(c) copyright View from Silicon Valley, 2005. All
rights reserved.
Who is really getting rich in real estate? Isn't everyone?
According to Money Magazine, CY04 real estate prices were up 14% of CY03. In turn, CY03 was up 8% over CY02. Through mid-August CY05,
nationwide, "median home prices of 12.5 percent vs. prices at this time last year." Home ownership is reportedly at record levels. Blah, blah, blah, you can read this type of commentary anywhere.
Does CY05's 12.5%, compared to CY04's 14%, mean
growth is slowing down? Who cares? What's wrong with making "only" 12.5% when 10-year bonds barely
pay 4%? Freddie Mac is quoted saying, "There is no evidence
here of prices topping out,” so apparently there's no risk?
We want to know how is actually banking this 12.5% at the end of
the day? Reading recent "Real Estate Loan" numbers from Doug Noland, this becomes a particularly interesting question.
According to Noland's weekly column:
RE Loans Total
YTD05 Increase Prev 52 Wks
September 02: $2.801T 15.6% $372B
15.3%
September 09: $2.812T 15.8% $369B
15.1%
September 16: $2.822T 15.9% $371B
15.1%
You don't want to make too much out of only three weeks' data, but a few points
leap to mind:
First, loans growing at 15%+ vs. prices "only" growing 12.5% tells us, obviously, real
estate loans are growing faster than real estate prices. (A back of the napkin calculation shows -2.5% means
over $70B+ debt was added over and above real estate's underlying "value.")
Second, we see total real estate loans up ~$10B per week the last couple weeks. Projected
over 52 weeks, that is a $520B increase in real estate loans (duh). However, Noland shows year-over-year
numbers are up "only" ~$370B.
In other words, the rate of real estate loan increases is accelerating,
But wait a minute. Wasn't the rate of price increases slowing?
Conclusion: The rate of increase of real estate prices is widely reported
as being unsustainable. Even with "sophisticated" "investors"using state-of-the-art
debt financing, and stretching to the max, the rate of increase is slowing.
Yet the rate of debt accumulation is accelerating. How is it that skyrocketing real estate prices are going
to never end? Or end well?
* * * * The above is strictly for entertainment purposes and should not be construed
as advise to buy, hold or sell any security, property or financial product.
