The Housing Bubble

From ben’s foreclosure report:

MSN Money has this report on a pickup in bankruptcies. “Consumer bankruptcy filings continue to increase, with Chapter 7 liquidation filings rising 54% in the second quarter compared to the previous three months. Consumer bankruptcies had plunged following the passage of a tough new bankruptcy law last year. By the second quarter, however, the pace of filings had picked up to 2,200 to 2,300 new filings per business day, more than four times the level in November 2005 after the bankruptcy law went into effect, according to Lundquist Consulting.”

“Individuals filed 85,449 Chapter 7 cases in the three months ended June 30 and 142,815 bankruptcy cases overall, a 39% increase from the previous quarter.”

“Meanwhile, the leading credit-counseling organization says bankruptcy reform is putting unprecedented strain on counselors’ finances. Bankruptcy filers are required to undergo credit counseling before they can proceed with their cases, and agencies affiliated with the National Foundation for Credit Counseling say such sessions now comprise one-third to one-half of their caseload, according to marketing director Bob Ensinger.’

“But many debtors arrive at the counselors in such sorry shape that they can’t pay the nominal fee the nonprofit agencies impose. ‘We’re running (these sessions) at a loss,’ Ensinger said.”

“If charge-offs and other delinquencies start to tick up, however, we could see the pace of bankruptcy filings quickly follow.

Credit counselors are already reporting an increase in the number of debtors seeking help because of high gas prices and adjustable-rate mortgages that have reset at higher rates. Those debtors may well enter the bankruptcy pipeline in the next year or so.”

Tip of the iceberg folks….

jmf,

Hello to Germany! Thank you for the report. It definitely seems like money is entering the system to me…everything suddenly gets a little push.

Look at HBs today & yesterday. Wicked for shorts.

I was in the Home Depot two Saturdays ago buying moving supplies. It was mid-afternoon and the place was empty. As always, my five year old and I had to look at every last item they sell before we bought our two rolls of packing tape. We were there for a least an hour, more employees than customers. The Home Depot was in Quincy, MA. Things seemed similar the last time I was in Lowe’s in Hingham.

This is a good synopsis of market psychology.

http://www.ampcapital.co.nz/MarketViews/Economic/Investmentpsychology.pdf

It is called obstinacy. I have seen a nice house about 2 blocks away from me that has been on the market since Sept 1. 2005. The seller has lowered the price from an exorbitant 575K to 475. Problem with the house is that it is right across the street from a large fish processing plant that stinks to high heaven in the summer, and right next door to a closed restaurant. Fair price for this house is around mid 100 to low 200’s if you find a GF.
I like the house, absolutely hate the location, and what is even worse, is that the house is really an old gorgeous colonial with a wrap around porch.

Totally OT:

Crack cocaine is/used to be referred to as “Monkey Nut” in some parts of the country.
Names for Crack

One wonders what would happen though if the sellers in denial all tried to actually behave rationally and get out at whatever price the market would bear. A huge number of sellers all determined to sell to a smaller number of buyers could drive the price down to where they were well below the long term trend. They can’t ALL get out by just lowering the price unless some are ready to accept a BIG lose.

People will do almost anything to avoid taking a loss, especially the first loss. Thus the big “stickiness” in the market is when market prices are trying to push through the point where many people must take first losses, even though they are small ones. When the stock market crashed, there was tremendous consternation, gnashing of teeth, and general inability to act over the first 5 to 10% loss - after that, the losses quickly gather steam and the investor/punter/gambler/speculator feels he is no longer in control. So, two things: (1) At this early stage, homeowners are still desperately trying to maintain control over the pricing decision (which in reality they have no control over anyway, since ultimately the market set it), and (2) the first 5% (10%, etc.) loss is more painful than the next 10% is more painful than the next 10%, etc. It is pretty irrational, but totally predictable.

As for bubbles themselves, they are all the same, whether they be tulips, stock prices, or hosing prices. Prices rise slowly at first, then accelerate and go up to levels that seem extremely high by historical measures - and THEN they spike up even more dramatically in the final 12 to 18 months (the actual bubble), prompting people to say that the old metrics don’t matter anymore, that prices are going to keep going up, because, well, they just are.

When the NASDAQ was approaching 5000 I told many people that I thought the real value was around 1500. Nah, they said, maybe it goes to 4000 in a correction, 3500 at worst. It went to 1100.

Florida housing market, for example, is overvalued at least 30% (north) to 50-60% (southeast) to 75% or higher (southwest). Prices will fall over next 3 years to BELOW historical valuation norms. It’s not overvalued like tech stocks were, but it actually is more leveraged.

Interesting.

When bulls were suggesting that the market could keep on rising above the rate of inflation for the next 15 years their sanity was questioned on this site. Similar predictions were made in 2000 about the DOW’s chances of recovery, as I recall.

Threre is no doubt that a period of adjustment lies ahead and in some locations that is likely to be severe but a complete meltdown of the housing market, as you so graphically imply, is unlikely for the following reasons:

The US census projects an increase in population over the next 15 years (2005-2020) from 295m to 336m http://www.cencus.guv/cgi.bin/ipc/idbagg this does not include the number of illegal immigrants entering the country believed to be anywhere between 1 and 2 m per year. The combined effect is an increase in population of between 55 and 70 millon over the 15 year period who will all require housing.

Overstretched construction companies will go out of business and there will be a slowdown in the number of houses being built. Other companies will switch their resources to alternate developments which are likely to have a better rate of return. In the meantime, houses will be destroyed in floods, hurricanes, fires, earthquakes and other natural disasters not to mention those being demolished to make way for “developments which are likely to have a better rate of return”.

The current imbalance of supply and demand is a knee jerk reaction in much the same way as panic buying during the boom. There are many reasons why people have placed their property on the market recently some are out of necessity and others are opportunistic. As the market stagnates in the months ahead, with sellers refusing to reduce prices and buyers sitting on the sidelines, many of the opportunistic sellers will withdraw their property from the market.

Initially, there will be a huge increase in foreclosures resulting in dramatic falls in the price of distressed property. Many properties will fail to reach their reserve/debt levels at which point lenders will realize it makes more sense to renegotiate loans, especially ARM’s, with those customers who are making repayments above the level they could expect to receive in rent.

As the head of a recoveries team for a major UK bank in the 1990’s it was interesting to observe how quickly attitudes changed from one of “kick em out” to “there’s got to be a better way”. By 1995 many areas had returned to their 1991 highs and the national median price in the UK is currenly (15 years after the “housing market crash”) up over 150% and still rising.

“i’d like to see hear some comments about the tragicomic human psychology (denial?) that paralyzes sellers to disastrously ride the bust right to the bottom.”

They believe things will turn around. They’ll hold on to the very end hoping that it does. It’s optimism that got them into this mess to begin with, and the same force which is going to keep them from getting out.

Thanks

Another thing to consider that isn’t included in the ARM figures: Interest rate buydowns.

It is extremely popular for builders and lenders to provide 3-2-1 or 2-1 rate buydowns to borrowers that otherwise would not qualify for the loan. In the case of a new builder the entire neighborhood will be seeing a rate increases over the next 3 years. I can only imagine that certain neighborhoods will have huge price pressures in year 2 or 3 as the rates creap up on all the homes in the neighborhood. For sale signs will sprout all at once and boards may start covering some windows and the grass will turn long and brown of the really F-ed borrowers.

In Texas, all of the newer housing developments (1990) have HOAs.

Cities in Cali like gated communities because the owners have to pay for all street maintance on their side of the gate.

Maz — all this is just IMO — not an attorney — HOAs are all over the map as to what they cover, what they cost and whether or not they accrue to the owners the cost of maintaining what would otherwise be taxpayer-maintained roads and lighting. The common element is that there likely is no state that allows an HOA to be formed after the fact (read: after you bought your house) to which you *must* belong and pay. HOAs most commonly, I believe, are described in the covenants that run with the land, otherwise referred to as deed restrictions. Frequently, at least in Florida, they expire after a set number of years (20,30, etc.) unless a prescribed percentage of owners formally vote to retain them; articles of condominium (condo docs) are dissimilar in this regard as I’ve never known one to have an overall expiration date, but condos do not seem to figure in your question.

IMO, any buyer who does not ask for and read all such covenants before buying/closing is a fool. Many people love HOAs, just as many hate them and a lot of folks are in between. The more passionate you are about the matter, the closer you should look and the more you should consider the use of a real estate attorney.

As for loving houses built before the 1920s, I’d think HOAs would rarely be involved in a place that old, IMO, for obvious reasons; any that are would have been added to an HOA voluntarily by a previous owner, roughly similar to annexation. Nevertheless, if it bothers you, inquire and read.

I think they are set up along with the developement. Our HOA doesn’t allow compost piles of any type or clothes lines or visible dog houses! We would never buy a house with a HOA. We are renting here.

HOA’s are usually creatures of statute and contract, so their exact terms vary widely. Their terms and conditions run with the land and you purchase the property subject to any HOA which was in existence.

In Northern Virginia they are endemic. My colleagues in the legal profession generally take a great deal of time and trouble and will pay premiums to avoid buying houses subject to HOA’s. I am 100% with them on that since I believe in maximum personal freedom and a free market.

Once you’re in a HOA, you are stuck with it. They can be formed by consent of homeowners; once formed it usually takes a super-majority (66%) to change anything about it. It will eventually become a little fascist dictatorship, regulating home colors, improvements, looks, decorations, etc., etc. If you want to put up a fence, you need their approval. God help you if your obnoxious neighbor is the President or on the Board because you will never get that approval. Ditto for hot-tubs, decks, and sometimes even screening vegetation.

HOA’s will sometimes use management companies, which are ticks upon the association, sometimes give no-bid work to friends and family, and it will invariably find more and more things to spend the homeowners’ money on every year, thereby raising the dues paid by everyone.

I guess you can say I’m not a fan.

I lived in a neighborhood with a HOA. It was one of the more liberal ones I’ve seen, largely regulating that ‘woodsy’ paint tones be used on houses (it was very wooded area), no tree over 6″ in diameter could be cut down, and regulated that no junk cars could be kept on the property.

HOAs are easy to crack though; all it takes is one violation to be ignored by the board and then it all falls apart. Hence reasons why the boards seem so militant in this area.

Some of the more ostentatious HOAs around here prohibit any color other than TAN on the houses and no pickup trucks can be parked in the driveways or roads. Basically the only choice you can make is to paint your front door hot pink.

Most new subdivisions here in the Phoenix area have them. Some cities here require an HOA for new subdivisions. In the neighborhoods that I have lived in, the fees ranged from $25 to $60/month. That covered stuff like landscaping and cleanup for the common areas. The roads are still publicly accessible and therfore publicly maintained.

Usually, the HOA board hires a management company that pays for the common area upkeep, etc. Enforcement of rules vary. I personally like the idea of people parking their vehicles in their garage or driveway, not having a yard sale every weekend, and keeping front yards presentable. In my experience, the management companies do an inadequate job, but I do not care enough to involve myself much in HOA activites.

The HOAs are formed before the houses are built, and are covenants that run with the land.

HOA are another tax on homeowners, obviously, you have no choice unless you buy a home in another area. most subdivisions nowadays have them. my mom’s house in north tampa fl, had sooo many rules. there was a 17mph speed limit, she had her mailbox batted down and had to pay a premium for only a cookie cutter mailbox from the hoa. like said above, their fence had to get approval and took like 7 months (the fence is funny cause their lot line went to 2 feet next to the house in their backyard so the put the fence up to the line and the neighbor cant even fit a lawn mower in that area anymore lol!), paint colors, etc.

but i think they do have their benefits cause if you have crazy neighbors you wouldnt have to call the cops on em, just the board

of course my mom just moved to NC and she’s telling me about the mountain road and other stuff that her hoa has to pay for and it makes you wonder….
if the county doesnt even pay for these roads and snow removal etc, where are all the tax dollars really going? taxes arent getting lowered yet more people move into new houses with new tax revenue and other than schooling (most of her new area is retired folk), that $ goes to what cops and firemen.

UFB! The taxes on that place are lower than on a 250K house in Dallas.

Dunno. But advertising it as a ‘great place to store your antiques’ just hooked me right away. Where do they find these people?

Put me in this category. I am sinking some money into my 1950 ranch–some updates are desperately needed (new roof), some will help lower my energy bills (new windows), some is mostly for curb appeal (new siding), and some will make the house nicer for both us and future owners (remodel main bath).

I don’t plan to sell anytime soon, but I figure if something comes up, I’ll stand a better chance with an updated house with a little curb appeal. The house does have a nice layout and has held up pretty well, so why not make it nice and ensure that people will continue to live in it?

After a neighborhood gets enough abandoned eyesores, re-zoning will seem the lesser evil. McMansions will be rehabbed into multi-family units. “Handyman” or contractor landlords will be able to save cash, though who know how many will bother to pull permits. Good for Home Depot and the rest, but the transition period between now and then will be brutal.

That’s what my hubby and I are hoping for. The last few years have been very good for us as he sells windows and I am a mobil notary. We know times won’t be as good as thy’ve been, but hopefully therre will be some people left with some $$ to spare to replace their old windows with energy efficient ones. The electricity bills here in so cal have almost doubled!! I hate to see that happen, but he sure has been busy since the last heat wave rolled through so cal!!!

schweeet

I still can not believe how much the OC has changed in just a few years. I lived in Fullerton and then in Fountain Valley. I used to work on Imperial Highway in Brea, East of the 57 Fwy and across the street from a golf course (which was replaced a few years ago by new homes). My wife and I laughed our *sses off when we saw people buying McMansions a few years ago for $750,000 in the area. Now we visit her parents and we see all the graffiti and illegals everywhere (especially Home Depot). North OC looks one step above Tijuana. At the beach nothing but trailer trash with too many tatoos and illegals. I think this weekend maybe I will go and plop down $2mil for a home on the beach in Newport - how about not!

Very interesting. I rent a 1BR (860 sq. ft) just across the river in Jersey City, right on the water and am renewing the 1 year lease beginning Oct at 6.5% above last year. Current rent is $2100/mo. Avg rent increase in the building is supposedly 8.5% this year. Full service luxury, doorman etc. in 35 story tower, excellent maintenance. I feel like I’m getting a good deal as I’m locking in for a year and plan on buying after that. I sold my 1BR condo last Oct and dumped half of the profits into 1 Oz gold Canadian Maples and another 10% into silver miners.

That seemed accurate to me. The requirements to rent an apartment are much higher than the requirements to buy an apartment or condo. It is sad. You have to typically make 35 - 50 times the monthly rent. You pay first and last month’s rent plus deposit. If you can’t meet any requirements you must have a guarantor. If the lending field had standards 1/3 as tough we wouldn’t have this f#cking mess on our hands.

expiration?

Dutch housing bubble still happily growing as well, after +/- 15 year bubble years total gains are now between 600 and 1100% depending on area and there is no sign of a top yet. Even in the last four ‘post-bubble’ years (with single-digit price growth) home prices have doubled in most areas despite personal real incomes declining in all of these years, slightly higher mortgage rates, surging inventory and (now) slightly declining population.

Why are prices still rising? Simple: the Dutch took out an estimated 50 billion of home equity over the last year which is probably about equal (per capita) to US refi activity. All ‘gains’ are financed by going deeper into debt and our government is very proud of what is going on.

test

The grazing isn’t so lush on the northern Plains, and you need a LOT of land to run a profitable ranch. My grandfather was a rancher in WY. A real cowboy, not some hobby rancher. When he died my grandma moved to town and sold the ranch to be incorporated into a larger ranch. That has been the pattern for a long time, now.

I love wide open spaces, but some of the mega ranches are too much for me. 20 acres or at least enough not to see my neighbor is all I want. I’ll be ready to buy in 2-3 years and if this blog site is correct, prices should be substantially lower by then.

hmm– feels like a (put) buying opportunity may be near.

Thx, JMF.

I cant believe there is actually anybody dumb enough for the builders to still unload $600,000 POS homes to. I would think either there is no one with the credit left who hasn’t already bought (or) they are astute enough to know that the market is over. But I have been wrong before in overestimating the average intelligence - just look at all the FB’s that bought in Temecula/Murrietta (middle of nowhere) in the first place.

By the way, now they are having a racial and gang (wannabe’s anyway) problem, because many people are gone all day commuting and their kids are being left home with nothing but trouble to get into…

I’ve said several times on this blog that I am expecting a depression, probably a deflationary depression that might followed by hyperinflation, or less likely hyperinflation leading to a depression. It is my belief that the inflation we are experiencing right now is caused by the housing boom because so many have taken out equity loans, etc, and are spending the money like mad. A contraction, or even a flat housing market should have a very noticable effect on spending leading to a depression and not just a recession because the boom has been extreme and the correction will be extreme, too.

I book marked your site.

Interesting chart. Any way to get the chart(s) on your site to blow up into a larger window in order to get a better read?

There is a home on my street in a much more desirable neighborhood that won’t move at $659K, good luck is right.

Update: I found the matching “SELLERS ARE MOVTIVATED! Make an offer!” ads for the same homes.

http://boise.craigslist.org/rfs/194855271.html
http://boise.craigslist.org/rfs/194856835.html

So is this “investor” calm and cool with some property available as “lease to own”, or is this an “effed flipper” ?

What’s funny is the builder is selling the same floorplan for 30k less than this “investor”.

They don’t build Boise homes with fireplaces anymore?

Good find! Thanks!