The Housing Bubble

A weekend topic starting with Silicon Beat in California. “Housing economist Lawrence Yun got everyone’s attention Thursday — he talked about bubbles in his address to the 27th Annual Convention and Expo of the Santa Clara County Association of Realtors. His assessments were largely reassuring. Given the tight supply of existing homes and the failure of local governments to incite construction of new homes, he said, prices will probably remain up in the stratosphere. In other words, the bubble — if you want to call it that — will not burst. In any event, the upward trajectory of home prices is already hurting the region: ‘The smartest people in American are all here in San Jose,’ he said, warning that that may not always be the case. More and more, he said, tech companies ‘will flee’ the area and go to more affordable regions of the country.”

“Bottom line: Expanding companies here, and recruiting talent to move here, is going to be ever more of a problem given the cost of housing. ‘Unless you can convince the local officials’ to clear the way for the construction of large numbers of new homes, Yun warned, ‘people will think about working in other localities.’”

“Yun, however, did get into a few of the shadowy scenarios that could undermine his predictions. For one, if hiring were to take a dive in the Bay Area — if the gravy train were to stop at Facebook and Google — well, then those prices would tumble.”

The Mercury News in California. “For the second straight month, the Bay Area lost thousands of jobs in September, making it the worst month for employment locally since February 2010. The lack of affordable places for workers to live appears to have hobbled the region’s ability to fill jobs as briskly as in prior years. ‘Housing is the chain on the dog that is chasing a squirrel,’ said Christopher Thornberg, principal economist and founding partner with Beacon Economics. ‘Once that chain runs out, it yanks the dog back.’”

“The September losses, combined with 2,400 job losses reported by the EDD for August, paint an unsettling picture and lend credence to the assessment from a growing number of experts that the Bay Area’s job growth has begun to slow dramatically. ‘The slowdown is real,’ said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy. ‘There were times this year we thought that job losses here and there were just temporary. But the slowdown is a fact. It’s happening.’”

“Some are finding the current job market tough. Steve Satariano, a San Jose resident and experienced worker in the information technology sector, said it appears tech employers frequently inquire about an applicant, but the interest doesn’t always lead to a job interview and almost never results in a full-time job with benefits. Now, his jobs consist of contract work and temporary projects. ‘Things were a lot better in the tech industry a few years ago,’ Satariano said, ‘and a lot of the job offers are for work in Sacramento or Los Angeles, but I don’t want to relocate. I’ve lived my whole life here in the South Bay.’”

‘The vicious housing market has made it tough to find decent living circumstances, he said. Satariano is sharing housing with roommates. ‘Growing up in Silicon Valley, I never pictured this for myself,’ Satariano said. ‘I always thought that if I went into the tech industry, I could create a prosperous future for myself. But who wants to commute six hours a day? You should be able to afford a place to live near where you have to work.’”

From Seattle Magazine in Washington. “As a branch manager for Caliber Home Loans, Trevor Bennett, who ranks in the top 1% of mortgage originators in the US, says success in Seattle requires products that cater to the local real estate microclimate. ‘Not all mortgages are created equal, so a nationalized policy will overlook opportunities in the local market. As a non-bank, portfolio lender, we underwrite our own loans and are able to serve a wider range of needs.’”

“Bennett points to several innovative approaches to serving the Seattle-area borrower which are unique to Caliber Home Loans. Underwriting with Restricted Stock Unit (RSU) Income: ‘Stock rewards paid by employers like Microsoft and Amazon have had a major impact of the income and wealth in our city and is a significant factor in our housing market. Caliber Home Loans have re-written the rules for how we underwrite loans in order to account for RSU income for loan qualification in these markets.’”

“So, if it’s quicker and easier to qualify for a mortgage today, and the local housing market is rising faster than any other city in the US – does this mean we’re headed back to a bubble like we had a decade ago?”

“Market pundits don’t think so. Seattle Times reporter Mike Rosenberg admits he is most frequently asked about the stability of the market in Seattle, and says the 13-percent growth rate we’ve seen in the last year has ‘to moderate at some point,’ but that it’s key to recognize that the factors present during the recession simply don’t exist in Seattle: ‘people are paying mortgages on time’ and ‘putting down big down payments,’ not to mention the impact the ever-growing tech industry is having on the region’s economy. ‘Amazon alone is enough to make the city’s economy among the strongest in the country,’ he added.”

From the St Catherines Standard in Canada. “Government initiatives to cool the housing market are starting to have an impact, but Niagara Association of Realtors president Randy Mulder fears any more interference will go too far. ‘A slowdown in Toronto has a residual effect in Niagara, for sure,’ Mulder said.”

“It’s reflected in real estate sales published for September, when house sales dropped across Niagara by nearly 36 per cent compared to a year earlier. He said both the federal and provincial governments have introduced initiatives to reduce escalating housing prices, including a new federal government plan announced earlier this week to add ‘a stress test to’ new mortgage applications.”

“Realtors across the country are concerned that the federal government might extend that same stress test to people who have down payments of 20 per cent or more. ‘That will have an even more adverse effect on the strength of the market,’ Mulder said.”

“The government, he added, needs to give the initiatives already in place the opportunity to have their intended effect before adding new ones. ‘Let’s let them have the effect and see if they’re doing what you hoped they would do before we throw another layer of baggage on it,’ he said. As an alternative, Mulder suggested increasing the number of houses being built to also drive up housing inventory as an alternative way of reducing the costs of housing.”

“‘Supply and demand is the key to the market,’ he said. ‘We need more supply, that’s all there is to it. Across Niagara, we need more supply.’ It seems as though upper-tier governments ‘don’t want to have a slowdown, they want to kill the market.’”

“Despite significant increases in real estate prices during the past few years, Mulder said there’s still “a bit of a shock from people who come from the GTA and say, ‘Really, I can get that big house for $450,000 or $500,000?’”

From CBC News in Canada. “New guidelines were introduced for mortgage lenders this week, and among the rules, a stress test for uninsured borrowers was introduced. David Gray of the Calgary Eyeopener spoke to Garth Turner, a former Conservative MP who writes about finance and real estate on the blog greaterfool.ca. Q: Now there’s a stress test. What’s this all about?”

“A: It’s pretty simple. What the regulator is trying to do is protect the banks, not really do anything for real estate buyers. The trouble really emerged last year when they brought in a stress test for first-time buyers to make sure they could afford higher interest rates. Well it was a pretty serious stress test — and a lot of people didn’t want to take it. So instead of getting insured mortgages, which meant they had to have the test, they found a 20 per cent deposit [downpayment], which meant they could avoid it.”

“A lot of people got the deposits from the Bank of Mom, or a sub prime lender — so it didn’t really mean they had the financial means. So they got around the test! All of a sudden, the banks realized, oh my god, we’ve got all these mortgage borrowers now who aren’t that great financial risks, and we don’t have their mortgages insured.”

“Q: What did they do? A: The bank regulator took action, in saying, you know what? The way around this is, everybody is going to have to take this [financial stress] test. And David, it’s a pretty serious one. It means mortgages are basically going to five per cent, effective January 1, and never going below that. The irony is we’re going from 2 per cent mortgages last April to five per cent in January, and we’ve never seen an increase like that. Ever. So it’s going to have an impact.”

“Q: What’s the downside? A: The trouble on the buyer’s side is that it’s going to mean less credit, because when people have to qualify at a much higher rate, well, people now don’t qualify for as much borrowing. So it’s estimated a family with 20 per cent to put down, that [once] might have been able to buy a home for $725,000, now will only be qualified to buy one at $570,000 — so that’s a serious, serious drop.”

“Now the laws of supply and demand being what they are, if that’s where people qualify, then the price of homes is probably going to drift down to that new level. After all, it was cheap money that took those prices up. So when money gets more expensive, prices come down.”

“Q: The message to them [uninsured homebuyers] is your money’s not good enough for us? From the banks? Is that really what they’re saying? A: Sort of. We care more about your ability to carry this home, not the fact that you plunked a bunch of money down. It really doesn’t matter how big a downpayment anyone has now. It’s all about the ability to carry.”