Monday, September 04, 2006

Market Conditions in the Bubble Markets

In the past year, nearly all housing bubble markets have experienced a dramatic change in the housing market. The housing frenzy of last summer, characterized by bidding wars, is becoming a distant memory as the declining housing market continues to decline.

What is a Housing Bubble Market? A bubble market is any housing market where there will be a real dollar price decline of at least 20% from peak price over the course of three years. This is for a typical property. In most of these bubble markets, real dollar price declines will continue for much more then 3 years. Most of these bubble markets saw prices double or more over the course of five short years.

Where are the Housing bubble Markets? The bubble markets are located mainly in the following states; MA, CT, RI, MA, NY, NJ, PA, MD, DC, NJ, VA, FL, NV, AZ, NM, CA, OR, HI, WA, CO. Here are some metro areas that are bubblicious.
  • Boston, MA
  • Hartford, CT
  • Providence, RI
  • New York City, NY
  • Baltimore, MD
  • Philadelphia, PA
  • Washington, DC
  • Virginia Beach - Norfolk, VA
  • Miami, FL
  • Cape Coral - Fort Myers, FL
  • Naples, FL
  • Orlando, FL
  • Tampa Bay - St Petersburg, FL
  • Sarasota-Bradenton-Venice, FL
  • Daytona Beach, FL
  • Jacksonville, FL
  • Tallahasee, FL
  • Boston, FL
  • Seattle, WA
  • Tacoma, WA
  • Bend, OR
  • Boise, ID
  • Merced, CA
  • Bakersfield, CA
  • Redding, CA
  • Fresno, CA
  • Modetso, CA
  • San Francisco, CA
  • San Deigo. CA
  • Sacramento, CA
  • Los Angeles , CA
  • Stockton, CA
  • Flagstaff
  • Phoenix, AZ
  • Las Vegas, NV
  • Carson City, NV
  • Reno, NV
  • Honolulu, HI
There are many more bubble markets that are not on this list. Some rural areas, especially near metropolitan bubble markets, are also bubblicious.

Exploding Inventory

Nationally, the inventory of existing homes for sale has increased by 39.1% year over year from 2,678,000 in June 2005 to 3,725,000 in June 2006 according to data published by the National association of Realtors. In the bubble markets, inventory has increased at an even faster pace then the national picture.

In San Diego County, housing inventory started off at 13,916 on January 1st 2006 and has risen by a full 67% and was 23,259 as of July 24th (Zip Realty, Bubble Markets Inventory Tracking).

In Los Angelos County, housing inventory started off at 24,463 on January 2nd 2006 and has risen by a full 82% and was
44,757 as of July 24th (Zip Realty, Bubble Markets Inventory Tracking).

In Sacramento Metro area, housing inventory started off at 9,513 on January 2nd 2006 and has risen by a full 80% and was
17,200 as of July 24th (Zip Realty, Bubble Markets Inventory Tracking).

In the Phoenix metro area, inventory spiked from 10,748 on 7/20/05 to
51,557 on 7/5/06 according ZipRealty and Bubble Markets Tracking Inventory. This represents an incredible increase of 379% year over year.

In Northern Virginia, a part of the Washington DC metro area, the number of active listings was 4061 in June 2005, which increased by 197% to 12,096 in June 2006 (MRIS).

In the Orlando area, inventory had exploded from 13,533 on January 7th, 2006 to 25,665 on August 21st, 2006 (HousingTracker).

In most bubble markets inventory has more then doubled since last summer. In some metro areas like Phoenix inventory has more the quadrupled since last summer. The inventory is obviously the supply side of the equation.

Plunging Sales

Last year, in the bubble markets housing units were often selling in less then a week with sellers choosing from multiple offers. Now, the average number days on markets has increased dramatically in nearly all bubble markets compared to last summer.

Nationally, new home sales are down 21.6% compared to July 2005 (US Department of Commerce). Existing home sales are down 11.2% (National Association of Realtors).

In July 2005, in the Baltimore metro area the average days on market for housing units that sold was 35. This July, the number had increased to 55 representing an increase of 57% in the days on market. In Baltimore City the number of housing units sold in July 2006 fell 24% compared to July 2005 (MRIS).

"Existing home sales in July continued their year-long downward trend, plunging 44 percent in Palm Beach County and 39 percent in the Treasure Coast, year over year, the Florida Association of Realtors said Wednesday. Statewide, home sales fell 33 percent to 14,451 closings from 21,691 in July 2005, the association said"" (Palm Beach Post 8/23/06)

According to The Warren Group, in Massachusetts, sales of single family residences tumbled 26.9 compared to July 2005. Condo sales are down a similar 23.5% as compared to July 2005.

In Washington DC, the number of housing units sold in July 2006 fell 21% compared to July 2005 (MRIS).


Graph showing the number of home sales plunging in 2006 in Northern NJ.
Courtesy of Northern New Jersey Real Estate Bubble

In Sacramento, CA "Declining demand and buyer hesitancy pushed existing-home sales down 45 percent in Sacramento, Placer and El Dorado counties in July, compared to the same month last year (Sacramento Business Journal)".

The demand from flippers and specuvestors is drying up as the the word gets out that prices don't always go up in the bubble markets. The National Association of Realtors reported "The annual report, based on two surveys, shows that 27.7 percent of all homes purchased in 2005 were for investment and another 12.2 percent were vacation homes" As prices decline in the bubble markets there will be even less demand from the short term investors (flippers) who have been such a large part of the price runup. Plunging sales indicates a strong decrease in demand.

Stagnating & Falling Prices

During the boom years 2001 - 2005, prices for many housing units increased by double digit annual rates. In Washington, DC the median sales price for all housing units increased by 17.45% from July 2004 to July 2005. Then from July 2005 to July 2006 the median sales price has actually fallen by 3.45%.

For July 2006, in most bubble markets, median sales prices increase are less then 8% and in a significant number of bubble markets median sales prices have declined from last year.

In Massachusetts, the median sales price for condos is down 4.2% as compared to July 2005. The median single family residence is down 6.1% compared to July 2005 (Warren Group).

Now in many bubble markets prices are falling as inventory swells and demand declines.



WSJ Chart showing the percentage of reduced price listing on local MLS.

The plummeting demand coupled with the swelling inventory has placed downward pressure on prices. Prices will continue to fall in the bubble markets.

Conclusion

The housing market in the bubble markets will continue to decline of the coming years. As the 2006 buying season comes to a close, inventory continues to pile up in many bubble markets. Sales are down significantly in the bubble markets compared to last year. Additionally, an economic recession in the US is coming within the next 9 months. Real dollar prices declines in the bubble markets are very likely to vary between 20% - 65 in real dollars (inflation adjusted) from peak to bottom (it may take up to 8 years). Most of the real dollar price decline will occur in the first 3 years of the housing bust. Indeed the huge price appreciation that occurred in the bubble markets over the past 5 years or so was a speculative episode. As John Kenneth Galbraith wrote "And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang.

58 comments:

  1. I try to keep opinion out of my comments, but JKG was an over-rated publicity hound and lucky if he was right 20% of the time. But, I don't disagree with

    "...the speculative episode always ends not with a whimper but with a bang."

    However, a 20% real dolar decline over 3 years after 100%++ run up in the preceding 3 years is the defintion of a "whimper".

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  2. The historical data indicates that after housing price bubbles "burst", price deflation runs about 35% over the course of about 4 years.

    Those people who believe that price inflation does not correct itself are simply delusional.

    (Note Appendix "C" in the following link):

    http://www.globalinsight.com/gcpath/1Q2006report.pdf

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  3. Lets look at the positive note for a change. Buyers now have the option to negotiate without having to deal with mutiple offers. They can take their time looking at as many homes as necessary without worrying about homes selling within hours. Interest rates on loans are still very low and have dropped recently.

    Nobody can predict the future of the housing market. Life does not wait for home prices to fall further or rates to rise. If your planning on purchasing a home, think long term (5 plus years) and make your move.

    Los Angeles Real Estate

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  4. Richard M. Johnston, Realtor said...
    "Lets look at the positive note for a change."

    True, buyers do not have to deal with multi offers any longer. Most buyers these days cannot afford a half million dollar Mortgage payment, and God forbid if they don't have 20% to put toward this enormous amount of debt.

    Interest rates are still low. Do they compenstate for the huge price tag a home cost today? My answer is no.

    Nobody can predict the market, with all certainty, but if your priced out your price out.

    It's kinda hard to think about the long term, once you've already taken the plunge and leveraged yourself against this huge monthly debt.

    If you can find a decent home, for a price that you can afford then by all means buy. In this current market, it's just not going to happen, especially for the first time home buyers.

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  5. RMJ-

    I want to ask a serious question. Are you encouraging any buyers you may have to bargain hard and make very low offers as starting points? What you say is correct--no more muliple offer bidding wars, etc. because there is double, sometime triple the available inventory now. With supply now so gluttenous when it once was tight, is it your opinion that prices must fall to allow all this excess inventory to be absorbed? If sales are not happening at current price levels, are you stressing to your sellers that a lower price is whats key to moving most middle-of-the-road homes?

    Thanks!

    BTW-David, excellent piece!

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  6. "However, a 20% real dolar decline over 3 years after 100%++ run up in the preceding 3 years is the defintion of a "whimper"."

    The vast majority of bubble markets will have larger real dollar price declines over the course of 3 years. Plus real dollar prices are likely to continue falling for 8 years.

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  7. Richard M. Johnston, Realtor said...

    "Nobody can predict the future of the housing market."

    Were you telling that to your fellow Realtors when they were saying RE only goes up? or to David Lereah who said the boom will continue to the end of the decade? Or crtitizing the 'buy now or forever be priced out' nonsense?

    Please do tell.

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  8. i_will_not_cooperate said:

    "If you can find a decent home, for a price that you can afford then by all means buy. In this current market, it's just not going to happen, especially for the first time home buyers."

    You're not giving yourself enough credit. Of course you can. It may not be your ideal place, but it rarely is for a first time buyer. However, it will be the place that 5 - 10 years from now will provide you the equity to get a lot closer to that ideal home by "moving up." Also, don't shy away from creative financing techniques. They exist to help someone specifically in your circumstances. Houses back in the early 80s were substantially LESS affordable because of interest rates approaching 20%. (Look at page 27 of Shiller's report to see how only 80% of people earing a median income could afford a median-priced house back then vs. something approaching 120% of people today.) People used financing means such as seller-financing with baloon payments due in 10 years. Just like today, people could have said "and what will I do in 10 years when the note is due?!" ... Well, things sorted themselves out then ... Just like they will now. The trick is to get into something you can afford today by buying something less valuable today (e.g., in a transistional neighborhood) and using whatever financing will get you in there. As the years go back and your salary doubles triples quadruples --- and your starter home builds equity --- you'll be able to go out and move up closer toward your dream home. Just note that there'll always be something nicer out there, but you need to start somewhere. And there really never is a bad time to buy, just people who don't know how to buy ... and find it easier to blame everything around them than to look inside themselves and realize the problem ... and the solution ... starts at home.

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  9. "Lance said...
    i_will_not_cooperate said:

    Also, don't shy away from creative financing techniques."

    Tell that to all the people that have lost their entire life savings to exotic loans,...please!

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  10. "Life does not wait for home prices to fall further or rates to rise."

    On the other hand, life definitely will wait for those who are upside-down on their mortgage. Better have a nice down payment handy.

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  11. i_will_not_cooperate said:
    "Tell that to all the people that have lost their entire life savings to exotic loans,...please!"

    The only people who will have lost their entire life savings to exotic loans are the same people who would have lost their entire life savings to conventional loans. It's always a lot easier to blame "the system" than to blame oneself. People who are going on exotic trips and buying $50,000 cars AND have an ARM will be in trouble. But they would have been in trouble even if they didn't have the ARM. Are you following?

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  12. Lance said...
    “Also, don't shy away from creative financing techniques. They exist to help someone”

    Yes! Snap up those exotic loans! And if you can’t keep up with payments, no worries, the state will help you out!

    http://www.dhcd.state.md.us/Website/programs/cdammp/Lifeline.html

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  13. robert,

    Those "exotic" loans have been around since at least the early 80's. Even had neg. am. loans back then.

    Real Estate did not collapse.

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  14. Lance and others who continue to harp on purchasing in less desirable neighborhoods.

    Guess what, I've looked there..and they are often equally as expensive. 500K for a 3 bedroom in Deanwood. I've noticed that some of the worst neighborhoods are just as expensive as the more popular ones. So, it's not a matter of a first time homebuyers refusal to lower standards. Apparently, people living on Danbury Street, people living in Deanwood, people living on Alabama Avenue...they all have decided that they should price their homes the same way people in other areas are. As someone else said..priced out is priced out. Plus...some of these neighborhoods aren't changing..not the same other gentrified neighborhoods have. Just because there's an interest in H Street does not mean that 450K 3 bedroom fixer upper off of Shipley Terrace is going to gain loads of equity when I have to move because my family has grown in 5 years. Again, I could care less about having granite countertops...and marble floors.

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  15. originaldcer said:
    "Apparently, people living on Danbury Street, people living in Deanwood, people living on Alabama Avenue...they all have decided that they should price their homes the same way people in other areas are."

    OriginalDCer, you've overlooked that which you yourself have pointed out. That they have decided to price their homes the same as homes in nicer neighborhoods. Now, who do you think really sets the prices on homes? Certainly not they, the sellers, alone. Go in there and offer them what the home is really worth which you can easily ascertain by checking tax records and seeing what similar houses in the same neighborhood are selling for. This gets back to the discussion with Neil last week ... where I mentioned that the 10% - 15% in price reduction he was referring to meant nothing in terms of what places were selling for ... Since those price reductions were on asking prices ... i.e., they were on prices that had never been getting obtained anyways. Also, note that when you find in the tax records that homes in those neighborhoods have been selling for a lot less than the asking prices, don't walk away without the realization that others have been seeing the same homes you thought were too expensive and realizing that they weren't "too expensive", just "overpriced" .... and making their offers on these homes accordingly.

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  16. va_investor,

    "Those "exotic" loans have been around since at least the early 80's. Even had neg. am. loans back then. Real Estate did not collapse."

    In some areas RE did have significant price declines. Secondly, the percentage of exotic loans was MUCH lower.

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  17. Lance and others. I've checked the tax records and many of these homes haven't sold at all. Oh and offers for less have been made..let's not forget that many of these folks are still living in their homes. They don't HAVE to sell..they simply are jumping on last years band wagon. So, yes..I've made a couple low ball offers..which were refused because "those people in Dupont Circle got that last year..why can't I?". This is the general response.

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  18. David,
    What and excellent post, great research, thoughtfully explained, and even some useful graphs.
    Very cool.

    Lance,

    I'm sorry to disagree again, but exotic loans are like leveraged stock positions and options, fine in hands of a sophisticated investor, poison laced candy to everyone else.

    Way too many people, usually the ones who can least afford it bite on the low low monthly payments. Five years when the balloon comes do or the payments reset is unimanginably far away, and besides, they want the house.

    Lately folks have been diving in with the false promise that real estate always goes up, at least in this location for a million inane reasons that are proving flawed as the market declines. Oops, I'm sorry, there is no housing market so there is no way for it to go down, oh that was NATIONAL housing market.

    Anyway, they were eager to get in beyond their means because of the promise of rising valuations was a sure thing and would take care of the balloon when it landed.

    No, IO loans are like options and other derivatives. Fine in the hands of pros but as we will see, deadly when miused.

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  19. I also think...and this may be a little risky to say..that there is some angst between some of the lower income areas in places like Southeast and parts of Northeast with respect to sale prices. When I go to Southeast and see what is being sold and I balk at the price especially when I send a message through my agent that I'd be willing to make an offer at a substantially lower price the response is similar to..well you're doing that because this is "black" neighborhood..or you'd give those white people the money..why not me. Sorry I know that is kind of off tangent.

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  20. Robert,

    That link is incredible. Housing assistance for people with 6 figure incomes! What it really shows is the need for a bureaucracy to justify its existence. By including what must be 120% of the median, the bureaucrats can justify their budgets by saying "we serve over 80% of the population".

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  21. I think the state program link only further emphasizes that prices have outstripped incomes

    ReplyDelete
  22. fogcutter said:
    "No, IO loans are like options and other derivatives. Fine in the hands of pros but as we will see, deadly when miused."

    you are 100% right ... i.e., I agree with you ... but what I believe is that the folks who misuse these instruments are the same folks who would find a way to mess up whatever was out there ... in another universe without these tools allowing them to make purchases they otherwise couldn't afford, they would still manage to get themselves in the same position by overreaching in another way ... perhaps they'd overcharge the credit cards, perhaps they'd sell that land in Florida that mom and dad left them for pennies on the dollar of what it is really worth, perhaps they'd just overcommit in a number of other ways. i.e., you'd still have these folks out there getting themselves in trouble ... but that is not your problem ... your problem is figuring out how YOU are going to buy ... and if you can RESPONSIBLY make use of these instruments, then go for it ...

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  23. data miner, you are so so right ... And it is so so scary ... With attitudes like this, it's no wonder you have people out there who think they should only buy if there are 100% guarantees that they'll always be able to make their mortgage payments. And that, is the beginning of the end ... for these people.

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  24. Lance,

    exotic loan products are dangerous instruments for seasoned investors and absolute "neutron bombs" for the less than savvy investor. real estate is a cash flow business (you must cash flow to service debt). if this "cash flow" stops even the best will go down hard.

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  25. creativemind,

    How do you see the "cash flow" stopping?

    ReplyDelete
  26. Just wanted to draw you attention to a recent survey conduced by Bankrate.com where it ranked the 50 states based on mortgage closing costs. Here is a link to the article and the table.

    http://www.bankrate.com/brm/news/mortgages/ccrank2006a1.asp

    http://www.bankrate.com/brm/news/mortgages/ccmain2006a1.asp?caret=2

    I was shocked to see that DC ranked 46, with one of the lowest average closing costs in the country. Last year's survey had D.C. ranked at 17. I specualte that this dramatic drop has a lot to do with the fact that margins are getting much tighter for the mortgage industry as the housing market begins its downward cyvle.

    ReplyDelete
  27. One more comment on David's post.

    The increased for sale inventory will not cause downward pressure on prices equal to the price increses caused by scarcity of for sale inventory. While both the scarcity and "surplus" of for sale inventory affect buyer sentiment, most sellers are not in desperate circumstances where they need to be "price takers".

    The true measure of inventory - number of homes - is the supply side of the demand vs supply equation. We will get a good picture of these numbers in October when the 2005 Census survey data comes out. Without a large suppply of vacant homes, we should not expect prices to fall below the "fundamentals" of affordability - as defined by income and interest rates.

    What the October Census numbers won't be able to tell us is the current overhang of empty flipper units on the market today. My guess is that many units of new construction that were sold to flippers in late 2004 and early 2005 were not delivered until 2006 and thus will not be in the 2005 numbers

    ReplyDelete
  28. VA Investor,

    "cash flow" is the ability to service debt. when a real estate investor has several properties in his portfolio he must be able to service the monthly debt. this "servicing" ability becomes critical as the real estate market becomes more and more illiquid. in many instances this debt can be substantial. now factor in any of the following: loss of job, medical emergency, divorce, loss of pension benefits, loss of renter. viola DISASTER. a chain is only as strong as its weakest link...ask the pilots at delta who are about to loss penison benefits, ask the ford motor company employees who are going to loose their jobs..etc.etc.etc...repeat..we are in dangerous real estate territory.

    ReplyDelete
  29. creativemind,

    You certainly have created a doomsday forecast. Of course, any of these events can happen to a person. The difference is that most are smart enough to have an "emergency fund" of at least 6 months pay.

    It wouldn't take a recession to blow away people who don't plan ahead. You have no reason to state that "cash flow" will stop.

    The DISASTER scenario is highly unlikely, except for those living paycheck to paycheck (owner or renter) for whom "disaster" is always one missed paycheck away.

    ReplyDelete
  30. lance said,

    "The only people who will have lost their entire life savings to exotic loans are the same people who would have lost their entire life savings to conventional loans."

    Right! Which is why there is a price bubble: the number of buyers was artificially inflated because the Federal Reserve dropped interest rates too low. Many "buyers" over the last several years really weren't buyers at all because they simply could not have afforded to buy without, in effect, a subsidy from the federal government, to wit: low interest rates.

    Not to worry -- markets have a way of correcting themselves. These people won't be owners soon, and housing prices will fall in recognition of this fact.

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  31. whitetower said:
    "Right! Which is why there is a price bubble: the number of buyers was artificially inflated because the Federal Reserve dropped interest rates too low."

    I think you are giving the Federal Reserve too much credit for low interest rates. Mortgage rates are even lower in Europe (3% is the current mortgage rate.) Do you really think our federal reserve is responsible for that too? No, we have a very fundamental change occuring in regards to how business around the world is occuring. The low costs of telecommunications and freedom of trade have created a situation where previously way-too-underutilized millions of people ... such as those in China and India ... can now participate in what has become a global economy ... And the magnitude of wealth being created out of previously idle hands has created a pletora of stored wealth for the wealthy that can be lent out at lower and lower interest rates. The doomesday scenario the bubbleheads like to forecast isn't anywhere in the cards ... Just the opposite.

    ReplyDelete
  32. Please STOP! you are like a 2 year old! how can we have rational discussions here when there is a 2 yr old around making mahem!

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  33. the fact that this blog has a stalker PROVES that this bubble is gonna pop and pop BIG!!!!

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  34. Mr Johnson (Realtor), i am worried , hell scared stiff, about what lies ahead about realtor profession..
    Life, like you said, will not wait for realtor profession to become vogue again in few decades..May be you should work for a career change...

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  35. VA, this site does allow for a full discussion of economic factors that could cause the "domino" effect of cascading defaults. however, i seriously question your statement that most people have six month of cash reserves. the savings rate in this country is negative! homes have become atm machines. most people who bought on ARMS and other products (my thoughts) are living check to check. even Sir John Templeton is calling for a 50% haircut in housing prices. this is a dangerous market...

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  36. Va....sorry about that...amend to "this site does not allow" sorry a senior moment...

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  37. Lance,

    "I think you are giving the Federal Reserve too much credit for low interest rates."

    Alan Greenspan had plenty to do the the interest rate being lowered and his board of Governers.

    Who kept dropping the overnight rate? I guess the goverment had nothing to do with this entire bubble mess. Now, today the majority of economy is driven by the housing market.

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  38. creativemind said...
    “VA, this site does allow for a full discussion of economic factors that could cause the "domino" effect of cascading defaults. however, i seriously question your statement that most people have six month of cash reserves. the savings rate in this country is negative!

    Hear, hear!
    Add to that the need for government help for those with exotic loans, the increased inventory, and trillions off dollars of ARMs resetting. Every data point is pointing to a housing bust.

    In the spirit of full discussion, please housingheads, post data indicating that RE will sustain current prices and/or will continue to climb in the near term.

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  39. This comment has been removed by a blog administrator.

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  40. This blog is now under comment moderation.

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  41. creativemind,

    It is well documented that owners have significantly more assets (savings, stocks, equity etc.) than renters. I wonder what the savings rate would be if no renters were included.

    I think we have had this discussion here before, but the "savings" figures do not include growth in home equity.

    And I don't believe that Home Equity loans that are reinvested in the home are counted as "assets".

    Robert,

    I never claimed that we were not in for a corretion. I have consistently stated that real estate is cyclical. I believe a 90's style correction is in store.

    It would be interesting to see average and median assets of homeowners vs. renters. Owners will be able, in the main, to weather this downturn. There have always been those who live paycheck to paycheck and have a good chance of losing their home(renter or owner). With employment and other favorable economic conditions, I don't see any valid reason to panic or think prices will drop by half.

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  42. In general it is probably true that homeownership correlates with higher net worths. That is not the same thing as causation. Are homeowners better off because they own? Or can they own because they are better off?

    In either case, it doesn't apply on this blog. The renters on this board are not ‘renters’ in the traditional sense. They do not rent because they did not qualify for a loan, or because they are caught in a minimum wage trap. (I would venture to bet that our incomes match those of the homeowners on this board.) They rent because they choose to, because for one reason or another they became cognizant of the real estate run-up and opted to wait it out. Over the long term, I am confident that the renters on this board will have assets on par with the homeowners.

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  43. On the subject of exotic loans in general, and the comment that I/Os and neg ams existed in the 80s in particular, some history may be helpful.

    I/Os did exist in the 80s but were a nonfactor in the residential purchase money and refi market. They were made available to wealthy individuals by the private banking departments of banks and brokers. In fact, the first one I ever saw was circa 1999 from Merrill Lynch's mortgage subsidiary. You know the rest. Interesting to note that the last time I/Os were a measurable part of the mortgage landscape was in the 1920s. Some track record.

    Yes, neg ams were around in the 80s. Dime Savings Bank was a pioneer in marketing them, and wrote a ton in the northeast. When the market tanked in 1989, a large percentage ended in foreclosure & Dime ended up being sued/investigated out of existence. In fact, it was the perception of the time that neg ams constituted predatory lending, and they pretty much disappeared until the current run-up, when they wre combined with variable I/Os into the "option ARM" or, as BW puts it, the toxic mortgage.

    You can disagree as to how the current market will unwind (or not); there is no question the amount of option ARMs are a problem. I will leave you with a link to an article by K. Harney, one of the biggest shills for the RE industry on the subject.

    http://realtytimes.com/rtcpages/20060227_equity.htm

    or: http://tinyurl.com/ljryn

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  44. actually, the most recent data shows that renters have a postive savings rate and home owners have a negative savings rate for the first time since the great depression. Go look it up, I think it was recently posted on cnn.

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  45. va_investor said...
    “I think we have had this discussion here before, but the "savings" figures do not include growth in home equity”

    And why would it? One would have to sell to see that “savings”. No buyer, no savings.

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  46. So send in the GS-15's/There ought to be GS-15's/Well, maybe next year.

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  47. Lance said...However, it will be the place that 5 - 10 years from now will provide you the equity to get a lot closer to that ideal home by "moving up."


    you really crack me up.

    i can't even afford a house in Compton right now and even if i could and i bought in 5-10 years the house i would have wanted will be up by the same amount (prolly more) so i'm still locked out.

    i swear the just buy no matter what nonsense on the blog is baffling!!!

    upside down for 9 years guy here BTW.

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  48. lex said:
    "I/Os did exist in the 80s but were a nonfactor in the residential purchase money and refi market. They were made available to wealthy individuals by the private banking departments of banks and brokers. In fact, the first one I ever saw was circa 1999 from Merrill Lynch's mortgage subsidiary. You know the rest. Interesting to note that the last time I/Os were a measurable part of the mortgage landscape was in the 1920s. Some track record."

    Interest only loans were extremely common in the 80s. However, it wasn't the banks but rather the sellers making them. Because interest rates had sky-rocketed, sellers would induce buyers by providing interest-only 10 year balloon loans for a good part of that being financed. At the time, existing (bank) loans were usually assumable (unlike now where they are called in when the house is sold), so buyers would assume a low interest existing loan and the sellers would finance the remainder ... minus the downpayment. This allowed buyers to weather the high-interest "storm". Yes, like the ARMs of today, there was risk involved. What would have happened if interest rates had not dropped within 10 yrs? Well, hopefully the sellers (i.e., I/O loan holders) would have been smart enough to refinance so that they wouldn't have to foreclose. Of course, that never became a consideration as interest rates went down.

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  49. robert said...
    "va_investor said...
    “I think we have had this discussion here before, but the "savings" figures do not include growth in home equity”

    And why would it? One would have to sell to see that “savings”. No buyer, no savings."

    Robert, a renter having invested his/her savings in equities or a bank certificate would also have to sell to see that savings. So, what was your point?

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  50. Lance said......in another universe without these tools allowing them to make purchases they otherwise couldn't afford,


    you just admited that the people who bought a house with an exotic loan couldn't really afford them,

    you just outted yourself as a :troll:

    so which is it??

    IMHO if you can't afford a 30 year fixed rate mortgage YOU CAN NOT AFFORD THE HOME

    end of story

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  51. Lance,

    Well sure, some folks are simply gifted when it comes to messing things up.

    I hadn't heard of IO loans until four years ago, and I thought the person telling me was kidding. Turns out he wasn't.

    Going back to the teacher who went all in to buy 'before she got left behind', I don't remember if she had an IO loan, but it was likely because she was bidding against other buyers who did. One region around the Bay Area reported something like 75% of new mortages were IO in late 2005. Naive buyers will go for the lowest monthly payment someone will loan them, and the man at the bank is saying 'do it, you qualify'. If the man at the bank says it, then it has to be OK, right?

    Coupled with the premise the real estate always goes up, well, a lot of harm was done inflating this bubble, and it is the little guys who will pay with their credit ratings and a good slice of their future earnings.

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  52. In addition to younger folks who are awaiting their first entry into the ownership market, there are a lot of renters plying these blogs who used to be owners. After 33 continuous years of ownership, I sold my fifth principal residence in 2005; because of this bubble, I have been renting, quite happily, since. Once costs of owning once again reflect incomes rather than expectations of appreciation (shelter versus investment) and the cost to own is only nominally higher than the cost to rent, will we re-enter the market. With good fortune, that could be well within the next five years. Meanwhile, we read the articles about the bubble, the crash, and this weeks Business Week with keen interest, rather than worry. There are a whole lot of worried readers out there.

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  53. Lance said...
    “Robert, a renter having invested his/her savings in equities or a bank certificate would also have to sell to see that savings. So, what was your point?”

    Sure Lance, cashing in CD’s or cashing out a savings account is just like trying to selling a house.

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  54. chip,

    You are clearly treating your "home" as an investment or you would not have sold.

    After factoring in all the costs involved in selling, moving, buying, moving etc. as well as the agravation; is it really worth it?

    Based on your 33 years of ownership, I would guess that you are in your 50's. Were you planning to relocate soon anyway?

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  55. A broker friend of mine had a client who liked Hilton Head so he bought a condo about 15 years ago. He popped in three or four times a year. When interest rates were near the bottom, he checked into a home equity loan on a lark. He paid ~$150K for the place when he bought it, it appraised at $1.1M USD. He put it on the market that week and sold it shortly thereafter.

    Selling in an up market is tough psychologically. A rising market just feels good.

    This guy didn't need the money, but $950K profit was just too good to pass up.

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  56. fogcutter,

    Your broker's client made a business decision. If his time frame is less than 10-20yrs. that decision may prove correct. Alot depends on how he plans to "invest" his, after tax, money.

    I might have 1031'd into a triple-net lease or something else with a good cashflow. It is hard to get a decent cashflow out of resort property.

    If someone has no need for the money and a desire to eventually live in the property ( or at least utilize it more), I don't see a reason to sell.

    If those properties are future "retirement" homes, I would hang on to them. At that cost basis; nothing ventured....

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  57. Va_investor said:
    Those "exotic" loans have been around since at least the early 80's. Even had neg. am. loans back then.


    Va... you know as well as I do that these loans have never been used to the degree they are today.

    In this bubble market, homes are investments.

    In the past, I would know about 1 in 200 being in financial trouble with their house. Today? Its more like 1 in 10.

    This hasn't even begun to start. If not, why were so many new homes listed yesterday and today in my area? The selling season is over! Inventory should be declining rapidly... and yet its at record levels. Its funny, on some streets they are now hanging multiple signs from the same post due to the huge quantity of homes for sale.

    A friend/coworker of mine went house hunting last weekend (his wife really wants to buy, she's a realtor). After the 10th homeowner or realtor *ran* out of the garage offering to cut the asking price by 20%... even she is too scared to buy. Yes, they had over 10 sellers offer to cut their asking price by 20% in one day of touring open houses!

    The home sales rate needs to drop another 20% to be down at its historical norm and yet people are panicing at today's relatively high transaction rate. (This is Oceanside, California.)

    The fortune 500 company I work for has gone from quietly relocating employees to lower cost areas to a mad scramble to move people. We aren't the only ones doing this... Between us and our competitors we're pulling a few hundred jobs from DC in the next few months. Why? The employees want *out* from overpriced real estate they are not comfortable paying for. They wish to live where homes are 28% to 36% of their gross, no more. So we're moving people (its cheaper than replacing them). No layoffs... no news...

    Think about that... The 1st rule of economics is "follow the money." The money isn't into bubble markets right now...

    Neil

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  58. va_investor,

    The condo was a small holding for him. He had done well in the last two real estate bubbles. The guy has uncanny timing. He saw a 9 to 1 return in what he perceived as a bubble that was sure to decline. Waiting and trying to fish out 11 to 1 or 12 to 1 wasn't worth the incremental gain compared to the risk of watching it decline.

    He was flabbergasted because he hadn't been following real estate values in the area for a long time. Through most of the 1990s the market had been so flat he lost interest.

    That appraisal sure perked him up.

    In stocks a good goal is to catch 60% of a move. Knowing when to sell is key and a lot of luck. Holding into a maket turn is no fun at all.

    I don't know what he did with the cash. Probably went shopping.

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