling, interest-only loans accounted for 61% of the mortgages taken out to buy homes in the first two months of this year, up from 47.1% in 2004 and less than 2% in 2002, according to an analysis prepared for The Wall Street Journal by San Francisco researchers LoanPerformance, a unit of First American Corp. Just 18% of California households can afford to buy a median-price house using a conventional 30-year fixed-rate mortgage, according to a report issued this month by the California Association of Realtors.

In another report issued this month, mortgage strategists at UBS AG called the shift to ARMS and nontraditional mortgage products such as interest-only loans 'symptomatic of...the end of the housing cycle. The thing that all of these loans have in common is that they allow homeowners to buy a more expensive home than they could have qualified for with a 'traditional' loan.

[...]

Since 1990, income for the median American household has risen only 11% after adjusting for inflation, while median household spending has jumped at 30%, according to an analysis by Economy.com. How could the typical family afford to spend so much? Median household debt outstanding has leaped 80%.

Despite the dicta of old sages, many economists--led by Federal Reserve Chairman Alan Greenspan--see the expansion of credit to lower-income families as a sign of progress. Some speak of the "democratization" of credit. In an April speech, Greenspan said that in colonial times through the late 19th Century, only the affluenct had access to credit and raters were high. In the early 20th century gasoline companies and retail stores started issuing credit cards, but cards didn't spread widely until the late 1960s when banks piled into the business. Now, Mr. Greenspan says, "innovation and deregulation have vastly expanded credit availability to virtually all income classes.

The funniest strategy: purchasing a house on interest only or ARM and then recruiting your friends to pay your rent so you can afford to make the mortgage payment. Disaster waiting to happen. International Phone Cards House review

WHY I LOVE THE DAILY RECKONING

Because we are on the same page -- TDR and I. Today they took on Trash Vegas:

In the homeland, meanwhile, prices are still going up - especially in that Mecca of the absurd and extravagant, Las Vegas. Prices of residential real estate rose 47% last year. And Donald Trump reports that every one of the 1,282 units in his 64-story hotel/condo are already reserved by buyers - despite the fact that not a single shovel has yet hit the sand. So many other high-rise projects are being discussed that builders are talking of the "Manhattanization" of the desert city - with skyscrapers full of luxury condos all up and down The Strip. If anyone knows why people would want to live in Las Vegas, he does not work here at The Daily Reckoning headquarters. Still, the city attracts 5,000 new residents every month.

If anyone knows why people would want to live in Las Vegas, he doesn't know what he's talking about. My guess is that the Vegas residential market will be one of the hardest hit in the crash, considering most of the population depends entirely on tourist spending to support their living. Hello, recession! Goodbye, Vegas tourists! Did you know Vegas generates more revenue off retail commercial development than casino gaming? It's true. Calling Cards Drug tests Alcohol tests

DEFINITIVE EVIDENCE OF A REAL ESTATE BOOM?

Rental income is stagnant. Housing prices have soared, rents have risen only modestly:

The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier. To bring the ratio of prices to rents back to equilibrium, either rents must rise sharply or prices must fall. Yet central banks cannot allow rents to surge as this would feed into inflation. Rents directly or indirectly account for 29% of America's consumer-price index, so rising inflation would force the Fed to raise interest rates more swiftly, which could trigger a fall in house prices. Alternatively, if rents continue to rise at their current annual pace of 2.5%, house prices would need to remain flat for over ten years to bring America's ratio of house prices to rents back to its long-term norm. There is a clear risk prices might fall.

...

Rent asunder

Take a two-bedroom flat in London, which you could buy for £450,000 ($865,000). To rent the same flat would currently cost £1,700 a month. In addition to a 6% mortgage rate, a buyer would face annual maintenance and insurance costs of, say, 1.25%. In the first year, the rent of £20,400 compares with total mortgage interest and maintenance payments of £33,000, a saving of £12,600. Interest payments would be less if a large deposit were paid, but in that case the income lost from not investing that money elsewhere has to be taken into account.

Assume that rents rise by 3% a year, in line with wages, while house prices from now on rise in line with inflation of 2%. At the end of seven years (the average time before the typical homeowner moves), you would be almost £35,000 better off renting, taking account of the capital appreciation and buying and selling costs. In other words, even without a fall in real house prices—which many believe to be likely—buying a house in Britain today seems a poor investment.

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I HEARD ON THE NEWS LAST EVENING

that the State of Hawaii is instituting price controls on gasoline. The newscaster actually said: "We look forward to seeing how this works." I'll tell you how it will work: there will be less gas available in Hawaii than there otherwise would be. It's a good thing our central planners here in the U.S. can crank open the reserves and flood the market. Who said socialism was a failed experiment? The Soviets just didn't have the right leader: George W. Bush.

Of course, leave it up to a nutball conservative to blame the rise in oil prices on John Kerry. Here's another lesson in basic economics: a producer can't pass the tax forward to the consumer by tacking it on to the prevailing market price. I suppose he is right that government actions reduce the supply of oil compared to what it otherwise would be. Still, you can't prove this is behind the rise in oil prices. A huge increase in demand for oil also puts upward pressure on the world price.

The trio have one thing in common -- their production is not growing. PetroChina and Sinopec's oil and gas production were virtually flat, while CNOOC's output growth of 2.9 percent was below expectations.

Half of PetroChina's crude output comes from the Daqing oil field in northeast China, where output has been sagging. Sinopec's Shandong-based Shengli oilfield, which accounted for most of its crude output, is also getting depleted.

PetroChina's upstream capex rose 16 percent to 59 billion yuan last year, but its output grew just 2.2 percent. Mirroring the difficulty of finding oil in China, PetroChina's total oil and gas reserves rose just 7.9 percent to 17.8 billion BOEs at the end of 2003, 40 percent of which is gas.

PetroChina plans capex of 17.4 billion yuan on gas this year, up from 13.5 billion yuan in 2003. The main project is the mega West-to-East pipeline, which is expected to pump 12 billion cubic metres a year by 2007.

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