Tuesday, May 31, 2005

Bubble Stages

Here are the likely stages of the housing bubble:
  1. Huge Price Gains (already happening)
  2. Public Awareness of the Bubble ( we are in this stage)
  3. Price Stagnation (almost there (maybe happening in certain markets))
  4. Lenders tighten up lending practices
  5. Price Declines
The longest stage of the bubble is stage 1. Going between stage 2 to stage 5 will be fast. Get ready for the torrent of change that is coming to the housing market.

Monday, May 30, 2005

Freddie Mac's Homeownership Guide

Check out Freddie Mac's: Is Homeownership Right for You? webpage. Interesting.

Here are some of the noteworthy finds:
  • Under 'What are the risks?' " Your monthly mortgage payment may be larger than your rent." may? It should read 'most likely will' ! Hello.
  • "Property values can depreciate" thanks for the information.
  • "To get a quick idea of what you can afford to spend, multiply your annual gross income (before taxes) by 2.5. For example, if your annual household income is $50,000, you might be able to qualify for a $125,000 home. This is just a rough estimate - the actual number will vary based on factors such as your debt and credit history." Hmm. Then how come you are bundling up loans where people are purchasing homes worth 5 times their income.
  • "Don't forget that you also have to save for the down payment, closing costs, inspections costs, moving, and other related expenses. " Ever heard of negative amortization loans?

Theis website directly contradicts the lending practices of Freddie Mac. Freddie no wonder you are in trouble.

MSNBC ' U.S. housing boom a bust for many'

MSNBC had a major article about housing and the rising amount of foreclosures particularly in working class neighborhoods.

  • "In 2000, the Philadelphia sheriff auctioned off 300 to 400 foreclosed properties a month; now he handles more than 1,000 per month. Allegheny County, which includes Pittsburgh, had record auctions of foreclosed homes and officials speak of a "epression-era" problem. The foreclosures fall particularly hard on black and Latino families. "
  • "The rates in Florida, Texas and Colorado are more than twice the national average. Even in New York City and Boston, where real estate markets are white-hot, foreclosures are rising in working-class neighborhoods.
  • So what is causing the increased amount of foreclosures?
  • "State and federal regulators place much of the blame for the foreclosure problem at the feet of mortgage brokers and bankers, who have crafted ever-riskier ways for Americans with poor credit to buy homes. Interest-only and adjustable-rate mortgages account for 63 percent of new mortgages. "
  • Rising home prices, with people buying beyond their means. Medical problems, especially when the homeowner does not have health care insurance.
  • "Is the push to boost homeownership — successive presidential administrations have strongly promoted it — backfiring? "
The credit bubble fueling the housing bubble must be stopped. Credit is something where the lender and the borrower both need to take responsibility. People can now get a negative amoization, 0 down, sub prime credit history, no income verification, interest-only adjustable rate morgate loan. It is just ridiculous. These irresponsible sub prime lenders are predators.

Sunday, May 29, 2005

Triggers that Could Contribute to a Bubble Pop

Here is a list of tiggers that might occur in the next 12 months that would contribute to a poping of the bubble.
  1. Rising fuel prices
  2. Increased media coverage (already happening)
  3. Tighter lending practices
  4. Foriegners cut back on buying up bundled mortgages
  5. Rising interest rates
  6. GDP starts stagnating
  7. A new hot investment category is found. Sucking money out of the housing market.
  8. Natural distaster / terrorist attack
  9. "upward valuations of the Chinese Yuan" (thanks commentator marutib)
  10. Something Else? Discuss

Washington Post Article: 'Most DC Buyers Choose Interest Only'

In today's WashPost there is a front page article about how most DC homebuyers are using interest only loans. Here are the highlights.

  • "The loans are attractive because their intitial monthly payments are tantalizingly low - about 1,367 a month for a 320,000 mortgage, compared with about 1,842 a month for a traditional fixed-rate loan. f home prices fall, though borrowers could lose big"
  • About 54% of home buyers in DC (just the city, not the sorrounding suburbs) purchased their homes using interest-only loans so far this year."
  • "Just 5 years ago, only 2 percent of home=purchase loans in the Washington area were interest only."
  • "Mark Zandi chief economist of Economy.com said buyers are turning to interest only loans because real estate has become so expensive partially because of the use of these new products". Exactly
  • " 'It largely reflects the inability of famililies to afford a home with a plain-vanilla mortgage.' Zandi said 'This is a way for people to get into what are extremely expensive homes'
Finally, there was an interview with a family where husband and wife are both teachers. They are looking to buy a townhouse in Woodbridge, VA ( a far out suburb of DC). Twice they made offers on a townhouse but were outbid. However, "they could stretch their income further if they considered a interest-only loan." But is "really dangerous, You don't know what interest rates will do. " said the husband "It would be great, yes, to get a property but bad to be destitute "

A smart man indeed. :-)

Friday, May 27, 2005

Ben Jones' The Housing Bubble Blog

Ben's Housing Bubble Blog normal website is temporarily broken the alternative site is at :

The Housing Bubble

Ben's blog Rocks! I hope his site is fixed shortly.

The Public Perception of the Bubble

Recently, the media has been giving significant attention to the housing bubble. The coverage of this important issue should have started many months ago. As usual the mainstream media are behind the curve.

In a slightly dated poll released May 5th, Experian and Gallup Organization found that the less then half on the population had heard about the "housing bubble."

From an article in on the Direct Marketing Association website:
"In addition to rising interest rates, there has been a lot of talk about a housing bubble," said Jacobe in the release. "Our latest survey showed that few consumers are aware of a possible housing bubble. This is troubling because if there is a housing bubble some consumers with mortgages could end up upside down, meaning they will owe more on their mortgage than their home is worth."

Only about a quarter of all consumers have heard of a potential "housing bubble," with 65 percent saying they have heard nothing about it, and another 12 percent saying "only a little." However, when told that a housing bubble is when the prices of houses have increased so quickly and gone so high that it's like a bubble that could burst and suddenly there could be a big drop in the price of houses, about four in 10 consumers say it is very or somewhat likely that such a situation could occur in their area in the next three years.

Lower income consumers (under $40,000 annual household income) are most likely to say a housing bubble could occur in their area - 46 percent express that view, compared with about 30 to 33 percent among consumers with higher incomes.

So what does this all mean? The public as of May 5th is under informed about the housing bubble. Since then there has been a rash of articles in the mainstream media. In the next few months, Joe and Jane public will be hearing much more about the bubble. The demand curve for housing will shift downwards.

Paul Krugman: 'Running Out of Bubbles'

In today's Nytimes op-ed section there is an extremely informative opinion by economist Paul Krugman regarding the current housing bubble.

Here is a quick summary of what he says:

  • There is a housing bubble
  • The housing bubble is generally concentrated in big wealthy areas (notably California & Florida) .
  • If housing bubble will burst
  • When the housing bubble bursts "the economy would still be in big trouble"
  • If housing prices start declining "pushing the economy right back into recession"
  • Some say that there is no bubble. "But someone will always come up with reasons why seemingly absurd asset prices make sense."
  • Alan Greenspan now ' admits that we have "characteristics of bubbles" in the housing market, but only "in certain areas." '
  • " The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble."
Krugman concludes with saying that the economy will head into a recession unless there is a new bubble "to take its place." Finally, he concludes that it is "hard to imagine what that might be." Krugman is right on the money.

Thursday, May 26, 2005

Housinghead Arguments

So housingheads what are your arguements? Let me start you off.
  1. Growing population
  2. Shortage of land in certain metropolitan areas
  3. Continued low interest rates
  4. Continued creative / lienient lending practices
  5. Lack of other attractive investment options
  6. Other arguements. Let's discuss !
The validity of their arguements can be discussed in the comments section. Please present other housinghead arguements not presented above.

Bubbleheads vs. Housingheads

The ongoing deabte between Bubbleheads (Of course there is a bubble) and Housingheads (bubble? What bubble? There is no a bubble!) has caused some serious exchange of insults (see craigslist.com housing forum). We need to keep this discussion civil.

While I am certainly a bubblehead, my blog certainly welcomes housingheads to come and post logical arguements why housing prices will continue to soar.

Too Much GDP Spent on Housing

The percentage of GDP being allocated to housing is extremely high. The USA needs a higher percentage of GDP devoted to investment in tradable commodities (biotech, technology, entertainment (Hollywood) etc.). [ To be fair a very small portion of residential investment is tradable (such as houses being bought or rented to tourists)]

Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product. That's the highest level since the late 1940s and early '50s, when an entire generation of returning soldiers was setting up families and expanding into newly built suburbs. This time, Americans are building second homes and enlarging current ones at a record pace.

By comparison, the tech boom of the '90s was at worst a baby bubble. Starting in 1991, business investment in information technology and communications gear began a steady climb, going from 3.1% to a peak of 4.8% in 2000 before collapsing.

Without much fanfare, residential construction basically followed the same path in the 1990s. Starting at 3.4% of GDP in 1991, it rose to 4.6% in 2000. But rather than turn down, as tech did, spending on housing just kept climbing, fueled by low interest rates. Measured by the increase in its share of GDP, the housing boom so far is about 40% larger than the tech boom. ......

Yet even if there are temporary disruptions, the end of the housing boom may be good news for the overall economy. The U.S. doesn't need to drive growth with ornate new homes and elaborate kitchens with expensive marble counters. Instead, a shift away from housing could free up hundreds of billions of dollars for other, more productive investments. (Business Week, Michael Mandel May 26, 2005)

However, these 'temporary disruptions' will most likely cause the economy to slide into a recession. However, in the long run the sooner we follow a more prodcutive economic path the better. The GDP alloted to housing needs to be reduced.

Natural Distasters & Home Prices

Some of the hottest RE markets are those most prone to natural disasters. Think Florida and California. How would a large earthquake or a Hurricane affect housing prices? Presumambly it would reduce supply by physically reducing the number of houses. But the demand curve would also fall for housing in the area.

However, despite last year's strong hurricane season prices in Florida inreased tremendously.

Three Florida metros led the nation in price growth. The strongest price increase was in Bradenton, where the first quarter price of $275,100 rose 45.6 percent from a year earlier. Next was Sarasota, at $326,300, up 36.0 percent from the first quarter of 2004. Third was the West Palm Beach-Boca Raton-Delray Beach area, with a first quarter median price of $362,800, up 35.9 percent in the last year. (National Association of Realtors)

Furthermore, getting Hurricane insurance on homes in Florida is more expensive then in the past. The Hurricane season begins on June 1st, we see will what affect it has on home prices in Florida.

Wednesday, May 25, 2005

Geography of the Bubble

We will be looking into the geography of the bubble. Which metropolitan areas have the most expensive housing?

Our first map shows 'Median Price of Existing Single Family Homes (1Q 2005)'


Who is to Blame?

One of the big questions is who is to blame for the housing bubble.

Here is my list:
  1. Greenspan & The Feds for the cheap money supply (low interest rates)
  2. Parts of the Real Estate Industry
  3. Irresponsible Lenders for lending to people who really can't afford it.
  4. Fannie Mae & Freddie Mac for bundling up risky loans from
  5. Asian Central Banks & GSE for buying all these bundled loans
  6. Speculators & Flippers ( for being greedy and fueling this mania)
  7. Some HomeBuyers for buying beyond thier means and being ill informed.
  8. Parts of the Media for not informing the public about this issue sooner (finally they are commiunicating this)
  9. Others ( yet to be determined, please discuss)

The bubble will burst soon

Behold the bubble is about to pop. The bubble will pop (price declines) within the next 12 months.

1) People are stretching to their limits to buy (look at how many IOs and ARMS)
2) Lending practices will tighten given Fed's reccomendations
3) Greenspan just used the term 'bubble'
4) The foriegn buying of loans is slowing
5) More public awareness of the housing bubble situation. See the increasing number of articles referencing the bubble (use a Google or Lexis Nexis news search)