The Housing Bubble

A pair of reports from California. “A drop in requests for building permits and in competition for the city’s housing allotments for single-family homes has prompted questions about a slowdown in residential development. By June 23, Redlands had issued 66 building permits for single-family homes this year, down from 170 by this time last year.”

“The city’s quarterly competition for residential building allocations, the precursor in Redlands to a building permit, also had fewer applications this quarter than recently has been typical. Just one 26-house project requested allocations in June.”

“‘It may be that we’re seeing the beginning of the slowdown in housing construction because the market is saturated,’ Mayor Jon Harrison said. ‘I get that impression from the real estate community, that not only (have) housing sales of existing inventory slowed considerably, but they anticipate that housing construction is slowing as well.”

An editorial at the LA Daily News. “There is a disquieting trend upon us. This much is a certainty, though: The resale housing market is in a funk for the first time in years.”

“We can now mark the sales turn at the end of the third quarter, the last time most markets recorded totals above a year ago. They’ve been under that ever since. And that signals a trend.”

“Consider the following price points in May: In May, the median price of a previously owned home in the San Fernando Valley was $600,000. That’s exactly where it was last July. And that’s the first time the current year and past year median price have been this close since September 1996, when the $158,000 median matched that of the prior 12 months.”

“May’s median price in Los Angeles County was $568,550. That’s not too far from the $564,340 median of last August. And the statewide median in May of $564,430 is below last August’s record of $568,890.”

“Riverside investor Bruce Norris sees dark days ahead. Norris predicts that California will see a 1,500 percent in foreclosure activity by 2010. He notes that $1.5 trillion in adjustable loans will do just that upward between now and next year. ‘California has a much higher proportion of adjustables,’ he said.”

“And Norris maintains it won’t take a lot of stretched mortgage holders to start some bad stuff rolling downhill. ‘You don’t have to have more than 2 percent of owners to create a tremendous problem,’ he said, ‘and send foreclosures rising.’”

One wide ranging topic thread went roughly like this. “Will the real Ben Bernanke please stand up! Does anyone have read on what Ben Bernanke is all about? Is he really serious about fighting inflation and loose credit or is he in reality a cagey poker player?”

“Based on my read of the FOMC statement, the Fed is starting to get nervous about further rate increases. Am I mis-interpreting? How will all this affect housing? Are (short term) rates high enough to deflate the bubble?”

One reader said, “Rates are and have been high enough for a while to burst this bubble. People cannot afford the houses they’re in, and you won’t believe the calls we’ve been recieving lately from stressed out borrowers. Last week I suggested the topic of reviewing the ‘basics’ that show the evidence is overwhelming that we are in for historic correction. Let’s break this thing down this weekend, folks. I think that most of us could use a little refresher, and for those that might find this blog over the weekend, perhaps an eye-opener.”

Another had this, “Obviously, the international community has no respect for the Fed’s ability to control inflation. The dollar is tanking, gold is up over 3% and will continue to rise. The Fed is well aware that inflation is currently running at 7%.”

“Inflationary pressures have been ignored for a very long time because they did not make it through to the government’s ‘core inflation’ statistics. The Fed relied on globalization to contain inflation.”

“And just to refresh all you youngsters memories: ‘We have seen security prices soar out of sight of earnings, brokers’ loans swell till they absorb a third of the banking resources of the country, and the blind pools of ancient days return and multiply by endless crossing and pyramiding as the investment trusts of today. Banks merge and emerge in chains, trailing trusts and holding companies, while industrial corporations pay dividends not by producing goods but by buying each others’ stocks and by borrowing and lending everybody’s money in the market.’”

“‘But of all these things can anyone say with surety what they signify, whether they are safe and sound, or what they are leading to? We do not even know, or cannot agree, whether inflation exists, what it means, or how it shall be measured.’”

“‘In face of the ignorance, uncertainty, and irrationality that surround every aspect of the ‘new era,’ it were wisdom for business to keep its feet firmly on the ground and assume for the present that the principles that prevailed through the long business past still govern the stability and success of business today.’”

Business Week - September 7, 1929

“IMHO this is the beginning of the World Wide Asset Bubble collapse. In fact the more interesting action will be next week with the quarterly redemption numbers from the Hedge funds released. Yesterdays and todays stock market action is quarterly adjustment of portfolios.”

Another added, “IMHO the World Wide Asset Bubble collapse began on October 19, 1987, but capitulation was successfully forestalled for 19 years by the world’s greatest bubble blower.”

To which was replied, “1987 was just the beginning. Many things developed since then not due to AG, but because of other macroeconomic, regulatory, and geopolitical reasons.”

“Don’t blame everything on AG. AG didn’t create derivative explosion, nor the dot-coms, he didn’t open sweatshops in Asia and Latin America, he didn’t destroy the USSR, didn’t deregulate the S&L and junk bonds, didn’t drop dollar.”

“He is a product of the Friedman’s monetarism, actually we all are, since we put so much naive faith in the Fed’s ability to govern the ecomony with one crude hammer of interest rates. We are all to blame.”

A pair of reports on foreclosures in Massachusetts. “Sheila Farragher-Jemma of ForeclosuresMass.com says in the last year the number of foreclosures jumped 105 percent, and she expects many more in the coming months. ‘Thousands of people, they’re losing their homes on a daily basis,’ she says.”

“And it’s a trend that’s happening not just in Massachusetts, but throughout the country. Foreclosures jumped 28 percent nationwide over last year.”

“Analysts blame adjustable rate mortgages. Ned Tobey owned the house that was just sold on 29 Woodbury Avenue. ‘I kept falling behind and falling behind,’ he says. He financed the $300,000 home with an adjustable rate mortgage, as the rates went up, he found himself unable to afford the payments.”

“‘I went from a monthly payment of right around $2,100 a month to a little over $3,000,’ Tobey says.”

“With the Cape’s Barnstable County leading the way at 73.9 percent, foreclosure filings in the Pioneer Valley went up more slowly. In Franklin County, filings went up 21.4 percent from 126 to 153; Hampden County filings were up 20.7 percent from 1,129 to 1,363.”

“The number of foreclosure filings has been going up faster than he expected, said Jeremy Shapiro, president of ForeclosuresMass. ‘It’s surprising in terms of how fast the numbers have increased, it’s startling,’ Shapiro said. In May alone, statewide filings more than doubled, from 788 in May, 2005, to 1,613 this year, Shapiro said.”

“Linda Rotti, president of the Realtor Association of Pioneer Valley, suggested that the cooling real estate market could be making it harder for people to sell their houses quickly enough to avoid foreclosure. In the red-hot market of recent years, ‘if people got into financial trouble, they could just put their house on the market and get it under deposit in a short period of time,’ Rotti said. ‘Now with houses taking longer to sell, they don’t have that luxury.’”

“Karen Wallace, a Realtor in Brimfield, said she fears there may be more foreclosures as time goes on. ‘I have seen more people, when the market was going higher, they pulled a lot of equity out of their homes,’ she said. ‘They’re stretching themselves, then some small thing happens and they can’t pay for it any more. It’s very sad. Nobody wants to see that happen.’”

“Peter Gagliardi, director of (a) housing assistance agency, has also seen a few people whose homes are at risk because they bought two-family homes with overly ambitious rent expectations.”

“Shapiro said he believes the rising wave of foreclosures is ‘just the beginning here.’ Many homebuyers chose 1-year, 3-year or 5-year adjustable rate mortgages in the recent housing boom, he noted. ‘Some of those have begun to adjust, others haven’t. I think the next two years are going to see much more heightened levels of foreclosures than we’ve seen in the past,’ Shapiro said.”

What do you see in your housing market this weekend? Motivated sellers? Builder incentives? Here are some from the topics thread. “There is a radio ad running in San Diego promising to help you ‘find a mate’ It goes on to explain how knowing your credit score can help you get a new car or boat. After describing a few loan products, the salesman says ‘a new condo could make you IRRESISTABLE!’”

One reader posted a link: “The times they are a changing. ‘A Washington, D.C. area seller writes that he has ‘drastically lowered’ his price, and is ‘very realistic about the market,’ but that he’s turned down two contingent contracts with unrealistic buyers.’”

“In further discussion, both buyers, according to this seller, are very unrealistic about the value of their own homes, and want to put them on the market way overpriced.”

From the Naples News. “Free upgrades, special financing, great incentives. Those stories and others of people getting great deals on a spec home someone had under contract but walked away from are everywhere. Fliers touting additional commissions and more incentives are flooding every real estate agent’s office.”

“Most builders won’t admit to having problems with speculators walking away from contracts. But by many estimates in the overheated market of last year, there was up to 40 percent investor and speculative buying. A majority of those properties have now either been put back on the market by the investor or by the builder.”

“Get it off the books, said (realtor) Joseph Ballerino. ‘Builders and developers are probably leveraged. They built their communities thinking they were going to keep selling at last year’s pace,’ he said. The Realtor incentives are what he has a problem with, Ballerino said.”

“‘When a Realtor takes a client to a particular property it should be because the home meets the client’s needs,’ he said. ‘Not because the Realtor is benefiting. If an agent is being offered special incentives, we will always disclose it to our clients.’ Often they even share it with their clients, he said.”

“The need to sell is also showing up in the resale market. Many offer to cover closing costs or provide seller-financing. Toni Stout and her partner are offering to pay up to $10,000 in closing costs on one home they’re selling, Stout said. ‘It is a way of saying ‘pick me,’ because there is just so much out there,’ Stout said.”

Some readers suggested a topic on non-US housing. “The countries I am most familiar with; Australia where I live, and the UK where most of my relatives live, seem to have dodged the bullet, for now.”

Another said, “I have noticed that Austrailia and the UK home prices have come to a soft landing. Is this scenario that is being played out in both those countries relevant to the United States housing market.”

This was added, “Good topic. I am sure some areas won’t crash. However; I am in S. Florida and it is crashing!”

And another said, “If one believes this is a bubble, then economics 101 says we must see a return to the mean. This could happen by a price decline. OR it could happen by prices staying neutral for a long period (say 7-10 years) and inflation bringing them back in line.”

The West Australian. “There are early signs that Perth’s overheated housing market is cooling with analysts warning of slipping demand for rental properties. The evidence prompted several property management companies and at least one economic forecaster to warn the local market’s jawdropping bull run could be slowing.”

“They were supported by figures released yesterday which show new homes sales fell 12 per cent last month compared with May last year.”

“Tony Warren, managing director of Perth’s biggest property management group said properties were taking longer to let than a few months ago. Analysis of a local website showed a 70 per cent increase in listings since last July. The number of available rentals had jumped about 25 per cent since May.”

“‘Historically the market does slow down at this time of year..but really not to this extent,’ he said. Mr Warren said many investors who bought a property early in the year had settled and wanted to rent them out. Mr Warren said if the trend continued there would be an oversupply.”

From the Guardian. “With house price rises now bubbling along at 5 per cent a year, dire warnings of a property crash seem long forgotten; but some experts still believe the worst may not be over.”

“Since the Bank of England stepped in with a confidence-boosting cut in interest rates last August to steady a rapid decline in consumer spending, the housing market has surprised many observers by bouncing back, though not to the gravity-defying double-digit price increases of the past five years.”

“Analysts warn that despite the market’s impressive performance since the turn of the year, many of the same factors which made house prices vulnerable 12 months ago are still in place, and it’s only a matter of time before they take their toll.”

“‘There are a lot of headwinds facing consumers at the moment, which makes me surprised that we have seen such a rebound, and sceptical about whether it can continue,’ says George Buckley, chief UK economist at Deutsche Bank. ‘The fundamentals are not really in place to sustain a significant further boom. Real income growth hasn’t been that strong, inflation is rising for non-discretionary items like energy bills, taxes are increasing and there’s a greater need for people to save for their pensions.’”

“John Butler, chief UK economist at HSBC, agrees. ‘I think the fact that it has rebounded over the past six to nine months doesn’t mean we’re past the worst: a lot of issues could weigh down on the housing market. House-price-to-income ratios are very high, the debt-servicing burden is high, and banks are suffering a pick-up in arrears. We are still where we were a year ago.’”

“‘There is a bigger group of people who are very vulnerable to a 1 or 1.5 per cent rise in interest rates than there would have been five or 10 years ago,’ says Ed Stansfield, property market economist. Also unclear are the consequences of the rapid expansion in so-called ’sub prime’ lending, often to borrowers with shaky credit records.’”

“‘While demand seems fairly stable, the deterioration in affordability and its likely impact cannot be ignored. Mortgage payments for someone on average earnings now take up around 42 per cent of takehome pay compared with around 32 per cent three years ago,’ said Fionnuala Earley, the Nationwide’s chief economist.”

“As the steam comes out of the market, analysts and homeowners will once again be asking themselves whether they face a flat few months, or the beginning of a much trickier ‘hard landing’. That has now become a trillion-pound question.”

The Salt Lake Tribune reports on the race to unaffordability in Utah. “Those with properties in the Sugar House area in Salt Lake City saw median selling prices rise by one-third in the first three months of the year. Selling prices in Hooper in Weber County jumped 40 percent. Think that’s crazy? How about the Alpine area in Utah County, where prices are up an unbelievable 57.2 percent.”

“Just how long can the party last? A lot longer than you might think. Economists and people who make their living in Utah’s residential real estate industry are betting the state’s housing market will be hot for some time.”

“Homeowners such as Shannon Harrison can’t help but thinking how long it all can last. ‘It’s just crazy right now.’ But overvalued? ‘I don’t think so, not yet,’ said Harrison, who has lived in Utah for more than two decades.”

“Mark Knold, senior economist with the Utah Department of Workforce Services, said Utah’s home-price run-up, like the one that occurred in the early to mid-1990s, is driven in great part by the state’s strong employment growth. Many have sold homes in other hot real estate markets. Many people in that situation are not as motivated to haggle over the selling price, which tends to further boost overall appreciation in the area.”

“Although Utah’s economy has all the components needed to sustain a hot real estate market for what could be years, there are some factors that could slow things down. One important factor is mortgage rates. Another potential factor in a slowdown in some other hot real estate markets such as Phoenix and Las Vegas is that prices have risen to a level at which many buyers are priced out of the market.”

“‘Housing prices can only go so far before they are outrunning the ability of local people to afford them,’ Knold said. ‘You just can’t double the price of a house in three years and expect that to continue and be the norm and have people still be able to buy.’”

“Residential real estate investor Murray Dallin Wall, like many investors in the Utah market, scoffs at the idea of the Wasatch Front becoming truly overvalued anytime soon. ‘I think the St. George area is just about the only area that doesn’t have a strong upside potential,’ said Wall, a member of the Utah Creative Real Estate Investors Association, an organization of people who buy real estate as an investment.”

“Still, he said, the strong appreciation of the past year along the Wasatch Front has caused many investors to drift to the outlying areas of the Salt Lake Valley and surrounding counties for the biggest upside potential. Wall said he has begun scouting for investment properties in Weber County, which in recent years has trailed most other areas in appreciation. Housing prices in most Weber County cities also are much lower than most other areas along the Wasatch Front.”

“Jaren Davis is another involved in real estate who thinks Utah homeowners will be rewarded in the coming years. The vice president of Coldwell Banker Utah in Salt Lake City said one key is looking at prices in Utah compared with other states.”

“‘Here in Utah, many people consider Park City and St. George to be ‘overvalued,’ he said. ‘But on a national scale, even Park City and St. George are still affordable. Utah is absolutely poised for a sustained period of appreciation.’”

Please post off-topic ideas, links and Craigslist finds here. This thread will be forwarded through the weekend.