The Housing Bubble

One reader wants to know if you’ll use a realtor. “I would like others opinions on if they plan on using RE Agents in the future. I know I have grown to loathe them. I don’t want to support anyone who has been a cheerleader for this bubble.”

“Perhaps we can start a list of agents and appraisers who have been vocal about/against the bubble so we can give our business to the right people?”

Here’s a straight shooting guy. “San Diego Housing Market; single family detached and attached: Inventory increases and demand declines continue. Sales finished the month at 2,844 homes sold versus 3,885 sold in March 2005, down 28%. Based on the March pending sales of about 3,100, April is forecast to be down from last April’s 4,134 by 25%. This downward trend in sales began in earnest in the last quarter and seems to be accelerating.”

“The first quarter sales were 6,743 sold versus 8,905 in the same period last year. This is down about 25% year to year. Typically the first quarter makes up about 22% of annual sales, if this holds true this year we are on track to sell 30,650 homes this year.”

“This compares with 41,122 in 2005 and 42,876 in 2004. This is a far bigger drop than I expected, I was thinking more in the 35,000 range which I thought might cause some problems.” “This drop in sales is happening at the same time that inventory continues to grow; we are now at 17,833 about 6 months supply.”

“The average price for the month was $635,775, up 11% from last March. Don’t get excited or misled, prices did not go up. The under $500,000 sales made up 45% of the sales volume versus 55% last year, this mix change pushed up the average price because of the sale of more expensive homes. This is not due to a lack of homes for sale, the under $500,000 inventory stands at about 8,300, 158 days supply, or 47% of total inventory.”

“The rise in interest rates, especially the ARM’s has had a dramatic impact on the San Diego market. Consider that 67% of all loans in San Diego are ARM loans, compared to 35% nationally and that 50% of total loans are interest only ARM’s. The overwhelming majority of buyers in our market are faced with major increases in the cost of home ownership. This combined with the overall San Diego pricing structure is chasing potential buyers out of the market.”

One reader wants to discuss the mortgage sector. “How about an update on the mortgage business. With emphasis on what is happening at the smaller shops.”

Kenneth Harney at the Washington Post wrote about a challenge facing the industry. “An important debate is raging inside the home mortgage market, though well beyond the earshot of most consumers. The issue: Popular ‘payment-option,’ interest-only and piggyback loans; and the financial risks they pose to home buyers and lenders alike.”

“On the one hand, federal financial regulators say the risks are too significant to ignore, so lenders need to take special care in evaluating and approving customers who apply for these mortgages. The regulators want to impose new creditworthiness restrictions and disclosure requirements.”

“Banks and mortgage companies, on the other hand, aren’t happy about the regulators’ plans. Between January and the end of March, lenders bombarded federal banking regulators with demands to back off or soften the proposed new rules.”

“Why all the fuss? And what might it mean for you as a home buyer or refinancer? The fuss derives from the fact that payment-option, piggyback, interest-only and other creative loans types can prove toxic for applicants who don’t understand them.”

“The question is whether most lenders are taking pains to educate borrowers about how the loans work or whether they have been mass-marketing dangerous mortgages to people with borderline credit profiles, low down payments and minimal knowledge.”

“Nick Nickerson, a mortgage consultant in Durham, N.C., said ‘100 percent’ of his clients ‘invest their savings..and end up financially ahead. I insist that each client have a financial planner involved and the mortgage payment savings are direct-deposited to their investment account.’”

“Lenders ‘don’t want borrowers to default,’ said Nickerson. ‘Negative amortization is simply a way of taking equity out of your home slowly over time rather than all at once.’”

“A Rocky Mountain News columnist thinks the loans are causing problems in Colorado. “Colorado ranked eighth among states in per-capita income growth last year, recent figures show. But it’s also at the personal finance level that the rosy outlook is roiled. I’m talking about first-quarter home foreclosures in the Denver area and their disturbing 31.5 percent rate of growth over the same period in 2005. This past quarter, 4,764 of your neighbors had their homes seized.”

“‘I’m very concerned at how much they did go up,’ said Patty Silverstein. ‘Given this stage of economic recovery in Colorado, I would think we wouldn’t have this many. There’s something else going on.”

‘”I have to think some of the mortgage products people are making use of are a big contributing factor, the interest-only loans, the variable-rate loans. When interest rates increase a bit, people can’t make the payments. I think they’re the ones who are driving the foreclosure numbers upward,’ Silverstein said.”

“A quick look around reveals eye-catching variable loan rates of 0.9 percent, 1.75 percent, 1 percent. ‘No payments for six months,’ one ad screams. But what happens then?”

The Reno Gazette Journal reports on the housing bubble in Nevada. “In Reno, the median price, where half the 132 homes sold went for more and half for less, for a single-family home was $384,500, down from $412,000 in January but a 6 percent rise since February 2005. In Sparks, the median price was $330,000, up from $325,000 in January and a 6 percent rise from February 2005. The North Valleys slipped to $270,000 in February from $289,000 in January.”

“‘That’s back to a more normal rate of appreciation that we would expect to see, not the 20, 30, 40 percent that we have been seeing in some of these areas over the past couple of years,’ said Brian Kaiser, analyst at UNR. ‘This is what we’ve been expecting to see for quite some time. I’m shocked it took as long as it did to slow down.’”

“The median price of condominiums in Reno slid to $185,000 on 41 units sold in February, down from $242,500 in January but up 6 percent from February 2005. In Sparks, condo prices fell to $179,500 on 12 units sold from $193,950 in January but rose 3 percent, year over year. All this is evidence of a soft landing from the boom that engulfed Northern Nevada during the last couple of years, Kaiser said.”

“‘It absolutely could not maintain the pace that it was maintaining for any length of time without completely pricing everybody out of the market,’ Kaiser said. ‘It’s just not one of those sustainable things that you can have houses going up 20 percent a quarter or year, across the board. This is not like a bubble bursting and suddenly those houses that were worth $400,000 are worth $300,000. That would be a serious situation for the area.’”

“Minden/Gardnerville fell to $402,500 in February from $408,103 in January. Dayton’s median fell to $253,750 from $269,500 in January. Fernley’s median fell to $247,00 from $257,294 in January. Fallon’s median home price fell to $205,000 from $272,500 on just 17 homes sold. The February median still represents a 37 percent rise, year over year.”

Several readers discussed the concept of an echo boom for the housing bubble. “Will we see an ‘echo boom’ sometime later this year or next year? I wouldn’t be entirely surprised to see a scenario with an echo boom (i.e. suckers rally) in 2007. Echo booms are not uncommon in bubble markets and are typically characterized by a boom > small crash > false bottom > shaky boom w/a smaller peak > full crash to the bottom. It happened with the NASDAQ in 2001. It also happened with the 1929 market crash, where the Dow Jones increased by 38% between Nov. 1929 and April 1930, before continuing its crash.”

“If we combine modestly falling home prices in 2006 with interest rate cuts in late 2006 early 2007, it could bring in some buyers priced out/waiting on the sidelines that ‘missed their big chance the first time around.’ (BTW Don’t catch a falling knife!)”

Another sees it in stocks. “It is happening now with the Dow before it continues its crash…it’s just that this time the time scale is so large that most people don’t recognize it. When the housing market goes, the stock market will, too.”

“The crash in the 30’s took 3 years, and we don’t know how long this one will take; it could take longer or shorter, but it is important to know that a crash is coming. Some people on this blog have enjoyed the benefits of the bear market rally, and that is great for them, but I think they should consider getting their money out now before the next phase of the bear market begins.”

Another asked, “I really enjoyed your post. I wondered how much you think the falling dollar will change historical bubble experiences.”

The answer. “The dollar isn’t changing the bubble experiences, the bubble is changing the dollar. The RE bubble has increased the money supply and put “spending money” into the hands of people through refinancing, and not earnings or an increase in real wealth. This increase of money supply caused by the bubble is a large part of what has caused the dollar to drop in my opinion.”

Another added, “The market has been rallying since negative news of R/E has been seeping out. Perhaps the market will surge AS the prices decline (as cash quickly pours into the market) then they both may fall in unison (as investors pull out cause of overvaluation of stock values).”

One reader think one echo boom has already occurred. “I think that’s what’s been happening in San Diego since 2004. The market was through the sky until summer 2004. In the fall, inventory really piled up; listings have been up YOY and sales have been down YOY ever since. We had a mild spring bounce in 2005 which brought prices back from negative territory (from peak through winter), and it’s basically stayed there (pretty flat) ever since. I think this was our DCB. Lots of complacent buyers who believe the ‘high plateau’ theory. Next step is off a cliff, IMO.”

The New York Times reports on Connecticut. “Listings throughout Connecticut are cluttered with winter leftovers. The inventory of available houses is up almost everywhere, suggesting that sellers who want their properties to move quickly have to come to terms with a cooling market. Pricing a house realistically is crucial in this more-competitive market.”

“‘You’ve got to be right on the button now with prices,’ said (broker) Rick Higgins in Fairfield. ‘People aren’t going to overpay, they’re afraid to overpay. Before, people felt, ‘Well, if we overpay, we’ll be O.K. in six months.’”

“The inventory of available houses in Fairfield County is up roughly 30 percent over last year. Darien’s inventory is up about 40 percent over a year ago. In Westport, 115 of the roughly 300 homes on the market earlier this month were in the $2-million-and-up range. ‘That’s huge, that’s like a year’s worth of inventory,’ said (agent) Darcy Sledge. ‘There’s a lot of new construction sitting. Buyers in that range are being very choosy.’”

And from the Journal News in New York. “The number of homes available for sale in Rockland County soared more than 80 percent during the first quarter. The inventory of unsold homes in Rockland rose to 1,325 from 734 a year ago. In Orange, the inventory of unsold homes rose to 2,796 from 2,122, a 31.8 percent increase.”

“‘What you’re seeing here is a little bit of resistance to the higher-priced listings,’ said Cathleen McVeigh, regional sales manager for M&T Bank in Westchester and Rockland counties. With interest rates rising and talk of a housing bubble bursting, home buyers are willing to wait, she said.”

“‘On the other side, there are sellers who have known that it’s been a seller’s market for a long period of time, and they’re aggressively pricing their house,’ McVeigh said.”

“(Agent) Peggy Connolly said she had noticed a shift in the market. ‘The market is softening. We have as many reductions every day as we have new listings,’ she said, referring to sellers who are lowering prices to entice buyers.”

“Still, many first-time home buyers may find Rockland’s prices a bit out of reach. After such long and steady climb, Bruce Mason, an economist in Orangeburg said, ‘If we had no price appreciation, that wouldn’t be a bad thing.’”