One of the many dire predictions done these past few months by many Carmel Indiana ‘bubbleologists’ out there
that is all those who indulge in the contemplation of
bubbles in the Carmel Indiana real estate market of all sizes and colors, whether real or imaginary, coming our
way - was that by now real estate markets everywhere would be inundated
and swept away by a tsunami of foreclosures of apocalyptic proportions.
general rationale among those specializing in the fine art of staring
at crystal balls (or perhaps at several empty bottles of rum) was that
the steady increase in interest rates, the consequence of a tightening
monetary policy implemented by the Fed since mid-2004, would have led
by now to a collapse of the adjustable-rate mortgages (ARMs) market,
since consumers could not possibly cope with the increased monthly
payments. This, in turn, would dramatically increase mortgage defaults
and foreclosures, with the end result that real estate markets
everywhere would be flooded with excess inventory at deflated prices,
thus causing markets to crash - the tsunami I was talking about.
The Mortgage Bankers Association of America (http://www.mbaa.org)
does not seem to share this particular vision of the end of the world.
In its Economic Outlook update released in May 2006, the Mortgage
Bankers Association of America (MBAA) pegs the ARMs share at 27
percent, down from the 36 percent peak of early 2005, an
indication that many prudent consumers have locked in already.
Likewise, the inventory of mortgages held by banks is virtually
unchanged at 1,500 billions (aggregate nominal face value of mortgages,
by dollars), the same level of 2005, suggesting that, rather than
defaulting, consumers are ‘holding on’. And, finally, the rate of
delinquency is at 4.38 percent, down from 4.70 percent in the
final quarter of 2005, clearly another measure of consumers financial
stamina, and an indication that banks were actually faring worse when
real estate markets were doing better.
But that’s not all!
In the Mortgage Finance Forecast released also in May 2006, MBAA highlights that the rate of housing starts nationwide has increased
nationwide, up to 2,131,000 units (annualized) for the first quarter of
2006 from 2,059,000 units in the last quarter of 2005 – an increase of
72,000 units representing a robust +3.496 percent overall,
although this rate is forecasted to slow down as the softening trend in
real estate markets continues throughout the year. Home sales overall
are forecasted to decrease by 501,000 units nationwide to 6,574,000
units by December, 2006 from the 7,075,000 of December, 2005. Although
this represents an annualized drop in sales of 7.08 percent compared to
last year, it can hardly be called a bubble burst!
And here is
the most surprising figures of them all – surprising for the
bubbleologists, that is. Notwithstanding the increase in interest rates
and the toll that many think ARMs will take on defenceless consumers,
MBAA forecasts that the average market share of ARMs will remain
constant at 27 percent of institutional mortgages for 2006, down only
3% from the 2005 average. The significance of this forecast is twofold:
1) MBAA does not anticipate that interest rates will increase
significantly higher for the remainder of the year and 2) MBAA mirrors
a Gallup survey conducted in May 2006, which found that only 11 percent
of Americans worry about ARMs, down from 20 percent in 2005.
why should they worry? In the latest release, the Bureau of Labor
Statistics, has pegged the Consumer Confidence Index at 109.6 in April,
up from 107.5 in March and higher than the 103.8 of December, 2005. The
Consumer Confidence Index is now at the highest level since March,
2002, with the average family income up 0.8 percent in March, 2006.
finish, I would like to spend a few words on how politics are filtering
into economics, especially in times of elections. It is a shame that an
increasing number of Bloggers and even journalists out there are
twisting and interpreting economic data to fit their own political
agenda. Although November, 2006 is pretty much around the corner and
the battle is on to take control of Congress, the manipulation of
economic and statistical data for political ends and means is a great
disservice to consumers, no matter the political colors.
example it is not true, like some Bloggers assert out there, that the
recent appreciation in Carmel Indiana real property values is the direct result of
President Bush’s domestic economic policies. Real estate capital growth
was largely due to the correlation between capital and employment or,
if you will, between income and labor. An increase in levels of
consumption has set forth an increase in prices caused by a
corresponding increase in demand, in itself generated by a commensurate
increase in the income-employment factor. So growth was derived by the
equilibrium of capital and investment with labor and employment. And
since, furthermore, production is in direct function of consumers
spending which increases as unemployment falls, capital accumulation
has increased as employment rose steadily. It is as simple as that!
it is not true that President Bush is the main culprit for the real
estate bubble burst – like many Democratic sources imply and some
actually cry out loud. Poor President Bush has absolutely nothing at
all to do with real estate bubbles and their bursts, essentially for
two reasons: 1) because there are no bubbles in real estate and 2)
because there are no bursts either. Like Prof. Bernanke has repeated
now several times, far from being a bubble burst the present
cooling-off trend through higher interest rates will have the
beneficial effect of consolidating market wealth achieved thus far, by
allowing the economy to get an even footing through a slowdown of
capital appreciation and, at the same time, allowing real wages to
catch up, thus reducing the affordability crisis and rejuvenating the
pool of buyers.
And, finally, it is not the President of Iran,
Mahmoud Ahmadinejad, that is trying to promote his country’s nuclear
programme by putting a stranglehold on North America’s real estate
markets through higher crude prices, while attempting to get rid of
Secretary Rice at the same time (I know, this is laughable, but I read
it in the commentary of a political blog – TIME Magazine should make
this particular blogger ‘Man of the Year’).
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