More specifically, Witter's expectations are colored by rather disturbing data:
• 32.6% of new mortgages and
home-equity loans in 2005 were interest only, up from 0.6% in 2000;
• 43% of
first-time home buyers in 2005 put no money down;
• 15.2% of 2005
buyers owe at least 10% more than their home is worth (negative equity);
• 10% of all home
owners with mortgages have no equity in their homes (zero equity);
• $2.7 trillion
dollars in loans will adjust to higher rates in 2006 and 2007.
August 2006 Archives
What has been so astonishing about the housing boom is how totally misunderstood its been by people who should have known better, real estate agents, mortgage brokers, developers, and economists. To reiterate our views, half century low interest rates, combined with an investor class burned by the stock market crash, Wall Street scandals and corporate malfeasance on a grand scale saw Housing as a better place to park their dollars.
Mean reversion apparently is not understood by many real-estate professionals. From brokers to lenders to developers and home builders, there was a irrational expectation that the "soaring property market eventually would glide to a soft landing." It makes little sense to assume that after home prices more than doubled between 2000 and 2005, they would then mean nicely revert to a normalized gain 5% or 6% a year.
That's the equivalent of stocks reverting to a 10% annual gains after the 1995-2000 run up. In case you forgot, lots of cheerleaders predicted that would happen. Remember, it was a new paradigm, and eyeballs and sticky pages counted much more than revenues and profits.
The growing supply of homes, particularly condominiums, has cuased prices to level off in many areas and decline in some.
It's even more clear to me now that the pace of technological innovation in the real estate industry has significantly increased with most RE start-ups either trying to help brokers defend the status quo of fat commissions using technology, or help blow it up for the benefit of consumers. Both investing strategies are valid, but have different risk-reward profiles; I choose the latter.
A study is about to give Madison Avenue a fresh pummeling: McKinsey & Co. is telling a host of major marketers that by 2010, traditional TV advertising will be one-third as effective as it was in 1990.
That shocking statistic, delivered to the company's Fortune 100 clients in a report on media proliferation, assumes a 15% decrease in buying power driving by cost-per-thousand rate increases; a 23% decline in ads viewed due to switching off; a 9% loss of attention to ads due to increased multitasking and a 37% decrease in message impact due to saturation.
"You've also got pronounced changes in consumer behavior while they're consuming media," said Tom French, director at McKinsey. "And ad spending is decreasingly reflecting consumer behavior."