The Housing Bubble

A reader is interested in conditions that might speed up the housing bubbles demise. “I would echo the topic suggestion from last weekend, (that) wanted to discuss ‘accelerants and value killers’ in a downturn and the current request, ‘a thread covering the difference between high end homes’ and low end homes’ experience in a bursting bubble.”

“What role, if any, does zoning play? For example, contrary to popular belief San Diego, still has many underdeveloped lots in central areas (lots with single family or duplex that are zoned for 4-8 units). Many of these were flipped during the bubble but with cosmetic improvements only (no further development). With a glut of inventory what role does the possibility of further development play?”

“I am also interested in regards to the competition in a downtown market btw re-sales and new homes. I understand how intuitivelly a new home is more appealing and a buyer can be easily seduced from all the shiny new appliances, high ceilings, etc vs. a home that has already depreciated and more prone to needing repair $ in the short term. However, in SD for example, newer homes tend to be the McMansion style (smaller lot, two stories and longer commute to job centers) and there is an abundance of poor construction practices (some stories have hit the mass media).”

This is the high/low end topic. “I would like to see a thread covering the difference between high end homes’ and low end homes’ experience in a bursting bubble. Snippets of evidence on this include the McCain story, and a couple of months ago, the story in the SD Union Tribune about how Randy Cunningham had difficulty unloading his Rancho Santa Fe home.”

“Note the beginning of the early 90s bust in the LA basin. The ice sheet which spread across the market clearly started out in the wealthy coastal areas and moved inland over time. Initially, buyers were still driving prices into the sky in San Bernardino.”

“Is the same pattern repeating itself now? It is hard to say, as it seems like sales of homes at the high end have just dried up entirely.”

Another added, “I think the key will be employment. As long as people have their jobs and they are making the same or more money they may be able to struggle with their mortgage payments if adjustable rates don’t move.”

“A recession in the early 90’s plus an aerospace downturn hit Southern California hard from 1989-1995. Some properties took a few years after that to recover their prices, as they were down by as much as 2/3 from their peaks.”

“If the income rug gets yanked out from underneath, demand could dry up overnight and the need to sell will accelerate.”

Reports from California show the precarious nature of that states’ housing bubble. “It’s unclear what lies ahead for housing, which is a state of flux. Residential permits statewide were down 2.7 percent last year. In San Diego County, permit activity dropped 12.2 percent. Among the bigger cities in the county, San Diego and Oceanside were off more than 6 percent. Chula Vista was down 51.1 percent.”

“University of San Diego economist Alan Gin predicted that fewer homes permitted in the state means that the 6.8 percent increase in California construction jobs last year will not be equaled. ‘That’s a worry,’ he said. ‘Construction has been a big job producer. We added 7,200 (San Diego construction) jobs in 2004 and probably over 5,000 in 2005.’ A bigger jobs hit is probably among real estate agents, mortgage brokers and other workers in housing services, he said: ‘I think there will be a shakeout in that industry.’”

“UCSD economist Ross Starr said the wild card in the local housing market is the financial health of recent home buyers who took out adjustable-rate mortgages with monthly payments set to rise substantially. ‘The question is will there be some panic selling by buyers who bought during 2002-2003 and can’t afford to hold on,’ Starr said. ‘The answer is nobody really knows the answer to that question.’”

“The December median home sales price in the Coachella Valley was $390,000, down slightly from the record $400,000 posted in November. Experts say the valley is in no immediate danger of dealing with a foreclosure crisis, as local prices continue to appreciate even as unsold resale inventory rises.”

“Buyers have relied increasingly on nontraditional loans to be able to buy into the local market amid plunging affordability. The loans have helped many, including investors like Danielle Galland of Desert Hot Springs. She bought a home in that city recently with an interest-only loan with payments scheduled to jump in two years. ‘The payments are scheduled to go up in two years, but I plan to sell before then,’ she said.”

“One red flag is that the valley’s notices of default, sent by lending institutions when payments are overdue, totaled 816 in 2005. That was up 29 percent from the 632 notices seen in 2004, and reversed a three-year trend of declines.”

“Longtime valley banker William Powers said while his bank does not offer them, many valley buyers have been able to save on their monthly payments initially by opting for non-traditional loan packages. The upside is that it allowed many more people to purchase homes than would otherwise have been possible. The downside is that when their introductory rates convert to adjustable, some will find that they really weren’t able to afford their properties long term.”

“The reason: They’ve already spent their monthly-payment savings on other items, like cars, big-screen TVs and upscale furnishings. If those owners find themselves with default or foreclosure notices, and home values aren’t rising as they are today, some may unload their homes at a loss or below-market value to pay off their loans. That could put a drag on the selling prices of non-distressed homes in the same neighborhoods.”

“‘As a homeowner, that wouldn’t make me very happy,’ Powers said.”

“As an indicator of what could be at stake nationally, there is currently between $1.5 trillion and $2 trillion tied up in what are known as interest-only loans. Currently, interest-only loans are more popular in the inland Riverside-San Bernardino metro area, which includes the valley, than in California and the nation. 39.3 percent of all inland home loans were interest-only in 2005, up from just 3.7 percent in 2000.”

“The California percentage was 34.3 (up from 1.4 percent). The national percentage was 24 percent (up from 1.1 percent). According to recent figures from the California Association of Realtors, only 10 percent of valley households can afford to purchase the median-priced valley home based on working income.”

“‘Our house is almost paid off, and we’re on a fixed-rate loan. We want to sell the house eventually and retire, but where? Not in California,’ said Colleen Bliss, (a) Calimesa resident visiting Palm Springs.”