The Housing Bubble

The Olympian has this update from Washington. “More adults younger than 30 are entering the real-estate market, and many are doing it at ages uncommon a decade ago. In 1995, people 25 and younger bought 172,000 homes nationally, said Walter Molony, spokesman for the NAR. In 2005, that number jumped to 501,000.”

“‘There seems to be a lot more peer pressure, more parental pressure to buy at a younger age,’ said Warren Ballard, (who) sells new condos and conversions. ‘The attitude really has changed.’”

“Although Seattle-area real estate is more expensive than ever, a tiny studio at the new NoMa Ballard condo building in Seattle, for example, starts at $180,000, it’s also more attractive than ever for young singles to buy, with cheaper conversions of apartments to condos, creative financing options and slick marketing campaigns aimed at them.”

“But there also is fear among young adults, and their parents,that they won’t be able to afford real estate in the future.”

“Young buyers are making major compromises and using creative financing to buy their first homes, including recruiting roommates or siblings, borrowing from parents, sacrificing space and living in less-desirable neighborhoods.”

“Dawn Wiggin, 27, decided she was ready to buy her own home only weeks before she signed the paperwork for a condo in NoMa Ballard. But the 475-square-foot condo, priced in the low $200s, will be tough financially. The mortgage is $700 more per month than the one-bedroom apartment she’s currently renting until her condo is finished this fall.”

“Until she bought her condo, Wiggin had extra spending money to travel and meet up with friends for happy hour. She also treated herself to a big vacation every year and took lots of weekend trips.”

“But the mortgage will require her to cut back. She’s considering limiting shopping to one big item a month, and figuring out a low-maintenance hairstyle. She also plans to limit weekend trips and will throw dinner parties at home instead of going out with friends.”

“‘It’s going to be a challenge,’ Wiggin acknowledged. ‘I’ll be paying a lot more, but it’ll be fine. It’ll be a great investment.’”

“Taylor Halverson’s mortgage is $400 more than his last rental, but Halverson was cautious about how much he could afford. The mortgage for the condo (around $200,000) has forced him to cut back on little expenses, like picking up breakfast on the way to work and buying lunch.”

“While Halverson was among the first of his friends to buy a place, he said he didn’t feel any pressure. Still, when asked what prompted him to buy at such a young age, he responded: ‘Is 25 young?’”

The Calgary Herald has this housing bubble report from Canada. “For Tim and Erin Luki, a hefty house loan meant settling for fewer future children, cheaper vacations, full-time work for both parents and a lifetime of monthly payments to the bank. So the family is cashing in on what’s become for many a real estate lottery, and like others, the Lukies are moving on instead of up.”

“The Lukies are among a growing number of longtime Calgarians seizing the opportunity to sell high and buy low, somewhere other than this booming metropolis where property values keep shooting skyward. ‘We feel lucky. We’ve been told by so many people they wish they could go, too,’ says Erin Lukie.”"The experts are reluctant to admit there’s an emerging trend; that people are increasingly catching the bus out of boom town. The Calgary Economic Development Authority ‘didn’t want to go there,’ and declined to provide any further comment.”

“The Calgary Real Estate Board, too, was reluctant to point out a flaw in the rosy picture called Cowtown. Board president Kevin Clark admits he’s heard stories of longtime Calgarians who’ve been sitting on a pot of gold selling out to chase a new real estate rainbow in another town.”

“‘Calgary is getting to be a pain in the butt. Traffic and taxes and all the BS that piles on,’ says retired geologist Don Wilson, who at 85 is leaving the home he bought nearly 50 years ago for a life in an apartment in Nanaimo, B.C.”

“Wilson bought his Glendale home for $19,000 in 1958 and recently sold it in a day for $480,000, $80,000 more than its listed price. A number of other longtime residents on his street are also selling.”

“‘At that price, I thought somebody had rocks in their head,’ said Wilson, still reeling from the windfall he doesn’t even need and plans to give away to his kids.”

Some housing bubble reports from Wall Street and Washington. “Construction spending fell in May by the largest amount in nearly two years as the once booming housing sector suffered another big decline. The Commerce Department reported that building activity dropped by 0.4 percent in May, following a 0.2 percent fall in April. It marked the first time in more than three years that construction spending had fallen for two consecutive months. May represented the biggest one-month decline since a 0.7 percent fall in September 2004.”

“‘(Economist) Ken Mayland said the drop shows ‘the foundations for the housing boom are beginning to crack.’”

From Reuters. “Fannie Mae on Friday announced the second member of its board of directors to resign in the last seven weeks, saying that Donald Marron would leave the board on July 31. His resignation comes just over a month after a scathing report from Fannie Mae’s regulator blamed the company’s management, its board and an ‘arrogant and unethical’ culture for massive profit manipulation and an $11 billion accounting scandal.”

From Paul Muolo at National Mortage News. “The House has passed a flood insurance reform bill by a 416-4 vote that eliminates subsidized premiums on vacation and second homes and commercial buildings, affecting an estimated 450,000 properties. Federal flood insurance premiums on those properties would increase 15% a year until they reach the ‘applicable risk premium rate.’”

“Mortgage originations could take off again in 2008, according to Jeff Speakes, chief economist for Countrywide Home Loans. Speaking before a mortgage broker convention, Mr. Speakes pointed out that residential loan production has shot higher every five years since the mid-1990s. Mr. Speakes advised brokers that if they can hold on through next year, brighter days are on the horizon.”

“Meanwhile, brokers and mortgage bankers fear the Federal Reserve won’t stop ratcheting up short-term interest rates. Some fear that the Fed has now gone too far.”

From Bloomberg. “Barclays Capital Inc. forecast the Fed’s target rate will reach 6 percent by the end of the year. JPMorgan Chase & Co. and Credit Suisse Group made similar calls for next year.”

The News Observer has this report from North Carolina. “In April and May, the number of existing homes sold on the Outer Banks plummeted by more than half compared with the same months last year. On the southernmost stretch of coast, sales in Brunswick County have dropped about the same amount. According to locally compiled statistics, sales on Emerald Isle are down more than 60 percent.”

“Broker Marcia Parrott has seen downturns before. But, like the thousands of others who make their living from Outer Banks real estate, she can’t help but wonder what’s happening. ‘Are we in a correction?’ she said. ‘Are we, I hesitate to use the word ‘collapse,’ totally falling apart? Or are we having a soft landing, which is what I heard someone say the other day.’”

“She said it was overdue, given the number of speculative houses that builders and developers put on the market, and the number of investors who jumped for quick profits. ‘Our prices went up too fast and too high,’ she said. ‘We needed this.’”

“Prospective buyers have caught on to the downturn and are routinely offering 10 to 15 percent below asking price, even though they know the seller has already dropped his price, sometimes more than once. In one recent case, broker Mark Petty said, a potential buyer even offered less than a previous offer, apparently betting that the first potential buyer would walk away.”

“Homes in the $500,000-and-under range are still selling, he said, but there’s a glut of oceanfront homes. In some cases, speculators have been left with one worth less than they paid.”

“Real estate is a huge industry on the Outer Banks. When Petty got into the business a little over a decade ago, there were 400 to 500 brokers on the Outer Banks, he said. Now there are about 1,100, including many who haven’t been in the business long and perhaps thought the market would always be booming. ‘It’s probably a rude awakening for them,’ he said.”

“On the Outer Banks the average home price fell 16 percent, or almost $100,000, in May, and sales were off 54 percent.”

“John Hunter, an appraiser in Kill Devil Hills, said he’s seeing such things as a seller who turned down a $1.5 million offer a year ago accepting $1.2 million recently.”

“Income from summer rentals is important for many homeowners on the barrier islands. Hunter thinks the nature of the downturn will become clearer in the fall, once people who might have been thinking about bailing out ponder that long stretch of winter mortgage payments.”

The Street.com has this editorial on the housing bubble and the press. “The Business Press Maven, who owns an obscenely overvalued home, wanted nothing more than for the loft in real estate prices to, uh, loft forever. And the real estate party is over. If you don’t believe me, just look at your favorite struggling homebuilder stock or bedraggled REIT or check the vast majority of increasingly grim housing numbers.”

“So where does that leave you, the investor? At high risk of being goaded into a mistake.” “Overvalued markets are always justified by the business media with constant story lines about how different things are this time. Once it starts to become apparent (like now) that there is such a thing as gravity, we enter the classic second state of business media delusion.”

“Having justified the bubble for so long, the business media never simply walks away. What always comes, instead, are a series of articles about how the worst of the damage has already been done and that it’s no big deal, just part of the natural course of things, a flesh wound. Moreover, that there are safe havens amid the carnage or that there are actual bargains!”

“A key element to making the argument that there has been no true shift in the market is to deny the very fact that prices are starting to drop. This was done recently by Samuel Lieber, while speaking on CNBC. He sounded like a local real estate agent, trying to convince a young couple that they were not buying into a ‘down’ market but an ‘adjusting’ one.”

“‘We are,’ he said, ‘transitioning from a period where people had to pay the offer price or above to a period where they are looking at a more normalized bid/offer spread. It’s just they don’t know..where that proper pricing will be.’ Sounds like prices are plummeting, buddy.”

“Remember how in the wake of the Internet collapse, we saw legions of articles about stocks that were steals because though they had started getting hit, they would offer safe haven because of their strengths.”

“When you hear people honestly assessing the damage and professing no hope, that’s a bottom. When people are in denial and are slinging jargon, well, we ain’t there yet. Until such troubles are spoken about openly, a bottom is not in sight.”

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