The Housing Bubble

A Freudian look at investing psychology. “Last Sunday was Sigmund Freud’s 150th birthday, a good time to take note of his contributions to investing. It was Freud who got people thinking about the unconscious. In most cases, it seems, the subconscious is working against some of us.”

“This is obvious with market bubbles, when people throw money into Dutch tulips, Internet stocks or overpriced investment properties. Most of these investors know they’re paying too much, but they figure a greater fool will come along to pay more.”

“Investors, the scientists say, hate to acknowledge mistakes. This makes us hesitant to shift money from losing investments to others with better prospects. We’d rather wait for a turnaround.”

A columnist at the Denver Post. “The former abandoned railyard continues to be transformed into an urban dweller’s dream. Developers race to add hundreds of new condos to the market here. Last week, as I marveled at cranes hoisting support beams, a woman walking past stopped and asked, ‘Who is going to buy all these condos?’”

“Good question. Do we really have that many people in Denver who can afford $500,000 for a 1,300-square-foot condo with a sliver of a patio? The answer is yes.”

“I often hear people grumble that these condo owners are buying more than they can afford. They peer into the windows of the townhomes, see no furniture and assume every cent of the owner’s money is going toward the mortgage.”

“In a reality the working class may be unfamiliar with, those townhome owners are just waiting until the interior decorator finishes coordinating with contractors to put in custom fixtures. The hot-mod furniture, imported from Scandinavia, will come afterward.”

And from the News Press. “With the recent slump in home sales, Donovan Owens of Benchmark Home Mortgage in Fort Myers recently rolled out a special loan program tailored for real estate agents going through a soft patch.”

“‘Many of them have been living off credit cards for four to six months,’ Owens said. ‘They bought pre-construction and they need more money.’ Others, he said, found themselves unexpectedly on the hook this year for a big income tax payment.”

“Benchmark’s program is designed to let agents borrow money against their houses or other assets even though they may not show much income in recent months. ‘We’re going off the fact that many of these people have done very well in the past and are going to do well in the future. They need something to get them through the next few months.’”

“Statistics from the Florida Association of Realtors show that 955 houses were sold in Lee County in March, compared to 1,309 in May 2005 in the heyday of the home sales boom.”

“Don Heisler, who’s president of the Cape Coral Association of Realtors, said the real estate business has always been cyclical. ‘Realtors customarily are paid strictly on commission, so when the deals slow down, so goes the income.”

“That does sometimes create problems in borrowing money, he said, because ‘you sometimes have five paychecks in a month and then no paycheck for five weeks, and sometimes that looks inconsistent to a lender.’”

A pair of reports provide an update from the northeast. “A majority of people who moved out of Massachusetts last year report they are very satisfied with life in their new state and would not move back, a Boston Globe poll has found. Seventy-three percent of those surveyed said they live in a home that is bigger than their home in Massachusetts was.”

“The top reason people gave for leaving Massachusetts was a better job, followed by the cost of housing, family ties, and the weather. In a separate set of questions, 50 percent of those surveyed said the cost of housing was a ‘major factor,’ and a better job was cited as a ‘major factor’ by 39 percent.”

“‘To me, what’s new about this period is that now housing costs are being factored into people’s migration decisions,’ said said William H. Frey, a demographer who has studied migration patterns throughout the United States. ‘In the past, they would look more or less at the job and what the job paid, but housing costs would not factor as much.’”

And from Connecticut. “The buyer’s market has officially hit Ridgefield. Local Realtors describe the market as ‘normalizing’ and ’softening,’ but no matter how it’s phrased, the fact of the matter is there are now 233 houses on the market. Last May there were 149 houses for sale in town.”

“(Realtor) Laura Fried said she saw the market forces at work now as simple economics, partly stemming from a glut of houses left over from 2005. ‘The way I see it, 2005 was a question mark year for buyers. They heard a lot about bursting bubbles and they sat on the sidelines to see what would happen. ‘The inventory built,’ said Fried. ‘Now there’s a classic economic situation of supply and demand, that creates a downward pressure on prices.’”

“‘The biggest problem is inventory accumulation,’ she said. ‘There are all those houses from 2005 and then the new houses coming on for the spring of 2006.’”

“(Broker) Patrick Fink said he felt some buyers were scared off by media reports of a ‘bubble’ in the Northeast housing market, which he said was an unfounded fear. ‘The bubble is an invention of the media,’ he said.”

“(Realtor) Jack McAuley speculated that one problem with today’s market is that sellers set their prices with too-high expectations. ‘Sellers typically are behind the herd instinct, particularly people who don’t have to move,’ he said. ‘People are too late to the party. If you bought your house in 2003 and sold it in 2005, you’d make money probably. If you bought your house in 2004 and tried to sell it now, you’d probably be underwater.’”

“He said sellers expect the prices to keep rising, and buyers expect to cash in on the ‘buyer’s market,’ and the result is frequently a ’standoff’ over as little as a $10,000 difference.”

“‘You see a lot more expireds right now,’ he said. ‘If they don’t sell it, they take it back off the market. I tell all my sellers that the buyers are who establish the price. What I’m seeing now is there’s too much of a stare-down here. Last year and the year before, buyers felt they had to make concessions. Now buyers are playing more hardball. Deals are falling apart. There will definitely be an adjustment here.’”

“Ron Van Winkle, a West Hartford economist, said there is some concern that the upper-end market in Greater Hartford has been overbuilt in the past few years as more builders entered the marketplace to take advantage of the high demand, and higher profits, during the peak of the housing boom.”

“‘We saw a lot of new builders trying to enter that market,’ Van Winkle said. ‘And because there are fewer buyers at that level, only a few decisions by a few builders can cause the market to go out of balance very quickly.’”

“Tom Francoline, a high-end builder in Avon is so confident in the market that he is building four ’speculative’ houses in the area, meaning he’s building the houses even though there is no buyer lined up. ‘Some people only want new construction, and they don’t have time to spend eight months custom-building,’ he said. ‘You don’t want to lose that segment of the market, so it’s important for us to have finished houses available.’”

“But custom builder Gilles Michaud said his Avon company is cautious about the market and is only building houses where a buyer has signed a contract. ‘People have more of a choice, and that’s happened very quickly,’ he said of the number of million-dollar homes on the market. At the end of April, more than 175 new and existing homes priced at $1 million or more were listed for sale.”

“‘There seems to be an imbalance, which has created an uncertain future,’ he said.”

A pair of reports on the California housing bubble. “It looks like that long-awaited cool-down in the median price of a San Fernando Valley house arrived in April with an annual increase of 8.2 percent, the first single-digit increase in many months. The final report will be released sometime this week and it will show the median price of a Valley house at about $598,500, down 2.7 percent from March’s record $615,000.”

“This is further proof that buyers are gaining more traction in a market that long favored sellers. But even with prices moderating, they still are not a bargain.”

“The condo market behaved in like fashion. Sales will be under the year-ago level. The condo median price last month hit $385,000. That’s an 11.6 percent annual increase, again likely the smallest in many months. And the condo price fell 3.5 percent from March.”

“Fifty percent of home sales were at the list price while 54.7 percent of condos sold at list.”

“One thing that market watchers have not seen yet this year is the housing affordability index from the California Association of Realtors. Here’s why. CAR scrapped its monthly report in favor of a quarterly one.”

“This is probably a good thing because the monthly index did not seem to track closely to reality. For example, it assumed purchases were made with a 20 percent down payment and 30-year fixed-rate loan. And no more than 30 percent of the household income servicing the mortgage debt. Now we’ve got a half-century mortgage, thanks to Statewide Bancorp in Rancho Cucamonga.”

“Leslie Appleton-Young, the association’s chief economist, said earlier that they were going to tweak the model to more reflect current market conditions.”

From the Bakersfield Californian. “The number of local homebuyers canceling builder contracts has crept skyward in the past year, along with worries about rising interest rates and the real estate market’s future. Kern County’s cancellation rate was 8.1 percent for the first three months of 2006, up from 2.3 percent a year before.”

“The cancellation rate for Centex Homes’ Central Valley division has hovered around 25 percent so far this year; double what it was last year at this time. Roughly 70 percent of those buyers backed out for financial reasons, said Centex spokeswoman Lissa Walker. Many just couldn’t afford the increasing interest rates and down payments, Walker said.”

“With sales dwindling, builders are reaching out more to real estate agents, said (realtor) Jeanne Radsick. Radsick said her office receives three or four faxes a week with details from builders on houses that need selling. ‘It isn’t just one or two. It’s a lot of builders,’ she said. ‘Builders are seeing the slowdown.’”

“Homebuyers will likely see more builders begin to offer incentives, especially the public companies that have sales quotas to meet, said (analyst) Patrick Duffy. Private builders don’t have the same pressures, Duffy said. ‘In general, builders don’t really want to cut prices,’ but they will, he said.”

What are you seeing in your housing market? Motivated sellers in the classified section of the newspaper? Builder incentives on a billboard? Anecdotal accounts of the market slowing down? Here’s some from the topics thread. “One of my students told me just yesterday that she and her mother are having to move. They rent half a duplex from her aunt, who has four rental properties, all with ARMs.”

“They have reset, and now the aunt is having to unload all of her properties, because the payments have nearly doubled and the rents will no longer cover them. This is, I suspect, only the very beginning.”

Another from California. “Hearing lots of ads on the radio up here in the Bay area advising people to break their ARM, and then the subtlety in the ad is that they will put them into another arm (saying five year fixed, etc). They are continuing the loan churning without any regard to the customers they are supposed to be servicing.”

“Then hearing that Chris O’Donnell at the O’Donnell group cares about you and will get you a 40 yr, 5 fixed, at low rate, etc (till I get sick from all of the lying). We will have real stories all over about ARMS resetting.”

Another noted the absence of a spring rally. “Something that I find astonishing is that there was no spring sales rally in real estate this year. Usually the buyers come out in spring and the market takes off. This year was the opposite. The sellers came out and that trend doesn’t look like it is done yet.”

“The other funny thing is the CNN headline of ‘If you’re a speculator … get out now.’ So how many months ago was it that CNN was running headlines about RE being the next sure thing? Six months? The tide has really turned and quickly and we are no where near low tide yet. Where are all the economists that were saying first of all that there was no bubble and then that the landing would be soft. We haven’t hit the ground yet, but this doesn’t look like it will be soft!”

“Its funny to see bond yields rally the last week after having been stuck at 4%ish for so long. It seems the stock market is waking up to the deficit and housing bubble situation and starting to take things into account.”

Several readers are looking for home buying strategies for the future. “Weekend Topic suggestion: How can the average Joe or Jane Sixpak maximize their buying power as a bottom approaches in the future? Lowball bidding is one way I have seen discussed here. What about foreclosures? Is that an area where normal folk can tread to get even deeper discounts? Were in the process is the ‘best’ entry point? Is it Pre-foreclosure, auction, or REO? What are the pitfalls of such an excursion?”

One replied, “I’ve had quite a few friends tell me after looking at repos here in SD during the 1990s that they were no bargain. The discount was very little. They were far too beat up, needed way too much work and the prices did not reflect that. I’m wondering if there will be bargains to be had as the bottom approaches or will it not be worth the trouble?”

Another added, “Bargains don’t have to be repos. There will be plenty of people who will have to sell at the bottom of the market for any number of reasons, including all those who become unable to service their mortgage.”

And another said, “As I understand it, one of the safest ways to enter this segment of the market is to consult the lis pendends list maintained by the county, which identifies homeowners who have received notice from their lender that they face pending foreclosure.”

“You get the benefit of a more typical buying experience compared to an auction (e.g., you get to fully inspect the property before purchasing and you can take some time to make your decision), but you still have a very highly motivated seller who may be willing to make some significant concessions.”

One reader advises patience. “I think the best plan is to simply wait until the media and public is disgusted with housing and everyone is saying RE is a bad investment and then go out and find a nice house, it should be a good price by then. Forget about foreclosures, etc, unless you want to make a business out of it.”

“It will probably take at least a year before anyone should be looking, maybe two or three years. We are not planning to try to time the bottom, since we owned our last house outright. I am expecting at least a 30% drop from today’s prices and we will probably buy when prices reach that point unless they are still falling very fast.”

The Star Ledger. “Joyce Aponte has spent the past 20 years selling single-family homes and properties repossessed by lenders after their mortgages have gone sour, and she is concerned about what she is seeing these days.”

“Families who bought houses with cheap, teaser-rate mortgages a few years ago, when interest rates were at rock bottom, are falling behind on their monthly payments.”

“‘When I started doing this in 1988, we were in urban areas. We were in Newark. We were in Paterson, Jersey City,’ said Aponte. ‘Now we are talking $900,000 houses. $700,000 houses. It runs the gamut. We’ll go from Newark to Holmdel to Upper Saddle River. People are totally in debt. They don’t have two nickels to rub together.’”

“Here in New Jersey, the numbers have been steadily climbing during the past 12 months, as well. During the first quarter of 2005, 6,482 properties entered into some stage of foreclosure. By the end of the fourth quarter, that figure had climbed to 13,487.”

“Already, companies are creating foreclosure units and hosting seminars to teach homeowners as well as investors how to navigate the system. ‘We’re getting calls from nice area such as Princeton,’ said Bryndan Moore, a real estate investor who buys homes from homeowners in distress. ‘I’m seeing it mainly from people who bought their house or refinanced in the last four years.’”

“‘The banks feel like they are going to be having a lot more (distressed) properties down the road, so they are telling me to hire people and to get my staff ready for the properties that are going to be coming down the pike’ Aponte said.”

Post your off topic bits of housing bubble related info here! Also, links and Craigslist finds. Not intended to discourage posting elsewhere. And be sure to send in your bubble photos to:photos@thehousingbubbleblog.com

A New Jersey columnist looks at the housing bubble. “The keynote speaker at a meeting of the New York Society of Certified Financial Planners last week said something that made the audience gasp. Martin Cohen, co-CEO of a firm famous for investing in real-estate investment trusts, simply said it’s a good time to buy a single-family house.”

“His argument: House prices have declined. There’s a lot of unsold houses out there, so you have plenty of choices. ‘It’s the year to buy a home,’ Cohen said.”

“Some other speakers at the meeting didn’t wholeheartedly agree. ‘We’re seeing price declines of 15 to 20 percent from the peak,’ said Christopher Low of FTN Financial. ‘”And it will escalate. Buyers who know that prices might be down 15 or 20 percent a year from now will wait.’”

“While real estate is local, there are bubbles, such as in Phoenix, California, Las Vegas, Boston and parts of New York, Low said. Florida has seen a 300 percent increase in the number of houses for sale. ‘A lot of people who bought investment properties are trying to get rid of them,’ he added.”

“Low said he called for a cab recently, and the driver apologized for being late. He explained that he had been on the phone with his real-estate agent. ‘Are you selling your house?’ Low asked. No, the driver said. He was trying to get rid of his five houses in Phoenix.”

From the Tampa Tribune. “Melanie Scala bought her first investment property, an apartment that had been converted into a condominium, in early 2005. Then she bought three more. Scala planned to rent the properties for a couple of years, tucking away a reasonable profit, then sell.”

“Finding renters, though, has been more difficult than she anticipated. To compete with other condo owners looking for tenants, she had to lower her rent so much that she is losing about $500 each month. ‘You don’t think that everyone is trying to do the same thing you are,’ she said. ‘I’m hoping I’ll still make a lot of money on the properties when I sell.’”

“The condo conversion boom in the Tampa Bay area hasn’t worked out as well as some expected, and a glut of units has triggered a cooling market. Some investors who hoped to flip properties for a quick profit haven’t. They can’t find renters and may face foreclosure on the units.”

“Interest in apartment-to-condominium conversions has started to subside, said Dan Fasulo. ‘When the lenders start to get nervous, the spigot gets shut off,’ he said.”

“Scala said she’s happy with her decisions but wishes there were less competition in the rental market. ‘When you have a whole development that closes at the same time, everybody’s trying to rent their units out,’ she said. It’s better to lower the rent to bring in a tenant than to let the apartment sit vacant for several months, she said.’

“‘I’m just a young person who’s trying to stay ahead of the game,’ she said. ‘This market’s a little more consistent than the stock market these days.’”