The Housing Bubble

Some readers are looking at interest rates. “How will the spike in l-t treasury yields impact the housing market? It just spiked up past 5% on the strong jobs report, then fell back to 5% even and it looks like it has flattened out there.”

Another wrote, “Here’s a topic: interest rates. They were on and off inverted for a few months, now they aren’t. What if we’re now experiencing a false bottom in treasury prices, and the curve will reinvert, as the Fed will keep raising rates?”

And another, “Maybe we should have a discussion about how much home prices should drop per every interest point increase in the market.”

Reuters reports on one effect of rising ARM rates. “Vicki Nious is seeing more clients struggling to pay their mortgage and hang onto their house. ‘We’ve definitely seen an increase in delinquencies and even we have a few cases we may consider for foreclosure,’ said Nious, mortgage services manager for AHC Inc. in Arlington, Virginia. ‘Many families are having trouble because their adjustable rate mortgages are expiring and they need help.’”

“Like a lot of Americans, many AHC clients got into the housing market in the last few years by taking out adjustable rate mortgages at extremely low ‘teaser’ rates, sometimes half that of a traditional 30-year fixed mortgage.”

“Last year, 43 percent of all mortgages taken out were adjustable or exotic in nature, such as those that require only the interest of the loan be paid for the first two years. But borrowing costs have been climbing for two years, in some cases to nearly double what they were in 2003 or 2004, just when the introductory low rates on adjustable mortgages are set to expire.”

“That means homebuyers who were once paying just over 3 percent interest are suddenly facing rates that are at 5 or 6 percent and still climbing. Economists are bracing for an onslaught of late payments and the inevitable worry among lenders and borrowers alike that failed loans will cause a consumer or housing collapse.”

“Anthony Chan, economist at JPMorgan, has done research to show that delinquency rates lag the increase in adjustable mortgage rates by about a year. That means delinquencies will continue to climb for as long as a year after mortgage rates have peaked. ‘Given that ARM rates are going higher, I think it’s pretty straightforward to make the forecast that over the next 12 months, those delinquencies are moving higher, not lower than where they are today. So if we think they’re bad now, they’re going to be higher,’ Chan said.”

“The traditional link between market rates like mortgages and official interest rates has been broken, so higher official rates may not feed into the mortgage market. After all, official interest rates have nearly quadrupled in the last 2 years, while mortgage rates have not quite doubled. ‘That’s going to rescue a lot of people. If that link were to reemerge, then we have a problem,’ Chan said.”

“The Center for Responsible Lending knows many homebuyers are only now beginning to realize the risk they took on when they signed up for an adjustable rate mortgage. ‘I think that many people are very misled in terms of the initial monthly payment. We certainly hear from borrowers who didn’t know until it adjusted that that’s what was going to happen,’ said Debbie Goldstein, the center’s executive vice-president.”

“At AHC, Nious is working with low- and moderate-income families to refinance costly mortgages in a desperate bid to avoid foreclosure. But with fixed rates now above 6 percent, it may be a losing battle. ‘For many, they can’t afford even a loan at 1 percent,’ Nious said.”

Some readers are interested in the ‘McMansion trend.’ “Another thing I’ve been pondering….Will the smaller home soon become king? Where will the McMansion-ites be going? (Home style) McMansion-ettes? I.E. 1500 ft Empty nester homes are still being stocked with marble and high end cabinetry.”

“Will granite still reign but in a smaller kitchen? With oil prices rising, will older homes w/7.5-8′ ceilings become more desirable? I seem very stuck on where people will be going to in this panic. Anyone care to prognosticate?”

A reply, “I think you are right on. I know that I am thinking that in a few years I would like to have a custom home that isn’t too large, we could afford it now, but we will wait for the bubble to blow over. Less square footage means lower heating bills and taxes. Lower ceilings not only have lower heating, but are easier to maintain, I don’t like painting or dusting 15 feet up on a ladder, which is what happened at our last home. 9 foot ceilings are the max as far as I am concerned for our next home.”

Another added, “What will happen to many of the McMansions recently built in flood plains up and down the San Joaquin Valley and the Sacramento area?”

MSN Real Estate has an article titled, ‘The swelling McMansion backlash.’ “Release the zoning hounds: The McMansion backlash has begun. From Atlanta to Austin, Texas, and beyond, more governments have started imposing stricter building limits and even temporarily halted new construction while they try to get a handle on the explosion of these 4,000- to-10,000-square-foot homes, sometimes sneeringly called ‘garage mahals,’ ‘Hummer houses’ or ’starter castles.’”

“Austin typifies the McMansion craze, and the backlash that’s followed. Several of the city’s neighborhoods like Tarrytown and Travis Heights have seen an influx of large homes, said Kathie Tovo, president of the Bouldin Creek Neighborhood Association, who lives in a ‘funky, fun’ area just south of downtown that also has seen some change.”

“Just down the street from their modest home, Tovo and her architect husband bought a house as an investment. After they finished remodeling it, the home next door got knocked down and replaced by a 4,000-square-foot building housing two condominiums. ‘What had been not a tiny, but a modest-size and -scale cottage, has been replaced by something hugely bigger than what’s the scale along that street,’ Tovo said. ‘The entire yard is now lined by this massive house,’ she says of her house.”

“Tovo and others worry that the homes are not only out of character with many neighborhoods, but that they put stress on older infrastructure and too quickly raise property values and thus tax rates. This forces out longtime residents. ‘Some people have made the argument that this is infill,’ Tovo said. ‘But it really isn’t; you don’t end up with more people, you just end up with the same number of people in bigger houses.’”

A related story in the Baltimore Sun. “‘A million-dollar house is not a big deal anymore,’ said (realtor) Tim Rodgers. ‘It will be a nice house, but it’s not ‘Wow.’”

“But sometimes, real estate agents say, the million-dollar prices are applied by sellers whose houses are really worth $850,000 or $900,000 but who can’t resist tacking on an extra digit, just because they think they can.”

“Often, they can because buyers are as willing to get into the $1 million range as sellers are. They have mountains of equity in their current homes, and the proliferation of interest-only and other exotic loans makes a stretch into seven figures seem attainable for many more people than was the case a few years ago.”

“‘If they have to pay $500,000 for a lot, they’re going to want to build a house three times that,’ said (broker) Pat Hiban.”

Several readers suggested topics dealing with inventory. “For a topic, what about ways inventory might be deal with? I was thinking that when it is obvious the bubble has popped there might be a sudden push to expand green space/parks or mass transit. In the Nova/DC area where I live I can think of some good examples like expanding the orange line of the metro west which would require buying up land near I-66 that has houses on it, ‘destroying’ the inventory.”

Adds another, “What are the historical early warning signs that the bubble is collapsing? Is it when inventory bottoms and starts up?”

From the San Francisco Chronicle. “In another sign that the real estate market is cooling, but not collapsing, the inventory of unsold homes in California is roughly double what it was a year ago. Statewide, the inventory of unsold single-family homes in February was 6.7 months, up from 3.2 months in February of last year.”

“‘We saw a rather dramatic increase at the state level beginning in January of this year and continuing in February,’ says Robert Kleinhenz, deputy chief economist with the California Association of Realtors. ‘Time on market is a lagging indicator,’ says Kleinhenz. ‘Unsold inventory is a leading indicator. If inventories are going up now, that means there will be less upward pressure on prices going forward.’”

“Inventories have risen to 4.1 months from 2.3 months last year in San Francisco County, to 3.2 months from 1.7 months in Alameda County, to 5.2 months from 1.3 months in Contra Costa County and to 2 months from 1.5 months in Marin County.”

“In Santa Clara County, the median single-family-home price was $765,000 in February and should come in around $760,000 for March. The slight drop, (broker) Richard Calhoun says ‘is significant. Normally, prices are going up from February to March. I think in September we’re going to be talking about a number like $710,000. I see no upward pressure’ on prices.”

What do you see in your housing market this weekend? Builder incentives? Homes not selling? Open house observations? Here is one some data from a reader: “OC #’s: Home sales to March 27: Prices +8.4%; Volume -25.1% Fresh DataQuick data strongly hints that March was the fifth straight month where the volume of O.C. homes sales couldn’t match the previous year’s sales pace.”

“If the $622,000 median price for the 22 business days ended March 27 holds as the final March figure, it would eclipse December’s record of $621,000. However, the 8.4% annual appreciation rate would be the lowest since November 1999.”

And from a TV station in Washington. “Across the state in the Mid-Columbia, home buyers almost have too many options. Right now there are more than 1400 homes on the market, but realtors say don’t let that number confuse you. It’s the highest number on the market ever in Tri-Cities and now home buyers have more to choose from.”

“The Tri-City Association of Realtors says the average price of a house in the Tri-Cities is $175,000. Realtors are selling about seven houses a day.”

Jonathan Lansner has his eye on Orange County property taxes. “In January, I told you that a decade has passed since this many of us missed paying a December installment of property taxes. Last week, John Moorlach’s staff was kind enough to whip up an interim report for me. The fresh data show that the early trend wasn’t any statistical fluke, as we continue to be annoyingly late on our property taxes.”

“Through the start of April, 24,701 first-installment bills were still late, 16 percent more than the same time a year ago. The tax collector only sent out 2 percent more bills this year. Those late bills were for $38million in total taxes, up 37 percent from a year ago. That handily exceeds the 11 percent expansion in overall property taxes due to soaring home prices.”

“‘I wasn’t surprised. So many people are stretching (to buy a home). It seems intuitive that some people are having a tougher time,’ Moorlach says. He calls payment results for this upcoming bill ‘the real test.’”

“Other markers of homeowner financial woes are creeping up, too. In the first two months of the year, mortgage makers served 700 Orange County borrowers with formal default notices, the first step toward foreclosure. That’s up 31 percent vs. 2005. In the same period, 39 county homeowners lost their homes to the lender through foreclosure. That’s more than double 2005.”

“So far, the financially challenged group is a manageable lot. If this crowd expands dramatically, their tight wallets will hurt more than the tax collector and lenders. If these folks decide to sell their homes to avert financial disaster, that added supply will challenge the housing market.”

An update on New Jersey. “The real-estate market has been slowing dramatically. In Morris County, sales during the first two months of the year were off 16 percent, and the inventory of unsold houses leaped 61 percent. That’s in line with figures for the entire state: sales down 14 percent, along with an increase in the unsold inventory of 61 percent.”

“In Somerset County, the inventory of unsold houses climbed the most, to 103 percent; in Camden, the least, with 32 percent. The biggest fall in sales: Cape May County, with 41 percent; the least, Cumberland County, with a rise of 34 percent.”

“The months supply of houses for sale indicates how formidable the inventory may be, and a six-months supply is considered normal. Morris County has a six-months supply, but Cape May has a 21 months supply, while Camden has only four months. The entire state has seven months.”

And the Hartford Courant. “Turn down Scarborough Street in Hartford’s upscale West End, and you can’t help noticing four ‘for sale’ signs clustered together. ‘It does look like, `What’s going on here?’ said Susie Hatch, an agent in West Hartford who has one of the listings. ‘But it is just chance that they are for sale at the same time.’”

“There are seven homes for sale on Scarborough and Prospect that have list prices of $500,000 or more. The ‘for sale’ signs that have cropped up on Scarborough have become all the more noticeable because two have gone up within the past month and a half. And two of the properties are right across the street from the other two.”

“There has been some slowing at the upper end of the housing market, and some of the homes for sale in the West End have dropped their asking prices. The owners of 1160 Prospect Ave. purchased the 21-room estate for $900,000 in 2000. Two years ago, they unsuccessfully tried to sell it for $1.9 million. The property was listed in November at $1.4 million.”

“‘It’s slower at all price ranges,’ (agent) Susie Hatch said. ‘There are four or five houses for sale on one street that a year ago would have sold bing, bing, bing. But because there is so much more inventory, they are just sitting and sitting. It’s going to take longer to sell these houses.’”

“And more competition means sellers need to be more realistic about prices, the agents said. ‘This year, the pricing is so important. You can’t just tack on 10 percent,’ (agent) John Hoye said. ‘That type of growth is behind us.’”