Recently there has been some concern, questions and references to the housing market from some members. Here is the latest story that may be of interest to some;

Buffett: Real estate slowdown ahead
The Oracle of Omaha expects the housing market to see "significant downward adjustments," and warns on mortgage financing.
Money Magazine
By Jason Zweig, MONEY Magazine senior editor
May 6, 2006: 2:51 PM EDT

OMAHA (CNN/Money) - At this weekend's annual meeting of Warren Buffett's Berkshire Hathaway, security is tighter than usual, with several entrances to the parking lot of the Qwest convention center closed.

This may have something to do with Buffett's announcement yesterday of his purchase of an 80% stake in Iscar, an Israeli-based metal cutting tools firm, for $4 billion. In one fell swoop, that makes him one of the biggest foreign investors in Israel. With that news, a little extra security amidst the sea of the roughly 20,000 shareholders and acolytes in attendance can't hurt.

Regardless, Buffett and Berkshire Hathaway (Research) vice chairman Charles Munger threw Saturday's entire morning open to a question and answer session with shareholders just as they do every year. With no major scandal or news event in the foreground, Buffett and Munger struck a more reserved tone than they have at past meetings.

But their views on housing prices and the energy and commodity markets may ruffle some feathers. Buffett played his usual role of the talkative, cheery extrovert, speaking in perfect paragraphs, while Munger took the role of the laconic, crotchety critic whose favorite sentence is "I have nothing further to add."

These are not just their stage personas, but how they normally think and speak. What follows is an edited and approximate transcript of their remarks.
On the real estate bubble

Buffett: "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. [Buffett singled out Dade and Broward counties in Florida as an area that has experienced a rise in unsold inventory and a stagnation in price.] The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments, especially in the higher end of the housing market."
On mortgage financing

Munger: "There is a lot of ridiculous credit being extended in the U.S. housing sector."

Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."
On a commodities bubble

Buffett: "I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.

Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice."
On ethanol

Buffett: "Charlie [Munger] and I do not know enough about the business to evaluate it. It depends on government policy and a lot of other variables we're not good at predicting. It's also a very hot area for investors right now, and we don't like looking at things that are hot and easy to raise money for. Generally speaking, agricultural processing businesses have not earned high returns on tangible capital. Ethanol could prove an exception, but I'm not sure how you gain a competitive advantage with any particular ethanol plant."

 

http://www.internetoffice.biz/IOFile...B1AFFCD%7d.pdf

 

OR:


* A 15-year upturn in US housing activity is coming to an end. Higher home prices and Fed tightening have squeezed affordability, setting the stage for a downturn in housing activity.

* The JPMorgan forecast looks for total home sales to fall 15% this year (4q/4q), as large a decline as has occurred at any time in the past 40 years except during recessions. A disproportionate share of the 2004-05 increase in home sales was in financing tied to shorter-term interest rates and included an explosion in subprime mortgage lending. Fed tightening along with regulatory warnings about risky lending are removing this froth from the market.

*The stage is set for a rolling adjustment in housing activity. The bulk of the downturn in sales is likely to take place during 1H06. A backlog at major homebuilders and the rebuilding along the Gulf Coast is allowing construction to rise into the spring. However, construction activity looks set to contract significantly through 2H06.

* House prices should hold their levels over the next year on a national average basis, but may give back part of their recent gains in some regional markets that have been hottest.

* The drag on consumer spending from the wealth effects of reduced house price appreciation, while significant, will be gradual. US household saving rates are anticipated to rise about a percentage point over 2006 and 2007.

* Fears of an abrupt adjustment by households as a result of a reduction in mortgage equity withdrawal (MEW) or the resetting of adjustable mortgage rates are overblown. The equity extracted from homes has been used as a vehicle for spending but has not driven consumption higher. Instead, the net impact of MEW has been to allow households to take the opportunity afforded by low mortgage rates and rising house prices to diversify their wealth holdings.

* The central near-term outlook issue is whether real household income will grow rapidly enough to sustain spending as rising interest rates and moderating home prices push saving rates higher. With hiring and labor income strong, and headline inflation set to move lower this year, households are expected to have ample real purchasing power to spend and increase savings.

* Viewed from a broader perspective, the turn in the US housing cycle is a signal that the long period in which global disinflation and falling interest rates boosted US relative performance is at an end. Rising real interest rates and a downturn in housing are part of the process by which the forces of global reflation will produce a less US-centric world.

 

It will be interesting to see whether the housing bubble will actually reduce prices all that much what with the FED inflating the currency at such prodigious rates. One thing is for sure, a lot of people with ARM's are going to be hurt badly when their mortgages are suddenly upside down. People who borrowed to much from DiTech will be in the same boat when interest rates go up because of declining house valuations.

The only fellow I know who did the right thing with a second mortgage spent the proceeds on silver which has almost trippled in price for him. Eventually he'll sell some of it to pay off his mortgage with depreciating dollars and he'll still be sitting on a cache of real money.

Edwin

 

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