The Housing Bubble

The Ventura County Star has this report from California. “Homeowners have short memories. 2005 and 2004 were two of the strongest years on record in Ventura County, which is skewing people’s perspective about a much tamer market this year. Some home sellers might have a difficult time adjusting after riding high through one of the most superheated real estate periods in California.”

“Ann and Ron O’Niell of Ventura are not too worried. Their three-bedroom midtown Ventura home has been on the market since March. And the price has been reduced to $659,000. After seeing so many ups and downs in the market, the couple is fairly relaxed, although they are in escrow to buy a home in Camarillo.”

“‘So it takes two months or three months to sell a house, that is what it used to be,’ Ron O’Niell said.”

“The days of multiple offers seem to have passed completely. CAR Chief Economist Leslie Appleton-Young said she can practically pinpoint the turning point. It was October. That is when the number of sales started declining, and in many markets prices flattened out, including Ventura County. There were some short lulls during 2004 and 2005, but this time the slowdown seems to be sticking.”

“‘There is no doubt that this has slowed down faster than we expected,’ Appleton-Young said.”

“Many Californians who saw home prices plummet during the early 1990s probably remember people walking away from their homes.”

“In Ventura County, the median home price was $250,410 in January 1990, but it sank to $193,965 by May 1995. The climb from there has been phenomenal. Most recently, the median price for an existing single-family home in Ventura County was $681,190 for April, a 251 percent gain in a little more than a decade.”

“Cindy Malecky has had her midtown Ventura home for sale since February. She isn’t surprised the market has cooled, but she cannot figure out what buyers want. ‘In my view, things are back to reality. The 2004, 2005 market was not reality,’ she said. ‘Now it seems like they are taking an especially long time.’”

“Her three-bedroom, two-bathroom house is listed for $725,000. After owning the house for 20 years, she will see a hefty profit if the house sells for that price. ‘I really thought that by now I would be packing,’ said Malecky. ‘I thought I would be out of here by fall, but I am not willing to give the house away to do it.’”

“What is still up for debate is whether the market is flattening to average or will it sink below average, possibly even plunge to a market like the early 1990s, when the median home price declined nearly every month. ‘We are kind of at an interesting point, so we don’t know which way this is going,’ said Mark Schniepp, director of the California Economic Forecast.”

“He said he believes the market has become overinflated. The best thing for everyone, he said, would be for home prices to simply flatten out and let the rest of the economy catch up.”

“Patrick Duffy, of Hanley Wood Market Intelligence in Costa Mesa, calls for little change over the next year with no major crash. The slower market is difficult on homeowners who started to believe ‘they had a God-given right’ to 20 percent annual appreciation in real estate, he said. ‘People get spoiled by the upside,’ Duffy said.”

Two readers suggested exotic loans as a topic. “Many of us have talked about the creative loan issue. Some study results. (I was surprised to see this in the San Diego Union Tribune, the biggest RE shill paper in the country IMO). Some highlights: ‘Nearly 54 percent of payment-option users in the sample had FICO scores below 700.’ (Wow, I didn’t realize ’sophisticated borrower’ meant ‘below average borrower’).”

“‘Some industry experts estimate that upward of 70 percent of payment-option borrowers elect to go with the minimum payment.’ (Shocking, to anybody who hasn’t been looking at what the option arm customer is like, or the average American even). ‘One out of eight payment-option borrowers and one out of six interest-only borrowers earned less than $48,000.’ (We’ve brought the dream-soon-to-be-nightmare to so many people!).”

Another replied, “I agree. Too many had no business whats so ever being in ownership; job stability suspect, credit history exposing the inability to properly manage small amouts of debt and then we hand them enough debt that will likely sink the boat. I wonder how bad it will get??”

From the Denver Post. “In a two-block loop of Mockingbird Lane and Mockingbird Street, a neighborhood built just seven years ago, there have been 23 foreclosures among 94 homes in five years. That’s nearly one of every four front doors. One home has been foreclosed three times, two others twice.”

“The house-building boom and loose lending practices that ended disastrously for so many people here mirror a pattern stretching across Adams County, which has the worst foreclosure rate in a state with the worst foreclosure rate in the nation.”

“The problem now, experts say, is that too many working-class families take on crippling debt loads to seize their piece of the American dream. They overpay for starter homes. They take on extreme mortgage rates to avoid making a down payment with money they don’t have.”

“‘If you have a job and breath in your body, a builder will put you into a new home,’ said Jan Buckner, who invests in foreclosure properties in Colorado. They wind up in a trap from which there is only one escape: losing their home.”

“Mockingbird Lane (was) initially zoned for manufactured housing. Then a national builder, KB Home, showed up in the late 1990s. On Mockingbird Lane, many who moved into homes designed for first-time buyers put little or no money down. KB offered easy financing. So did other lenders.”

“Some homeowners refinanced quickly. Many accepted adjustable-rate loans that could run as high as 16 percent when conventional 30-year mortgages were below 6 percent. It is common practice for lenders who originate a mortgage to resell it to other investors. In almost every case, the lenders who foreclosed on the Brighton homes did not originate the mortgage.”

“Jim Spray, a Colorado mortgage broker and his wife, Linda, a Realtor, reviewed foreclosures on Mockingbird Lane and Street at the request of The Denver Post. They say they saw minimal down payments, and also refinancing loans, that left homeowners owing more than their homes were worth. At foreclosure, some buyers owed $20,000 to $30,000 more than their original purchase price. ‘That’s a killer,’ Linda Spray said.”

“Margie Ibarra was among those who started out with a newer, and riskier, 80-20 loan. Her first mortgage covering 80 percent of the purchase. Another lender supplied the remaining 20 percent in a second mortgage. That enabled her to buy a $160,500 house without a down payment in 2002.”

“Her first mortgage started at 6.5 percent interest but could climb to 12.5 percent. Her second mortgage, on the 20 percent balance, came in at 12.75 percent. Her payments started at $1,148 a month: $811 on the first mortgage and $337 on the second.”

“‘I kept trying to refinance. They would tell me you have to wait, due to the fact that all of the properties in the area had gone down in value,’ she said. ‘The foreclosure was due to my financing,’ she said. ‘I would have rather had the mortgage company be honest and say, ‘No, this is too steep.’ Why couldn’t they have made me make just one payment at a fixed rate? They make it sound so good.’”

“A car accident finally sank her hopes. She needed surgery. She borrowed more money to buy a replacement vehicle. After that, ‘I couldn’t catch up,’ she said. Her home was foreclosed in 2004, less than two years after she bought it. She filed for bankruptcy protection and let it go.”

“She said she drove through her old neighborhood the other day, passing the home she loved. It sold for $131,000, nearly $30,000 less than she paid for it. Around the neighborhood, ’so many houses are for sale,’ she said.”

Several readers discussed future Fed rate decisions. “Topic: Bernanke and the June Fed meeting. I think the results of the next meeting are huge in terms of the psychological effect. What signal does it send to Wall St. and all the whiners who don’t want their bubble taken away. What if he doesn’t raise?”

One had this answer, “To answer your question, if the Fed does not raise rates - INFLATION >7%.”

Another did a ‘what if.’ “If BB blinks on the June rate hike, look for long-term Treasury bond yields to rapidly increase to above 6%, with mortgage rates considerably higher to price in a growing risk premium. The housing bubble might ‘decelerate’ more quickly if the Fed stands pat.”

To which another replied, “Another reason why the housing bubble is toast no matter what BB does.”

The Lowell Sun. “Hey, that Ben Bernanke looks like he’s determined to show us he’s no wallflower, eh? OK, Big Ben, for the past month you have talked the talk, so let’s see if you and your friends at the Federal Reserve will walk the walk.”

“As you and your colleagues have so astutely pointed out, inflation is at hand. And it’s not just at the gas pump. So no more of these wimpy quarter-point interest-rate hikes. How Greenspanish. Show us you’re really serious and give us 50, as in basis points.”

“That’s right, half a percentage point. When it comes to that meeting in Washington next week, show ‘em your fangs. Tame that inflationary beast.”

“Through the first five months of this year, inflation is running at a seasonally adjusted annual rate of 5.2 percent, according to the government. So-called core inflation, which strips out such ‘non-necessities’ as gas and food (Gee, who needs that?) is still over 3 percent.”

“I know I’m not getting a 5 percent raise this year. Are you? If not, that means you’re losing spending power.”

“Quite frankly, interest rates aren’t that high, historically speaking. A prime rate of 8 percent would have been welcome in, say, 1982. Even as recently as 2001 it was 9.5 percent.”

“Get crackin’, Ben & Friends. We know you’re going to raise rates at month’s end. We’re just not confident you’re going to flex your muscles enough. Give us the medicine this economy needs. Fifty basis points, baby.”

“It isn’t the Fed’s responsibility to ensure the stock market goes up. It isn’t the Fed’s responsibility to keep the housing bubble, er, market, afloat.’

“The Fed’s first and foremost responsibility is to prevent prices from rising too rapidly in our economy. If Ben & Friends don’t get up to speed, that’s going to continue to happen.”

What are you seeing in your housing market? homebuilder incentives? Motivated sellers in the classifieds? Here are some from the topics thread. “More personal stories of capitulation? My brother (bought a 508k POS in bad area in ‘04) AND a work colleague (bought 3bdr in La Jolla in ‘04) just this week have confided in me that they are thinking of selling their homes.”

“The friend says if he can get out with less than 30k loss, he’ll do it. Bro still thinks he’ll escape with a 10k ‘profit.’ I guess he is overlooking the 60k in interest he has paid over two years.”

Another said, “As per CNY homes.com Syracuse market now up to 3700. The site showed a huge jump of listings in last 2 days. There’s some old stuff on there but I think we’ll break 4000 before June’s over. I wonder what will happen after August. It’s starting to feel real bubbly round here.”

“I do notice I could take some bubble photos in my little village area but they are in the ‘rental’ neighborhoods in the older, less desirable areas. That and the million dollar homes on the lake are plentiful.”

And another, “We waited 3 months on a list to get into this 780sf one bedroom in Rancho Bernardo in the summer of ‘04. Very nice area. Now, there is a ‘Now Renting’ sign at the entrance (first time since we’ve been here), and they just put a flyer on my doorknob yesterday stating that the company will pay a 300 dollar finder’s fee if we get someone to move in. Think my rent is going down this summer???”

From Oregon Live. “‘From a buyer’s point of view, they have a little bit more to pick and choose from,’ said Sherry Francis, an agent whose territory runs from Portland’s West Hills to Hillsboro. Francis says she’s seeing fewer out-of-state investors speculating in the Portland market this year and more owner-occupied sales.”

The Mail Tribune. “‘There seems to be clear evidence nationally that a slowdown is taking place,’ said Tim Duy, at the University of Oregon. ‘We’re starting to get softer readings from Oregon as well. The lower permit numbers in single-family housing is reflective of that change.’”

“Craig Horton of the Medford Better Housing Association said he wondered whether new rental buildings could pay their way. ‘Building costs are so high anymore that it’s hard to build something and have a positive cash flow unless it’s a large project,’ Horton said. ‘When I drive around seeing all those buildings going up, I ask myself ‘Where are they getting tenants?’ said Randy Unger, Southern Oregon Rental Owners Association president.”

From California. “Dale Griffin has been trying to sell her home in Merced for more than a year. She says seeing the most recent report that says Merced’s housing market is extremely overpriced is frustrating. ‘It’s hard to escape what the news says and I am sure everyone that is looking for houses is looking at that and saying well are they telling us the truth?’ said Griffin.”

“Griffin reduced the price of her home $85,000 over the last year and it still hasn’t sold. ‘It’s very frustrating; we have loved Merced, it has been good to us, but we just want to go to the coast and retire,’ she said.”

This was the most popular topic suggested this week. “If buying a house is not advisable, then where would you park your savings?”

The first reply. “HSBCDirect at 4.65%, EmigrantDirect at 4.65%, Citibank at 4.75%. Splitting among these 3 you can FDIC insure 300k, 600k if you open them up as joint accounts.”

A followup, “This will only work if FDIC can really cover the defaults, which it may not be able to. 3 month T bills are yielding more than 4.8% at this time so it is hard for me to see why anyone would put their money in a CD with more risk, less liquidity, and less yield.”

Another said, “I think those might be money market rates. Countrywide bank offers 5.41% on 12 month cd right now.”

There was this exchange, “If FDIC doesn’t back the savings, what makes you think T-bills would be any safer?” Answer, “Treasury bills are government debt. The FDIC is a government insurance company. If the government defaults on the debt, all those dollars backed by the FDIC are worthless any way.”

Others discussed liquidity, “‘CASH..’ ‘Ok, but which countries? I am thinking the Yuan.’ ‘But the Yuan is not readily spendable here in the US. By cash, of course, he means, that which can be stuffed in the mattress and used when the virtual money in the banks disappears, a la 1929. If enough banks fail so that the FDIC was swamped (unlikely, I think, but not impossible. The number of bank failures in the early 90s came close, and this could be worse), you want to have something you can actually put your hands on.’”

More replies, “‘Then I would want Loonies!’ ‘And twoonies, canadian dollar has made some serious advance against the dollar in the last year.’”

Others like hard money, “‘Swiss Franc if you are a girly man, Gold if you have a set of nuts, both if you are hermaphrodite.’ But, ‘When the recession comes and people can’t buy so much bling, gold will go down with the rest of the commodities.’ The reply, ‘Not true. Given a choice between a stack of paper or a 100 oz bar of gold which one do you think the car dealer will accept?’”

“‘What car dealer would accept payment in 100 oz bars of gold? The car dealer will accept dollars, the question is whether gold will go up or down in terms of dollars. The spike in gold may have been merely caused by the spike in the money supply brought on by excessive liquididy, in that case, as liquididy slips away, gold prices will fall. Pretty much all assets have risen together; it would not be surprising for them all to drop at the same time.’”

Another said, “‘Gold if you enjoy catching falling knives (which many of those with nuts apparently do…)’”

And finally, “‘T-Bills are better than CDs because there is no state income tax on T-Bills. 3 months and 6 months. If you saw this coming like me in 2001, you would have been primarily investing in Series I Savings Bonds (also not taxed at the state level) and municipal bonds (no state tax, no federal tax).’”

“‘I do gold and platinum too. The key to successful precious metals buying is to be patient, do not be greedy, and buy small quantities regularly, like an ounce or two every 2 months. I even get into treasury notes. You can buy from 2 years to 10 year notes. I’d stay closer to 2 years than 10 years for now. Park 6 months of living expenses in a high yield money market account.”

Post off-topic ideas and links here! This thread will be forwarded through the weekend.

The Arizona Republic asks ‘how low will it go?’ “Greed drove metropolitan Phoenix’s home prices and sales to new records in 2005. Fear is driving the market this year. Home buyers are worried about paying too much and are waiting to purchase. Concerned about dropping home values, some owners are trying to cash out. Builders, struggling to sell even deeply discounted new homes, are scaling back production and warning of lower profits.”

“Each day more people, from contractors and mortgage firms to real estate agents, are losing jobs or money in the metropolitan Phoenix’s rapidly slowing real estate market.”

“Until recently, the market’s slowdown had been considered a necessary, short-term hardship to offset last year’s wild run-up in prices. But now many analysts and economists say it looks as if the slide will continue for at least the next six months, possibly pulling down home values as much as 10 percent before it’s done.”

“‘There’s a psychological umbrella of fear in Phoenix’s housing market now,’ said Tim Sullivan, a national housing analyst. ‘Buyers are uncertain.’”

“New data that includes used and new houses shows Valley home prices are down as much as 20 percent from last year’s high. Prices aren’t down all over, but some areas are showing steady declines. The median price of a used home in Pinal County fell to $211,500 in this year’s first quarter. That’s down from the $220,000 the typical existing home was selling for at the end of 2005.”

“The median price of an existing Valley home was pushed nearly $60,000 higher last year by investors, according to Jay Butler.”

“Owners who used adjustable loans just to afford a house may be unable to pay the higher mortgage. If they can’t sell in the slowing market, where the number of homes for sale climbs to a new high each month, they could wind up in foreclosure. Many other homeowners who tapped the equity that last year’s run-up brought also will be vulnerable.”

“Home builders began offering incentives early this year to try to sell their backlog of new houses in metropolitan Phoenix. The deals keep getting better, signaling the market isn’t. Late last year, investors began walking away from deposits on new homes because they couldn’t flip houses for quick profits as they did early in 2005. Regular buyers can’t sell their houses to clear the way for them to close on new ones.”

“Builders are offering incentives worth as much as $100,000 to unload them. Recently, a few started offering to buy existing homes from buyers as a way to free them up to close on their new houses. That hasn’t happened since the market crashed in 1990.”

“Because buyers aren’t biting, builders are downgrading their sales forecasts, laying employees off, backing out of some Valley land deals and seeing their stock prices plummet. A recent study from Hanley Wood Market Intelligence showed metro Phoenix ranked in the top five U.S. markets for new-home cancellation rates. Some Valley builders are reporting cancellations as high as 40 percent. ”

“The Valley also has a glut of condominiums, with at least 8,000 units planned and under way. Some apartment complexes that were converted to condos last year are being ‘reapartmented,’ or turned back into rental units because buyers don’t want them.”

“Metro Phoenix led the nation for new-home building in 2004 but slipped to No. 4 last year. Housing analyst Barbara Allen, who is based in Scottsdale, said home builders are calling the Valley a ‘good long-term market,’ which she says means ‘they’re worried’ right now.”