Thursday, June 30, 2005

Greener Pastures

We have entered the period of stagnation in some formerly hot markets. Many don't recognize the stagnation, but it is occuring. The stagnation is spreading and the smart money has already exited or is exiting. If you are a speculator, Real Estate Valley is no longer a good place to graze. Time for them to cash out and move somewhere else. The sheeple have gotton fat from the grass in the valley. The rainy season has ended and the grass will be turning brown shortly. The grass is greener somewhere else.

Tuesday, June 28, 2005

Bubble Cities

So where are thes bubble cities we talk about? Where is the froth that Al Greenspan has reluctantly acknowledged? Here is my list of the bubble cities (cities where price declines are likely be greater then 20% over the course of 3 years (inflation adjusted )):

  • Bakersfield
  • San Diego
  • Merced
  • Fresno
  • San Francisco
  • Pheonix
  • Las Vegas
  • Reno
  • Sacramento
  • LA
  • Portland
  • Miami
  • Naples, FL
  • Tampa Bay, FL
  • Daytona Beach, FL
  • Jacksonville
  • Boston
  • NYC
  • Baltimore
  • Philadelphia
  • Providence
  • Honolulu
There are more bubble cities that are not on this list. The other unknown variable is that once the housing bubble starts bursting in the bubble cities, the economy is highly likely to spin into a recession. That could cause price declines even in non bubble markets.

Sunday, June 26, 2005

"Why Buy When you can Rent?"

"Why Buy When you can Rent?" That was the the headlines of the a full page ad in today's Washington Post Real Estate section. In smaller font it continued "The current real estate bubble has turned the old adage on its head." Brilliant. The ad was for some luxury aprtments in Bethesda, MD (surburb of Washington, DC). The ad continues:

"We all grew up with the adage, 'Why rent when you can buy?' But timing is everything, and with the historic rates of appreciation over the last several years, home ownership has certainly paid off handsomely for those who bought five, 10 or 20 years ago. But that was then - and this now. The days of double-digit annual appreciation are over. However, that doesn't mean you should give up the idea of moving to a modern, luxurious, .... What is does mean is that you have options you may have not considered. options like renting instead of buying. The monthly mortgage payment on a condominium that even approaches the level of luxury of The Palisades would far exceed the amount you pay in rent. Invest in savings as you see fit. "
It made my day to see this full page ad in the Washington Post Real Estate section.

Friday, June 24, 2005

Washington, DC

My townhousemates and I rent a townhouse in one of the inner suburbs of the DC area. An appraiser came out yesterday to make an appraisal. The owners who have owned it since it was built in 1984 (payed 165K) want to refinance. The place is worth about 525K. Our rent is 2,250 ( plusutilities). The place is 1700 sq feet. Ok. I talked to the appraiser has done many appriasals around the area. We talked about the housing issue. He mentioned how properties within the Beltway(inner suburbs) were still hot and selling well. However, further out housing units were selling more slowly and that some properties are being reduced in price. He expected continued weakening in the outer suburban DC market. Also, the amount of housing units available for rent or sale in my zipcode has climbed to 54 from 50 in the last two weeks.

Suggested Discussion Topics: DC housing Market. Geography of price declines.: Urban vs Suburban vs Outer Suburban vs Rural? Housing Style (SFH vs townhouse vs condo)?

Thursday, June 23, 2005

Option ARM Explained

Option ARM loans have many other names including: "Choice Pay," "Personally Tailored Mortgage," the "Mortgage Stretch," "Cash Flow ARM," "Flex Pay," "Advantage ARM," the list goes on and on. Most of these products share the same general features.

Here are the general features that these loans share:

  • "These loans carry an adjustable rate that is tied to some index. The index could be the One year Treasury Bill, the Monthly Treasury Average, the London Interbank Offering Rate (LIBOR), or the COFI (Cost of funds Index etc"
  • " The loans allow multiple payment plans. Typically, the borrower will receive a monthly statement that outlines the current interest rate and loan balance. It will also show four different payments based upon different criteria. (Realty Times June 23rd 2005) "
  • Here are a list of the monthly payment options (from smallest monthly payment to greatest):
  1. The "minimum payment" which is calculated based upon some pre-determined criteria. The minimum payment is usually less than the interest charged for the month, resulting in "negative amortization," or the more politically correct term, "deferred interest." It's very important to understand that making payments with negative amortization results in a rise in loan balance, to cover the interest not paid. (Realty Times June 23rd 2005) "
  2. "Interest only" payment, which is equal to the interest charge for that month. Meaning that the loan balance remains the same.
  3. 30 Year Amortization Payment
  4. 15 Year Amortazion Payment
These option ARMs can be dangerous. They are often diffucult for the average homebuyer to understand. They also carry a high degree of risk if the homeowner generally pays the minimium payment or the Interest Only option. These loans can be useful for workers who have have a variable income (business owners, contractors etc.) . However, these loans are just another way for lenders to keep monthly payments down and get more people into homes.

Wednesday, June 22, 2005

When will the Bubble Pop?

There are growing indications that there is a slowdown occuring now. It is quite likely that we will see an increasing amount of stagnation throughout the summer. By October, the price stagnation in many areas will become price declines. It will be clear by then that the price appreciation of the past is not happening. Selling will follow as investors speculators and others try and get a peak price. For the most part they won't be able to get the 'peak price' . Inevitibly, they will start lowering prices. The bubble is nearing its end.

Tuesday, June 21, 2005

Homebuilder Stocks Take A Hit

Shares of homebuilders stock took a hit today. These stocks have made huge gains in the past few years. From today's .

Shares of Centex were down $1.40, or 2%, to $69.54.

Centex acquired Fairclough Homes in 1999. For the fiscal year ended March 31, Fairclough Homes closed 1,563 units and recorded operating earnings of almost $67 million on revenue of $501.3 million.

Other homebuilders were also lower Monday along with the broader market. Lennar (NYSE:LEN - News) was down 2% to $61.89, and KB Home (NYSE:KBH - News) was falling almost 3% to $75.19. Toll Brothers (NYSE:TOL - News) was losing 3.5% to $100.91, and Hovnanian (NYSE:HOV - News) was slipping 0.7% to $65.73. Pulte (NYSE:PHM - News) was down 3% to $83.22.

The market is finally reacting to the growing indications that the bubble is about to burst. Keep yours eyes on these shares and watch them tumble even more. Remember there are about 15 million unoccupied housing units in this country.

Sunday, June 19, 2005

Housing Rant

Housing Rant:
  • ARM (Adjustable Rate Mortgage) aka Adjustable Risk Mortgage
  • Down Payment? What's a down payment? No need for that anymore.
  • IO Loans (Interest Only Loans) i.e. Illinformed Only Loans. Equity? who needs to build equity the old fashioned way. I'll get equity after my home appreciates 20% this year. Maybe not b.c I just took out a home equity loan.
  • Future. Hell no. I only think about the short term. I want it now damn it. What's the lowest monthly payment I can get? Oh please help me mortgage lender.

Friday, June 17, 2005

Web Searches

"Remember the report last week that keyword prices relating to mortgages had dropped? Well, real estate sites themselves didn't see a drop in traffic. Hitwise has posted stats today showing how visits to US real estate sites have remained strong since climbing high earlier this year. It also charted a spike last month for searches on the terms "real estate bubble" and "housing bubble." So perhaps the interest in real estate remains strong, but no one's wanted to plunk down for a mortgage as much." (From SearchEngineWatch)

As noted earlier in this blog, public awareness of the bubble has grown tremendously in the last two months. This is just one more way to confirm the vastly increased awareness.

Now on to collecting evidence that housing appreciation rates are slowing. Stagnation here we come.

Thursday, June 16, 2005

NYTimes: 'The Trillion Dollar Bet'

In yesterday's NYTimes article there was a phenomenal article about interest rates, mortgages and real estate. Here are the highlights and some of my comments:

  • "American homeowners have made a trillion-dollar bet that mortgage rates will remain near record lows for at least a few more years. But with some interest rates already rising, economists worry that the bet could turn bad." Exactly.
  • "This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted. But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis. " A trillion dollars is a huge amount of money.

  • "Consider a typical $300,000 interest-only mortgage with fixed payments for the first five years The homeowner would start by paying about $1,250 a month. If interest rates rise modestly over the next few years, as many forecasters expect, the payment will jump to almost $2,100 in 2010, according to Stephen Barrett, the owner of Redmond Financial, a mortgage business near Seattle." That would be a jump of over 50%. Ok it would be less if adjusted for inflation. But still a huge increase. Once again, the long term is being sacrificed for the short term.

  • "The traditional 30-year mortgage with guaranteed payments is increasingly a loan of the past." Sad. Very sad.
  • "This year's fashionable model, known as an "option ARM," allows borrowers to make payments with monthly rates starting as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent." Avoid this loan like the plague. Entirely reckless. Flippers (speculators) love these loans as they increase their leverage (buying ability). Some flippers have made a boatload of money flipping properties. It is sickening to watch. What useful product or service are these flippers creating? Irresponsibly shifting wealth from the future to the present. Thats real useful.
  • "Borrowers whose incomes have not risen enough or who have not planned for the higher payments could find themselves shocked." Right.
  • "The apparent froth in housing markets may have spilled over into mortgage markets," Alan Greenspan, the Federal Reserve chairman, said while testifying to Congress last week. "The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern." You are partly responsible Mr. Greenprint aka Mr. Bubbles. You actually recommended people take adjustable rate mortgages out last year. Wake up and smell the coffee. You should resign now and save what dignity you still have.
  • "The lure of such loans is obvious. Because of the lower initial payments, buyers can purchase bigger and more expensive houses." Right on.
  • "One possible warning sign is that a growing share of those taking out the aggressive loans is made up of lower-income families living in expensive areas, according to, a research company. " The good folks at are generally right on the money.
  • "In the first quarter of 2005, 70 percent of option ARM borrowers made the minimum payment, according to UBS." Very troubling. But not unexpected. Screw the future, the short term is what matters. :-(
  • "Nationwide, the increase in monthly payments as more mortgage rates start to float will cost families about an extra $40 billion over the next two years, according to estimates by Credit Suisse First Boston. That is the rough equivalent of a 40-cent increase in gas prices over the same span, which would pinch incomes but would not be likely to create a recession. " Interesting. I still believe a recession is on the way soon (within the next 10 months).
Great article in the NYTimes. The NYTimes deserves major credit for digging into the details of the housing bubble. They should have started earlier. But now they are really working hard in digging to the bottom of this pit.

Wednesday, June 15, 2005

The Ownership Society?

The ownership society which is highly touted by the Bush Administration is becoming the 'debtship' society. "Where's the pride in "ownership"? Buyers today own nothing. When you take out an I/O loan---over 70% now in my county in Calif---you own nothing. (post on the Housing Bubble 2)" It is a lease with a contract to buy. If the price drops, you still have that contract to buy you can't just get out (walk away). You will be under and it won't be pretty.

This country is becoming a nation of debtors. The situation is entirely unsustainable. The sooner the housing bubble pops the sooner we can begin to readjust our economy to bring sustainable economic growth.

Chicago Downtown Construction Frenzy

From the Realtor Magazine Online:

Chicago Downtown Construction Frenzy

(June 14, 2005) -- More than 8,400 new residences will be added to Chicago's downtown in 2005—the most ever added in a single year.

This comes on top of the 43,000 new units added between 1990 and 2004, according to a recent report by Appraisal Research Counselors in Chicago.

"We have been a bit surprised by the demand for new units," says Gail Lissner, vice president of Appraisal Research. Also somewhat surprising to Lissner has been the recent velocity of home sales. About 2,500 units sold during the first quarter—an 80 percent increase over first quarter sales in 2004 and 50 percent greater than the first quarter record (5,625 units) set in the year 2000.

If the pattern continues, 10,000 condominiums could be sold downtown this year. Lissner attributes strong sales to the overall favorable climate for real estate and renewed interest in living downtown.
The Chicago housing market has had reasonable appreciation in recent years (6.7% last year). Yet it has not had the double digit apprecaition seen in many metropolitan areas. Chicago, being the largest city in the Midwest, is representative of the region's moderate housing appreciation rate. Also, downtown Chicago rocks. I highly recommend it. It has the second most vibrant downtown in the nation (after NYC). However, Chicago's downtown is much more consolidated then NYC (NYC has the financial district and Midtown).

Sunday, June 12, 2005

Growing Signs of A Housing Slowdown

From today's NYTimes, we have an article titled "Signs of Spring Slowdown." In this article:

  • "After a torrid first quarter that spun the sales prices of Manhattan apartments to breathtaking highs, anecdotal evidence suggests that the headiness has started to dissipate. While the jig is hardly up, brokers are saying that the tempo resembles a more seasonable waltz, and that there are signs of growing price resistance among buyers.
  • " ... chief executive and president of Corcoran, adding, "What tells you if prices are going up is the price per square foot." She said that data from the firm's signed contracts show condo and co-op prices per square foot of $1,003 in March, $1,016 in April and $1,009 in May."
  • " and a professor of economics at Yale University. Mr. Shiller shared the results of a Lexis-Nexis search he conducted among major newspapers: In May, 77 articles contained the words "housing bubble," nearly double the 40 logged in April."
The evidence of growing bubble talk and stagnating prices continues. Stagnating prices will lead to a change in market sychology. Many more people will no longer believe in the contintuation huge price apprecaitions. This will lead to panic selling especially amoung speculators, investors and second house owners. Price declines will start occuring. Look for price declines of up to 50% in certain markets over the course of a few years (inflation adjusted).

Gambling & The Housing Market

One of the "The biggest price increases in the HPI during the past year occurred in Nevada, with a 4 quarter increase of 31.2 percent" (HPI = Housing Price Index) OFHEO Report. What is Nevada known for? Gambling. How appropriate. In some markets the housing market has become a new form of gambling. Las Vegas is not only gambling on money but housing stock as well. When the economy takes a hit, one of the first things that gets hit hardest is tourism. Las Vegas has profitted tremendously off of the reckless consumer spending and will be one of the hardest hit areas when the consumer spending takes a dive.

Thursday, June 09, 2005

Tropical Storm Arlene: First of The Season

Tropical storm Arlene has form over the Gulf of Mexico. While it is still a weak storm with sustained winds of only 40 mph. It is the first tropical storm of the season. It is heading right for Alabama and Mississipi. Will this Hurricane Season be a contibuter to popping the housing bubble in Florida? If it is a bad season like last year then that is a very likely outcome.

Tuesday, June 07, 2005

Losing Faith in Greenspan

Greenspan has lost my confidence. I used to have confidence in him. Today, he has supported and created economic conditions that considerably weaken our long term economic health.

In a Central Bank panel discussion to the International Monetary Conference, Beijing, People’s Republic of China (via satellite) on June 6, 2005 Greenspan says "The economic and financial world is changing in ways that we still do not fully comprehend. Policymakers accordingly cannot always count on an ability to anticipate potentially adverse developments sufficiently in advance to effectively address them. Thus our economies require, in my judgment, as high a degree of flexibility and resilience to unanticipated shocks as is feasible to achieve. Policymakers need to be able to rely more on the markets' self-adjusting process and less on officials' uncertain forecasting capabilities. "

So why did you lower interest rates ridiculously low rates and keep them there for such a long time? This was key in creating today's credit bubble that led to today's housing bubble. Why did you support a huge federal budget deficit (caused mainly by GOP tax cuts)?

Greenspan goes on to say "The U.S. economy's response to the terrorist attacks of September 11, 2001, is a case in point. That shock was absorbed by a recently enhanced, highly flexible set of institutions and markets without significantly disabling our economy overall. But that flexibility should not be taken for granted, and every effort should be made to preserve and extend it. "

Sure you have preserved the economy in the short run, but at what cost? Today's level of debt are simply unsustainable. The magnitude of the debt is truly staggering. Furthermore, most of the debt is not going into economic productive endeavors ( reasearch, factory building etc.) but instead buying stuff like plasma TVs, cars & SUVs, overpriced housing units. The sooner the housing bubble pops the sooner our economy can focus on productive economic development.

Monday, June 06, 2005

Great Interview with John Rubino

Author of "How to profit from the coming Real Estate Bust". Long, long interview, but worth every second: The interview is from May 28th of Friday. Fantastic interview. He says some very troubling things about the coming financial storm. Highly recommended.

Sunday, June 05, 2005

Washington, DC

Driving around the NW quadrant of Washington, DC I noticed lots of houses for sale or available for rent. Every two blocks seemed to have one. Maybe it is entirely seasonal. Doubtful. The RE websites are showing a large increase in listings. Refering to the Washington area one commentator on another blog site stated "I’ve never seen so many for sale signs in this area as I’ve seen this spring." Real estate is expensive here due to huge appreciation in the last five years. More reports to come.

Thursday, June 02, 2005

The OFHEO Housing Report

Check out the OFHEO Housing Report released yesterday. It is a 75 page report. Lots of valuable of information.

  • "Average U.S. home prices increased 12.50 percent from the first quarter of 2004 through the first quarter of 2005. "
  • Across the US "appreciation for the most recent quarter was 2.21 percent, or an annualized rate of 8.82 percent."
  • "The biggest price increases in the HPI during the past year occurred in Nevada, with a 4-
    quarter increase of 31.2 percent" (HPI = Housing Price Index) Isn't it ironic the Nevada is the capitol of gambling? One more thing to gamble on. Such a creative place
  • " The list of the 20 fastest appreciating MSAs remained largely unchanged from the
    previous quarter, with 14 of the 20 fastest growing MSAs in California, 4 in Florida, and
    2 in Nevada."

Let me know what else you find noteworthy. :-0

Field Reports

It would be great to hear some local reports from the field. Share you observations and analysis of the local housing market. Here in DC and Baltimore, inventory is up from past 2 months ( this is probably a seasonal variation). In the gentrified and gentrifying neighborhoods in Baltimore properties are not selling as fast and there has been an increase in the number of price reductions. However, other markets are much more likely to stagnate and pop first then the DC / Baltimore market.

Wednesday, June 01, 2005

RE Futures

Now you can 'invest' in future contracts on various local median house prices at Bet house prices will go up, or bet houses will go down. More information at . This is a solid concept. However, right now the Hedgestreet housing market is pretty inactive. I'll be keeping my eye on Hedgestreet.