So many different opinions on the current state of the property market and where it's headed in 2007. In the UK for example, the FT reports that most analysts are predicting the housing market will cool next year; but given that so many of them were wrong about 2006, it's hard to know what to expect or who to believe going forward. The big story in the US is this years "housing bubble" which hasn't burst yet; and seems to have the experts dumbfounded and confused as to whether or not it will happen. Here's a few predictions:
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US BUBBLE
Mauldin: When Will the Housing Market Bottom?
Look at this very interesting chart from one of my favorite analysts, Professor Robert Shiller of Yale. This chart tracks housing prices, adjusted for inflation, since 1890. This is on existing houses and not new construction. It is easy to see that the recent boom is a bubble. Since 1997, the index has risen 83%. Shiller talks about housing regressing to the mean over time. That could mean a lot more than a 20% drop in housing prices and another 12 months to the bottom. A drop to the mean could be over 40%. That is rather hard to imagine.
Jain: Has Housing Bottomed In the US? Data and Fifth Grade Math Says No
"Look at this figure, a sad example of what lies ahead for the housing mess. Yes, it is a one big mess, maybe the biggest mess ever that I know of. Now, you never want to make the mistake of ever getting such a graph out to the public. You keep this to yourself and find some other facts that you can spin. For example, Housing Scams are up, permits are down 30%, and housing starts are down 26% from year earlier. Then, summarily claim that the housing is in the process or bottoming or has already bottomed. You never want to give a number for what the current rate of the housing demand is, unless you can quote someone's false claims about the demand. Use vague phrases like demographics, immigrants, to give a sense of demand far greater than the actual demand shown by the survey data."
Schiff: Sub-Prime Disaster in the Making
The main problem is that the majority of these loans were made to people who really cannot afford to repay them and were collateralized by properties whose true values were but a fraction of the loan amounts. Once the music stops and prices return to earth, borrowers who put little or no money down may decide to simply mail in their house keys rather than make additional mortgage payments. Why would anyone stretch to spend 40% of his or her monthly income to service a $700,000 mortgage on a condo valued at $500,000, especially when there are plenty of comparable rentals that are far more affordable?
NYT: Dow Hits New High as Sales of New Homes Pick Up
While the housing market has been in the midst of a sharp slowdown in recent months — some economists are calling it a full-blown housing recession — the damage to the economy has been limited so far. The decline in residential construction during the summer months knocked more than a full percentage point off of the nation’s gross domestic product growth, pulling it down to 2 percent in the third quarter.
But strength in other areas of the economy — consumer spending and commercial construction, for example — has helped to keep growth from stalling.
Bloomberg: New-Home Sales Rise More Than Forecast
Sales of new homes in the U.S. rose more than forecast last month as lower mortgage rates and more incentives helped builders reduce inventory. The figures add to evidence that the slowdown in construction may take less of toll on the economy early next year than it did last quarter. Even with the decline last month, the number of unsold homes remains near a record high, making it less likely homebuilding will strengthen outright, limiting economic growth, economists said.
NY Observer: Gaze Into the Crystal Ball of Housing in 2007, and Shrug
A federal government report on Wednesday showed stronger-than-expected new home sales nationwide in November over October. And a report out on Thursday shows existing home sales were also stronger in November than in the month before. Mortgage applications, too, have been up since the summer, rising as much as 12 percent from August through this month, according to a new report from a leading trade group.
These statistics have buoyed the spirits of some, including likely suspects such as brokers and sellers. But the optimism is often - and rightfully - tempered by variables, such as: Will interest rates go up? Will energy costs rise? Will home construction ebb, allowing inventories of unsold homes to dwindle? Will any national statistics ever truly matter to some local markets, like Manhattan's?
Unfortunately, for these questions, only time will likely tell.
UK PREDICTIONS
FT: Visions vary on the fortunes of property
The message is clear: if you want to gain an understanding of how the market will perform next year, be prepared to keep a close eye the latest projections for growth in gross domestic product.
Walayat: Interest Rate Forecast for 2007 - Bank of England to do Battle with Inflation
I am sticking with the earlier forecast of UK interest rates hitting 5.25% by March 2007 and possibly even going as high as 5.75% during the 2nd half of 2007 as the Bank of England is forced to reign in inflation as it hits the upper boundary of 3% (CPI).
The risks to the forecast are a sharp drop in the UK housing market or sharp slowdown in the UK Economy, though thus far the rise to 5% has failed to have an impact on either.
Fionnuala Earley, Nationwide Group
The number of estate agents reporting an increase in new buyer enquiries fell back sharply in November, and while this is a more volatile indicator of house purchase approvals, it does lend some support to the view that we will soon see the start of some weakening in demand.
Savills: UK Residential Research Bulletin
There is no housing market bubble - yet. Only a severe external economic shock or very unpleasant inflationary surprise could cause prices to reduce substantially from current levels. Few housing market analysts now use historic levels of house price
to income ratios as an indication that the housing market is overheated. Those that do come rapidly, and erroneously, to the conclusion that house prices must fall substantially in order to correct this anomaly.
FTAdviser: Britain saving badly
Almost one in three UK adults failed to save a penny this year, according to research from Alliance and Leicester. Encouragingly, the survey revealed that most people earmarked 2007 as the year they will begin to adequately save, with 31% saying that they have realised the implications of not building up savings.
STOCK MARKET/CURRENCY
Nathan Lewis: The End of the 1972 Bull Market
Housing valuations today are WAAAAY higher than in 1972, when they were still in recovery after being crushed in 1970. ... If there is one good thing today, it's that tax brackets are adjusted for the CPI, thus minimizing "bracket creep," a big source of effective tax hikes during the 1970s. Also, capital gains, though still not CPI adjusted, are taxed at much lower rates than they were then (35%-50%).
Thus, based on this analogy alone, we can create some hypothetical "back to the 1970s" scenarios for 2007:
1) The dollar [vs gold] will sink below its previous low of $730/oz. and head quickly to $1000/oz.
2) The stock market will begin to decline when the dollar makes new lows vs. gold, if not a bit sooner (maybe the $680/oz. region).
3) The Fed will eventually have to react to this monetary situation with some rate hikes, possibly taking the Fed funds rate to 7% or higher by the end of 2007. However, the Fed would like to remain easy-peasy, so it will generally be "behind the curve" in its actions.
4) "Goldilocks" will be dead as an investment hypothesis.
5) The S&P 500 will at some point be 20% below its high point for the preceding bull rally, but it may close the year down only 12% or so. In terms of ounces of gold, however, the losses for equities will be enormous (50%+).
6) Monetary order will be disturbed as the dollar makes new lows against foreign currencies in 1H07, Other governments will at first be willing to let the dollar sink. However, pretty soon (2H07) they will take action to prevent their currencies from rising too much against the dollar, with all the trade consequences that implies. Thus, all governments will effectively devalue their currencies alongside the dollar, producing worldwide inflation.
The thing that would really cinch a "back to the 1970s" outcome is new highs for gold vs. the dollar ($750/oz. or higher), setting off a very quick move to $900+. I think this is fairly likely going forward, although there are no certainties.
Sprott: The Downfall of the Dollar
Much has been made of the Dow being up 15% this year, but when measured in other currencies (especially the “real” currencies, gold and silver) the performance of the Dow has been far from stellar. In Euro terms, the Dow has gained an unimpressive 3% this year. Against gold, the Dow is actually down almost 6%. Against silver, the Dow has lost over 26% this year! Is there really a bull market in US equities? These facts often get lost in the over-exuberance that is mainstream financial media. The weakness in the dollar is making things look better than they really are from the perspective of Americans who, to date, have suffered little from the debasement of their currency. Whether this continues to be the case next year remains to be seen, but we believe time is running out. We consider this the critical issue for financial markets going into 2007.
POLITICAL ECONOMY (Middle East/Iraq)
Newsweek: Iraq's Economy is Booming
Civil war or not, Iraq has an economy, and—mother of all surprises—it's doing remarkably well. Real estate is booming. Construction, retail and wholesale trade sectors are healthy, too, according to a report by Global Insight in London. The U.S. Chamber of Commerce reports 34,000 registered companies in Iraq, up from 8,000 three years ago. Sales of secondhand cars, televisions and mobile phones have all risen sharply. Estimates vary, but one from Global Insight puts GDP growth at 17 percent last year and projects 13 percent for 2006. The World Bank has it lower: at 4 percent this year. But, given all the attention paid to deteriorating security, the startling fact is that Iraq is growing at all
[interesting comments to this article on Kudlow's blog]
Cedric Muhammad: How Iraq Could Have Been Stabilized
There can be no unity when inflation rates touch 70% as has been the case in Iraq as recently as August. With inflation rates still over 50% and an exchange rate that is operated by the Iraqi central bank under an impossible managed peg regime, the case has now gone from the evidence of 2003 to a state of proof three years later, that fatal mistakes and errors were made early-on in the planning (and lack thereof) laying the ground work for economic development and growth. It is hard to imagine that the United States government believed that everything depended upon an oil revenue grab, but the evidence suggests a second thought wasn’t given to other important economic basics.
Brenner: The Economics of the Rise of Ahmadinejad
Power is dispersed within democracies, and democracies are always weakened when more money flows through government hands. This is true even when the facade of democracy persists. When more capital sifts through the government, more groups depend on government handouts and have less access to sources of capital that are independent from the ruling political parties.
Conversely, when capital markets are opened, the risk that one-party states will emerge diminishes. As independent sources of capital surface, political power is dispersed and lasting prosperity follows. Thus, it is a mistake to promote democracy without first establishing the ground for letting people have access to capital and collateral — or at least coordinating such access with political change. After all, prosperity is the result of matching people with capital, while holding both sides accountable.
What happens when societies either do not have or destroy their financial markets?
That’s how one-party states such as Ahmadinejad’s Iran emerge: People bet on crazy ideologies when their customary ways of living suddenly crumble and capital markets close. Capital markets are the unique feature of the West, and their democratization is the key to the civilizing process and the best insurance against the emergence of one-party states. Indeed, that’s what the U.S. should have been “exporting” all along in the Middle East, coordinating the promotion of capital markets with the necessary political changes in Iraq.
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There's certainly a lot of food for thought in these articles and while I can't honestly say I agree with or even understand some of what these experts are saying; I can pretty much make one prediction for 2007, with a fair amount of accuracy: no matter where you are or what you're doing in the new year, one thing's pretty much certain that real estate / property will no doubt have an even greater impact on our lives in 2007. But of-course, I could be just saying that; I am after all the RealEstate Enthusiast!
Happy New Year everyone.
