A House in My Neighborhood

Today, I went to check out a house ( MLS ID#: MC5308496) for sale in my neighborhood. No, don't worry I am not actually considering buying this house.



It is located in Silver Spring, MD which is an inner suburb of Washington, DC. Previously it was listed at 519,00 but had not sold for a month. Now it is listed at 489,000., which represents about a 6% price reduction. The house is located on a quite street in a desirable neighborhood. The schools are pretty decent, it is 1 mile from the Beltway and 4 blocks from the train station ( metro). It is the cheapest single family house (SFH) in the neighborhood. It features:

• "Charming Exterior and Interior""
• "Three Bedrooms"
• "One Bath (room for more)
• "Quiet Neighborhood"
• "Three level living"
• "Central Air Conditioning"
• "Original six panel wood doors interior"

The interior of the house is not "charming," in fact the walls are badly painted, the hardwood floor is damaged, the kitchen is outdated ( not granite), and the upstairs bedroom looks terrible.

So will it sell at this reduced price in a reasonable time frame? Possibly.

I ended up chatting with the realtor.

Conversation 1:

Me: "Well at 489,000 your monthly payments on a fixed 30yr loan would be about 3,000 a month."

Realtor: "A bit less maybe 2,800. Or you could take out a crazy ARM."

Conversation 2:

A Women "We have a friend who is looking to buy but is concerned that when she may sell in five years the price won't be good because of the bubble"

Realtor: "She'll do just fine if she holds for five years."

Conversation 3:

Realtor: "This house is cheap. I might make an offer on the house if it doesn't sell soon"

Me: "What would you do with it?"

Realtor: "Rent it out for a while"

Me: "But the rent would not cover the mortgage."

Realtor: "How much do you think I could rent it out for?"

Me: "About 1800 a month."

Realtor: "More. It used to be rent out at 1850 a month about 1.5 years ago."

Me: "Okay you could rent it out at 2000 a month. That still does not cover the mortgage, taxes and maintenance costs. You would be losing hundreds of dollars a month hoping for future price appreciation"

Realtor: "There are ways to make it work."

Me: "Like what?"

Realtor: "I could split it into two and rent out the basement."

Me: "Is that even legal?"

Realtor: "I probably could get a permit. Or perhaps I could get one of those 1% ARM loans."

Me: "But then it would be a negative amortization loan."

Realtor: "Perhaps. Maybe I could renovate it and sell it for more."

Me: "Well it does need major work."

We chatted about other things as well. A pleasant individual. Many potential buyers walked through, but there was very little interest in the house due to the high price for a house in a poor condition.

My Date & The Housing Bubble

I usually don't talk about my personal life on this blog, but on my date tonight we ended up talking about the housing bubble. I related some of my knowledge about the housing market. She went ahead and said flat out that people will be burned from the it. She gets points in my book for being aware of the housing bubble and realizing the precarious nature of this speculative episode. :-) ( Please note I will not date housing flippers and speculators.)

Teaser Rate Loans

Here is the text for the * (next to 1.00%):

We do not offer mortgage loans in New Jersey and Texas. Available programs may be limited in other states.

Start rate of 1.00% is fixed for the first 30 days. Fixed payment option is available for the first 12 months. Terms of the payment are based on a margin of 2.10% plus the 1 month MTA Index (2.022% as of February 16, 2005). APR of 4.27% and payment of $643.28 per month is based on a 30-year term, $200,000 loan amount at 1.00%, and may change if the index adjusts after the first 30 days. If minimum payment option is selected, deferred interest may accrue. Interest rate quoted assumes a credit score of 620+ with a loan-to-value (LTV) of 80% on a primary residence. The APR and payment will vary based on the specific terms of the loan selected and verification of information and credit. Rates are subject to change without notice.

All loans will be secured by a lien against your property. Not all applicants will be approved. Terms and conditions apply, call for details. AZ Mortgage Banker LIC No. 0904930; Licensed by the Dept. of Corp. under the CA RMLA; GA Residential Mortgage Lender LIC No. 17302; IL Residential Mortgage Licensee; MA Mortgage Lender LIC No. ML2206; Licensed by the New Hampshire Banking Department; LIC by the NJ Dept. of Banking and Insurance; Licensed Mortgage Banker – NYS Banking Department; PA Dept. of Banking Licensee; RI Licensed Lender; 163 Technology Drive, Irvine, CA 92618.

Loan programs are offered by Home Loan Center, Inc which is also known as Home Loan Center USA, Inc. in AL, FL, ID, MI, MN, OH, OK, VT, & WY; Online Home Loan Center in NH; LT Loans in NV; and Loan Center, Inc. in WA.

For more information:
If you still have additional questions, please call one of our friendly loan specialist at 1-800-756-0789.

Notice the "1.00% is fixed for the first 30 days." Oh no! :-(

The Regional Housing Bubble Sites

Its great reading local news regarding the housing bubble. There is a growing number of local housing bubble blogs. You can access many of these sites on the right sidebar under the 'Regional Links' section. Here is a list of the sites:

• The Jersey Shore RE Bubble
• Marin Real Estate Bubble
• Seattle Bubble
• Vancouver Housing Market Blog
• New York Housing Bubble
• Boston Bubble
• San Diego Housing Bubble

There is a tremendous amount of fascinating and timely material on these blogs. Check them out!

Market Cooling in Northern Virginia

The housing market is cooling in Northern Virginia ( DC suburbs). Here are some highlights:

Home sales in Fairfax County dropped 7.7 percent in July compared to last year. In Arlington, they tumbled nearly 19 percent due to a sharp decline in condo sales. Loudoun County fell 12.3 percent.

It's something we've been waiting for. It's just a natural market balance. We thought it was coming last year," said Amy Ritsko-Warren, spokeswoman for the Northern Virginia Association of Realtors.

The rising inventory, along with fewer sales, helped push July's average price of a single-family home or townhome in Fairfax County down $19,000 from June, to $597,255.

DC is a special market in that there has been strong high paying job growth in the past 4 years. The DC area is likely to see stagnating prices with home price appreciation being near to inflation.

Hurricane Katrina Effects on the Housing Bubble

So what will Hurricane Katrina's impact be on the housing bubble? Will it be a factor in prolonging the bubble or will it help pop the bubble ?

Reasons Katrina would be a factor in prolonging the bubble:

• hundreds of thousands of homes were destroyed. Thus supply has been reduced and hence that causes upward price pressure
• Building materials increase in cost due to increased demand thus causing upward price pressure on new homes.
• The Fed decides Not to raise short term interest rates this month because of increased economic risks due to the hurricane
  

Reasons Katrina would be a factor in popping the bubble:

• People view housing as a more risky investment due to an enhanced awareness of natural disasters.
• Gas prices continue to remain high. People have less money to spend on housing.
  
• Economy suffers due to the hurricane.

Overall, I maintain that the hurricane is a negative factor for the housing boom.

A Responsible Lender

In the Motley Fool there is an article title Bad Mouthing the Bubble there is feedback from an owner of a mortgage-financing company:

T.B., the owner of a mortgage-financing company, says:
I have to chastise my fellow mortgage professionals for their money-hungry nearsightedness. The interest only and option-ARM (pick your payment) loans are going to come back to haunt the majority of those who have chosen to use them. The default rates on those homes will be far and above the average.

In all the years that I have been in the finance/mortgage business, I have only done one interest-only loan, and I refuse to do an option-ARM loan no matter how "sophisticated" the borrower is. The potential for negative amortization has no place in my book. The mortgage companies and lending institutions that are heavily promoting these loan programs don't care about the borrower (their customer!); all they care about is making a fast buck.

Take my word for it, Seth, the majority of all the Johnny newcomer mortgage people will be out of business once rates start moving up. Unfortunately, we have to live with them for now. I can only sit here and feel sorry for the majority of borrowers who have been conned into interest-only and option arm programs.

Amen brother! Amen. T.B. is being very responsible. I hope he makes a high income and is not undercut by the major competition from all these irresponsible lenders.

Las Vegas Bubble, Tourism & Gas Prices

Las Vegas has been a major bubble city. The city is highly dependent on tourism. Now, with gas prices rapidly rising the Las Vegas Sun had this article:

Fuel prices in Nevada neared $3 a gallon for unleaded regular and were closer to $4 a gallon in many other parts of the country on Thursday, and AAA Nevada said this state's average prices could quickly increase.

"There is concern in the industry how the consumers are going to react whenever you have these kinds of price increases," said Bill Bible, executive director of the Nevada Resort Association which represents most major hotel-casinos.

Will Las Vegas see a major bubble bursting as the tourism industry falters due to rising gas prices? Or will some sort of perverse American logic appear that says 'I am so stretched thin financially that I might as well gamble'?

OFHEO Housing Report

The Office of Federal Housing Enterprise oversight (OFHEO) just released their findings on housing for the 2nd quarter.

Average U.S. home prices increased 13.43 percent from the second quarter of 2004 through the second quarter of 2005. Appreciation for the most recent quarter was 3.20 percent, or an annualized rate of 12.8 percent. The new data represent the largest four-quarter increase since the second quarter of 1979.

13.43% is huge. This data only goes through the end of June. Notice how the price appreciation for the whole year is 13.43% whereas the annualized price appreciation for the second quarter is 12.8%. Thus there has been a slowdown in the rate of appreciation. I expect third quarter price appreciation of only 1 - 2%.

Nevada continues to have the highest appreciation of all states; house prices increased 28.1 percent over the past year and 5.5 percent for the quarter. However, for the first time since the fourth quarter of 2003, Las Vegas is not on the OFHEO list of the 20 fastest growing MSAs.

Nevada is a major bubble state. Glad to see that the Las Vegas market is 'simmering down'

Thirty of the 265 ranked Metropolitan Statistical Areas (MSAs) had four-quarter appreciation exceeding 25 percent.

Damn. That means over 10% of MSAs experienced year over year (yoy) price appreciation exceeding 25%. Wow.

"“The continued price increases are a result of many factors including low mortgage interest rates and the apparent impact of speculative investing," said Lawler. "The robust appreciation rates are striking both in terms of their magnitude and in their geographic scope. However, they are likely unsustainable given the underlying inflation rate, income growth and other factors".

The phrase 'apparent impact of speculative investing' should read 'considerable impact of speculative investing'.

Its is also worthy to note that of the "Top 20 Metropolitan Statistical Areas and Divisions With Highest Rates of House Price Appreciation" a full 14 of them were either in Florida or California.

Hurricane Katrina

The destruction is huge. The loss of life is rising. It is all very sad. I hope and pray that the death toll will stop rising. The survivors will need help. I made a donation to the Red Cross tonight.