The Housing Bubble

Hey, I am back to blogging. To pick up on the gold digger discussion from yesterday’s Bits:
A week ago today, I thought I was going to get a date with Ernesto here in Tampa. I guess he must have been reading this blog and learned that all the smart ladies rented u-hauls and moved from Florida up to North Carolina. I have to admit, that Ernesto is just the kind of guy that I am a magnet for; comes on real strong and creates a lot of economic devastation. It is really hard to protect ones self financially from Mr or Ms Wrong. Soliel’s comments, brought back memories of chapters in my Forrest Gump style life,
one of which, I would like to share, because it is really funny to me now and I hope you can learn from it too.
My ex and I started investing in off campus rental houses very young, in our early 20’s. We were lucky to be taken under the wings of those hard a$$, old time landlords-very different from what you see today on the infomercials. Anyway we did pretty well, in fact I wish that I still had that cash flow coming in today. Well as life would have it, I was called to active duty for Desert Storm. The military requires personnel who are called up, to designate a power of attn. for their financial affairs, so of course I gave power of att to the old, “ex love of my life”.
When it was all over and I was released, I had promised some fellow activees rides home from the airport in my big ole Buick(trunk can fit at least 3 duffle bags). Well who should show up all smiles in a brand new 2 seater sports car, you guessed it. I could barely fit my things into this car. Anyway, he had sold all the rentals and had bought, among other things, this car that was depreciating by the minute more than I made in an hour of work.
Now, if a guy is only interested in me after he sees my bottom line, then I know what I am getting into. And I don’t mean, a “bottom line”, extending from my low-rise jeans.
P.S. I am not rich, but there are a lot of crum bum men out there who make a career out of moving from one woman to another draining their assets, before they move on.

Hi, Ben. Thanks for keeping the blog up over the holiday weekend, and enjoy your day off tomorrow…much earned, I might add.

I missed the report regarding the local housing market, so I thought I’d weigh in here. It probably won’t surprise anyone to learn that folks in Savannah are finally aware of the housing bubble. After all, it’s been splattered all across the national news this past week. Almost everyone here is talking about a bubble in Atlanta and South Carolina housing, and it turns out that many people have relatives or friends who are having trouble selling.

Some people are also starting to become concerned about the local market. Rising prices have largely been driven up in recent years by buyers from the Northeast. They usually have chosen to purchase either in the Historic District (or the bordering Victorian District) or in the small towns ringing the metro area. Richmond Hill is a popular choice because of its waterfront property and short drive to Savannah.

I went to the dentist earlier this week and was surprised to see that his assistant was still there. I knew from my last visit six months ago that her hubbie had found a job out of state. Well, it turns out that her house in the District has been on the market all of this time. She says that they are only asking what they paid for it five years ago, but have had few lookers and no offers in all these months. To quote her, “The people from New York who came because of ‘Midnight’ aren’t buying anymore. I don’t know when we’ll sell our house.”

By “Midnight” she means, “Midnight in the Garden of Good and Evil.” And as far as I can see, she’s got a point. When Midnight became popular, people from the NY/NJ area seemed to suddenly discover Savannah. Many came to visit, and some of them stayed. That trend has slowed in recent years, as the fad has passed. And word around here is that many northern retirees and self-employed professionals are once again escaping to Charleston rather than Savannah. Charleston has Spoleto and the historic district there is not surrounded in its entirety by the slums, as is the district in Savannah, hence the crime stats are quite different.

I hope for her sake she’s wrong because she seems like a nice young woman, but I tend to agree: Who knows when her house will sell now that the Northeasteners aren’t fighting over houses here?

Anxiety complex?
The crop of condominiums has increased as the once-soaring housing market tries to find a soft place to land. But bargains are few — for now.
http://www.latimes.com/business/la-re-condos3sep03,1,3852813.story?coll=la-headlines-business

Nearly 3 years later, ‘risk-based’ loan applicants still in the dark
By Kenneth R. Harney, Washington Post Writers Group
September 3, 2006
WASHINGTON — A congressionally mandated consumer protection of huge potential value to home mortgage applicants has been paralyzed because two federal agencies have not published required regulations, 33 months after the legislation was signed into law.

Funny how I couldn’t find this article at washingtonpost.com

The Last Stand of the 6-Percenters?

NY Times article. The “6-Percenters” in the title refers to real estate agents who earn a 6% comission.

Doing a little research here in Palm Beach County, FL, I came across this. DR Horton has a small townhome development called Villa Rosa in Riviera Beach, Florida:

http://tinyurl.com/mo355

They have been trying to sell these things for a year now, and they’re now still only a little more than half sold.

DR Horton was selling the smallest model, the Cambridge, for $215K earlier this year. According to the most recent public sales records, they are now selling it for 179K (although it is still advertised at 210K). Here is a sample of selling prices I pulled from the public records:

Jan 2006: 215K
Apr 2006: 210K
May 2006: 185K
Aug 2006: 179K

People were originally paying $243K for the larger model, Emory, which DR Horton is now selling for $199K, according to the latest sales in the public records. Here is a sample of the price trend:

Jan 2006: 243K
May 2006: 236K
Jun 2006: 210K
Aug 2006: 199K

So, prices are already down 16-18% in less than a year in this particular development.

Adding to the hurt, there is an identical sister development across the street called Thousand Oaks that sold out early last year. There are now 120 units for resale in that development.

Only 2 Cambridge models have re-sold there all year. I saw a couple of Cambridge units in Thousand Oaks sell for $235K in mid-2005. There is one now listed in MLS for $175K, and it’s been on the market since April. That’s a 25% decline in prices from the peak.

I fully expect the prices on the Cambridge models to fall below the original pre-construction price of $149K, which was offered in the Thousand Oaks development in 2004.

Given my post a few weeks back about the Georgia swampland peddlars, I just had to share this article from Florida:

http://snipurl.com/vuzg

Swampland going for 10 times its value? Oh baby! GFs come on down!

Another sign of the bursting Housing Bubble: Instead of the usual denial-ridden upbeat take on the great opportunities in the SD home purchase market, this week’s sdhomes buying guide (in the Sunday SD-Union Tribune) is circumspectly entitled “Realtors provide guidance in changing market,” and begins as follows:

“The cyclical nature of real estate demands precision, intuition, preparation and a vast knowledge of the real estate market. Your professional Realtor can satisfy the individual demands of buyers and sellers unique circumstances (blah, blah, blah)…

There are many contributing factors to our changing San Diego real estate marketplace today. The two most prevalent factors of change are the overall local economy and consumer perception (positive or negative).

Historically, tough economic times have lead (sic) to a declining real estate market and feelings of frustration and anxiety for all buyers and selles. This is why professional Realtors are more important today than ever. Realtors understand that general recessions are brought on by, and begin with, negative mental attitudes that become perpetuated. Therefore, buyers and sellers need Realtors to overcome negativity and beat the declining curve by being inventive and putting experienced professionals with ethical sales practices to work.”

His tone suggests that, from his perspective, San Diego is already in a recession.

I am glad he pinpointed the reason why recessions begin — negative attitudes. They have nothing to do with the irrationally exuberant price forecasts from Realtors (TM) and their industry groups, which served the dual purposes of pushing prices up to unaffordable levels and fueling a building boom which left a massive housing glut in its wake.

Further along in his marketing blurb:

“Buyers and sellers need to understand that San Diego’s economic foundation is sound.”

Where have we heard something like that before?

(’The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.’ — Herbert Hoover, statement to the press, Oct. 25, 1929.)

“The demand for housing remains stable.”

Then why did San Diego used home inventory grow by a factor of over seven since spring 2004? And why is unsold new home inventory at a record level (7000+)? I guess Realtors(TM) don’t feel compelled to bother addressing the facts on the ground.

“San Diego County’s population continues to grow at a healthy rate of 1.3 percent,…”

As Rich Toscano has carefully documented, San Diego’s population is shrinking:

http://www.piggington.com/migration_mystery

“So, don’t let negative perceptions deter you from achieving your real estate goals. Taking no action may be regrettable in the long run. Real estate cycles will come and go, but appreciation is dependable over the long term ensuring your equity position. Opportunity is knocking at your door right now.”

I have a suggested action: Follow the lead of the chief economist of the Mortgage Bankers Association, Douglas Duncan, who sold his home and began renting in order to wait out the coming real estate crash.

Or if you want to take one for the team and you have not bought yet, then you can personally help stave off a recession by purchasing a home right now near the all-time high real price for San Diego housing. And you will feel good about it eventually, because real estate prices always go up, eventually!

Sorry if already posted and discussed:

“Once bubble bursts, cities feel the pain
Housing market riddled with speculation

Joel Kotkin
Sunday, August 27, 2006
Main Opinion Page
Chronicle Sunday Insight

Like binge drinkers or fast-food fanatics, American urban leaders have had a tendency to run wild when things appear to be going well. But soon they will find that the good times are coming to end.

The prime culprit this time will be deflation of the residential real estate bubble, which has brought about a surge of tax collections and development.”

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/08/27/INGD3KNV2U1.DTL

Let’s move to Compton!
http://louminatti.blogspot.com/2006/09/lets-move-to-compton.html

There are lots of decent SFH’s in Buffalo on the market now for about $9,000. I didn’t leave off a zero.

QUESTION:

Does anyone know historical ratios of “homes for sale” to “population”.

i.e, one home for sale per 100 residents, etc.

Trying to get a sense of what “normal” for sale inventory should look like for various places.

Thanks.

Here’s a blurb from today’s Tampa press:

http://pasco.tbo.com/pasco/MGBNRXWEMRE.html

It’s about more owners going it on their own, and not having much luck.

Here’s one that’ll get you guys laughing. Seems Robert Allen has saturated the newspapers and airwaves with ads that he’ll soon be in Syracuse and Rochester “revealing secrets of buying homes with no money down” He’s gonna make me his next millionaire!

I was thinking of hanging out in front of the Marx Hotel in Syracuse where he’ll be conducting his conference waving a sign with Ben’s blog site on it and the proclamation: “Don’t purchase a thing before visiting this site!

Some quotes from the newspaper ad:
These are proven methods - they work. You can make $25,000 to $35,000 in a matter of 60 days or less. Preston Fleming, Illinois

“Today has ben the best day of our real estate careers. We sold our fourth house. This will put our net worth to around $1 million.”
John (Chuck) Neuschafer, Georgia

“We didn’t take anything out of our pocket, and we bought a $250,000 property that gives us a $900 monthly cash flow.
- Guy Burns, Nevada

But most offensive was the tv infomercial where one power couple had their son purchase his first home at the age 12. Of course, he supposedly made $45,000 after flipping it in a few months.

Here’s my “off topic” suggestion: We all know there are millions of stupid people out there, with absolutely no money to their name, who are willing to borrow hundreds of thousands–if not millions–of dollars (at outrageous terms) and buy crap with it!

How do *we* make money off these people? After housing dies, they’ll all be looking for the next big thing! We need to supply it for them!

(I remember during the dot-com “boom” how I knew of stupid people who maxed out CREDIT CARDS to buy stock at day-trading “parlors”!)

Should this be construed as a sign that the demise of the symbiosis along with a hard landing is imminent in China? (Hoz — looking forward to your knowledgable take on this…)
————————————————————————————————–
Bernanke says China economic crisis not likely
Noneheless he thinks a “hard landing” can not be ruled out
By MarketWatch
Last Update: 3:31 PM ET Sep 2, 2006

NEW YORK (MarketWatch) — Federal Reserve Chairman Ben Bernanke in a letter to Senate Banking Committee Chairman Richard Selby that the likelihood of an economic crisis in China is not great, but that the possibility of a “hard landing” for that economy can not be eliminated, The Washington Post reported Saturday, citing Reuters.

Bernanke’s August 30 letter said, “We believe that the chance of a Chinese economic crisis is very low for the foreseeable future.”

“Although the banking sector is burdened with an enormous and probably growing stock of problematic loans, the government possesses sizable resources and is unlikely to allow the banking system to fail,” Bernanke told the Alabama Republican.

Bernanke also said Beijing’s large foreign exchange reserves made a currency crisis unlikely, the newspaper reported.

“However, we do not entirely discount the possibility of a ‘hard landing,’ in the form of significantly slower growth, as authorities attempt to reduce investment growth from its current rapid pace,” he wrote.
The Fed chief said the rapid pace of investment in China was leading to overcapacity in some industries and likely adding to bad loans already on bank books, the report said.

“However, there is less evidence of widespread overheating. Inflation is still quite low,” he added.

http://tinyurl.com/ghl4y

This article in the Globe and Mail Business Section (Canada).

Sorry, not sure how to set up tiny link:

http://www.theglobeandmail.com/servlet/story/RTGAM.20060903.whousing0903/BNStory/Business/home

The housing collapse heard round the world
BARRIE MCKENNA

Globe and Mail Update

Real estate agent Andrea Gaus knew the market was out of whack when the price of a typical four-bedroom house near good schools in the leafy Maryland suburbs of Washington shot past the $1-million (U.S.) mark.

“It got to the point where appreciation was so high that it priced people out of the market,” Ms. Gaus said.

But the peak has passed, and the consequences of the deflating bubble are buffeting the housing market, in Washington and across the United States.

What sold in a weekend here last year is taking months to unload. And increasingly nervous home sellers are slashing prices to get rid of properties before their value sinks even further. One buyer recently threatened to walk away from a signed contract on a $1.6-million house unless the seller took $100,000 off the price to reflect the drop in value since the deal was struck. The seller quickly buckled, fearing the house might be worth even less if put back on the market today.

“Look how fast prices were going up. The same thing is happening on the way down,” observed Ms. Gaus, who’s been selling homes in Potomac for 16 years.

“It’s a very tough market.”

The once red-hot housing market has fizzled. And the topic du jour among economists, investors and policy makers is whether the end of the housing boom signals the beginning of the end of a long run for the world’s mightiest economy, and by association, the rest of the planet.

The U.S. housing crash may prove to be the economic equivalent of the canary in the coal mine — a warning of impending danger in an economy that has surged too far, too fast. Many experts are now openly speculating about a possible U.S. recession next year, brought on by consumers reacting to the shrinking value of their nest egg. If they’re right, the fallout could prove to be far nastier than the collapse of the technology bubble at the start of the decade.

“It could throw the economy into recession if consumers go into a shell,” worried economist Peter Morici, a business professor at the University of Maryland. “I don’t see anything out there to compensate.”

The housing market has been a perfect conduit for economic activity, funnelling and leveraging billions of dollars worth of household wealth into consumer spending in recent years. The U.S. savings rate is negative now, but even a relatively modest shift toward savings now could have a dramatic effect on consumption, sending the economy into reverse. Joining a growing number of anxious forecasters, Prof. Morici puts the risk of recession in 2007 at 50-50.

“The wealth effect has been very important in fuelling the recovery,” he said. “It doesn’t appear like that is going to be available any more. Housing prices have finally outrun incomes.”

Runaway real estate prices, which had been growing in double digits throughout much of the country, are now pricing potential homeowners right out of the market. The ability of Americans to afford a home is the worst it’s been in two decades, according to the National Association of Realtors.

The past year has been rough on consumers. First, mortgage rates began to rise. Then, there was the jolt from sharply higher energy prices. And now the apparent end of the long real estate boom is at hand. It’s all combined to make Americans feeling distinctly poorer, and less confident. Mirroring other recent surveys, the U.S. Conference Board reported last week that its consumer confidence index suffered its biggest one-month drop in August since the devastation of hurricane Katrina a year ago.

Think it all doesn’t matter to you? Think again. For nearly a decade now, the United States has been the economic driver for much of the world — Canada included. The United States has been sucking up excess savings and consuming everything in sight, from cars to homes and everything that goes in them.

“It’s hard to imagine that a U.S.-centric global economy wouldn’t be at risk in the aftermath of a bursting of the U.S. housing bubble,” warned Morgan Stanley chief economist Stephen Roach, one of Wall Street’s most outspoken worrywarts.

“The non-U.S. world remains heavily reliant on selling exports to wealth-dependent American consumers. As the United States comes to grips with the aftershocks of another post-bubble shakeout, so too must the rest of the world.”

As he put it: “If the American consumer sneezes, countries in both the developed and the developing world could easily catch a cold.”

How Potomac real estate became a leading indicator for the global economy is the story of a silent transformation of the U.S. economy.

In the early 1990s, when Ms. Gaus got into the real estate business, investment in residential real estate represented less than 3.5 per cent of the economy. Today, it makes up 6 per cent. Add in all the products and services tied to real estate — furniture, big-screen TVs, home improvements and financing — and the total contribution is much larger.

Housing has also emerged as an increasingly vital economic driver — for consumption, jobs and overall economic activity.

Economist David Rosenberg of Merrill Lynch & Co. Inc. estimated that construction activity, combined with surging home values, accounted for nearly half of U.S. economic growth over the past three years, or 1.5 percentage points of the 3.5-per-cent average annual GDP increase.

Encouraged by low interest rates, innovative mortgages and a tax system that favours maximum leverage, Americans have been using their homes as ATMs. Thanks to generous lines of credit and multiple refinancings, they’ve renovated, furnished their nests and moved up to ever-larger homes.

In the past decade, the percentage of U.S. household wealth tied up in homes has climbed to 48.5 per cent from 38.7 per cent.

Americans have also super-sized their abodes. From 1975 to 2005, the average size of new single-family homes grew by 48 per cent — from 1,645 square feet to 2,434 sq. ft. — even as families shrunk in size, according to new data from the U.S. Census Bureau.

These larger homes come with more bedrooms and more bathrooms, spawning a bevy of retail chains to help homeowners furnish all that space, such as Crate & Barrel, the Pottery Barn and Bed, Bath and Beyond. In 1975, only 4 per cent of homes had more than 1½ baths. Today, nearly half of new homes do.

That has changed the way Americans spend. Nearly 15 per cent of every dollar consumers spend now goes toward housing-related items. That compares with 11.5 per cent in the early 1990s.

So perhaps it’s understandable that some forecasters may be underestimating the potential downside of this housing boom.

“The decline in housing will not be a mere sideshow,” warned Merrill Lynch’s Mr. Rosenberg. “The housing correction has all the markings of a three-ring circus that has the potential to pull consumer spending to the brink.”

He’s predicting that housing prices will fall by 5 per cent by next year, erasing $1-trillion worth of household wealth.

U.S. Federal Reserve Board chairman Ben Bernanke, for his part, has predicted an orderly deflation of the housing bubble, and a soft landing for the rest of the economy. But in the minutes of their Aug. 8 rate-setting meeting, Fed governors acknowledged that housing is “a downside risk” to the economic outlook. Prospects for the sector remain shrouded in “considerable uncertainty,” according to the minutes, released this week.

Part of the problem for economists is that while housing is now clearly in a slump, other parts of the economy are behaving as if nothing is wrong. Manufacturing, for example, continues to fair well, outside of the auto sector. Similarly, corporate profit and business investment are healthy and growing. Even retail sales and consumer spending aren’t yet showing the impact of the slump.

But signs of stress are apparent. Major retailers, including Wal-Mart Stores Inc. and Costco Wholesale Corp., have warned of substantially weaker profit in the months ahead as consumers cut back.

The problem is even more apparent in the home finance business.

Foreclosures were up 18 per cent over last year in July, and are now running at rate of one for every 1,245 households. Banks also report that late payments are way up. And in some markets, homeowners who have seen the value of their property fall below what they still owe the bank are trying to coax lenders to write off part of the mortgage.

The current slowdown is “atypical” because it’s being driven by a “less than once-in-a-lifetime housing market bubble,” suggested Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

“Traditional warning signals of impending slowdown are unlikely to work in their usual way,” he explained. “Investors need to focus on the housing numbers, which are fast becoming horrific, and on the implications of the drop in housing activity.”

But there may be a glimmer of hope in this sobering scenario, according to Morgan Stanley’s Mr. Roach. He said the global economy, like the U.S. housing market, is badly out of kilter, and needs to be rebalanced to ensure its long-term health. The housing correction could go a long way to erasing these global imbalances.

And if there’s a silver lining for Canada it is that we may not be as vulnerable to a U.S.-led recession as much of the rest of the world.

Economist Clement Gignac of National Bank Financial Inc. in Montreal argued that the price boom in oil and other commodities may keep Canada from following the United States into a recession. He said Canada escaped U.S.-driven downturns three times in the 1970s, and this time could be the same. He puts the odds of a U.S. recession at 40 per cent, but just 15 per cent north of the border.

In Potomac, Ms. Gaus lamented that too few people have fully adjusted to the harsh reality that it is now a buyer’s market.

For sellers, that means accepting less, possibly waiting months to sell and being ready to make huge concessions.

“People just aren’t prepared for what’s happening,” she said.

I was a real estate terrorist today. Every time I heard someone talking about real estate I made sure to make a snide remark to them about needing to hold out until after the crash. I wrote all over the real estate section in the waiting section at the Mimi’s Cafe–things like “Greenspan’s credit bubble will create a real estate depression”, “Debt is not wealth”, “The return of jingle mail.” I also put little write in signs in the photos of the homes for sale that said “Bank Owned.” Hehe it was awesome to lay it out and watch people pick it up while I was eating.

test