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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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How about some dicussion on what tactics the agents and builders will use this spring to create a “sense of urgency” among buyers. The last few years its been very effective to tell people that they would be “priced out forever”, or to “huury up before interest rates rise”. Creating a “sense of urgency” is a very effective sales technique. It causes people to make rash decissions without much thought.
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Easy:
“It’s a BUYER’S MARKET now! Hurry up before you miss it!”
NAR: “Hurry up before prices start going up again later this year.”
And their ad guy for that campaign admits housing prices are going down in the OC Register.
Buy before interest rates go up.
Buy now for the best selection and location! Quantities are limited.
Take advantage of your best and last chance in a lifetime to qualify for the home you’ve always dreamed of. Get in now before it’s too late!
Don’t let the market take off again without you.
I just got a mailer from Standard Pacific (San Diego area), and they are offering $15,000 to buy down interest rates, along with some free upgrades (depends on the development) and cash back for closing. They mentioned four different communities.
This topic is particularly interesting in light of the likely inventory explosion we’ll experience post-Super Bowl. One of my posts yesterday linked to an agent in Baltimore who has started tracked withdrawn listings, and in some places there continue to be more new listings than withdrawals, going in to November!!! This report contains some really great lines, like this one…”This month I started tracking withhdrawn listings and you can see that there are as many coming off as going on. I think we’ll see sales numbers stabilizing until late January/February 2007 and then as hordes of new sellers try to hit the “resurging spring market” the proverbial stuff will hit the fan. Only those with a strong stomach should apply for this job.”
He is very honest…here’s the link again. http://tinyurl.com/negxu
This was supposed to nest under Vmaxer’s comment regarding tactics to create urgency among buyers in the spring.
“When I was younger, very few people bought a home for investment purposes, but when the last stock decline hit, many did just that. The glut of rental properties and proliferation of speculators has a whole lot to do with today’s slowdown. Greed is another big factor. I think sellers should be happy with a decent return versus an obscene return.”
Wow, Dominick may be sleeping with the fishes before long if he doesn’t clam up
I know…I spoke with him via email and expressed sentiments similar to what txchick posted, and his reply began like this: “I really don’t worry about what makes me popular with sellers or buyers. As a Realtor, I feel I have an obligation to tell it like it is. I don’t necessarily like to spread doom and gloom, nor do I feel like this market will last indefinitely. I didn’t believe we would continue to see appreciation rates at 20% or more continuing forever either.”
Another gem from his report is ” It’s interesting because there are still some homes selling that don’t follow any form of reason. Maybe these buyers are coming from markets more over priced than ours and think we are still a bargain??” It’s clear his implication is that there are some seriously overpriced properties still moving and he can’t understand why. If that’s not as honest as an agent can get, I don’t know what is!
” If that’s not as honest as an agent can get, I don’t know what is!”
Gee, my idea would be to actually ask the buyers why they bought before telling me he didn’t know why they bought. He could even call up the agents that handled the transaction and ask why they bought. I guess your definition of honest includes some wiggle room.
I’d consider what you suggest to be “due diligence”, not honesty. He’s simply stating overpriced homes are selling, he has no obligation to find out why, nor is he being dishonest by not doing so. I guess your definition of honesty includes background research.
In a year or two, when purchasing a house possibly becomes affordable again, I’ll be looking to hire a realtor with some honests posts like that. Any D.C./VA realtors want to come forward?
Bernanke’s bugaboo: Deflation.
Yellen’s hobgoblin: Ghost tract home developments.
Bernanke’s worst fears would seem to push the Fed in the direction of respiking the punch bowl and getting the housing speculation party rolling again. The stock market party has never ended — Wall Street clearly believes the Fed will cave and drop interest rates next year at the first sign of weakness, and the market is rising in anticipation of Bernanke’s promise to continue in Greenspan’s footsteps (which would presumably include a continuation of the Greenspan Put to make the stock market go up forever).
Too bad that more housing speculation will only exacerbate the ghost tract home development problem.
Yellen (at the San Francisco Fed) appears to have noticed something out there in the real world that her New England colleagues may have missed, which is that some areas of the country which were formerly referred to as frothy now appear to have a severe excess supply of overpriced housing that runs the risk of morphing from vacant homes into ghost tracts — a natural consequence of housing supply vastly exceding fundamental needs.
Whose concern will prevail in shaping the Fed’s policy response to the bursting housing bubble?
Check out the dollar this mornin . . .
I’m feeling a little verklempt . . . .
Has the ForEx market passed a verdict on BB’s inflation-fighting credentials?
“verklempt” I thought that is what you felt after Thanskgiving Day dinner with your relatives.
The FED will have little influence - unless it can get mortgage rates down to 2% to 3% and then only maybe.
The problem is psychology now…even if houses become more affordable, they are now (again) a depreciating asset. This will become ingrained over the next 18 to 24 months in peoples’ minds…even the most dim witted. The investors won’t come back for quite a while and then only the smart income investors when a solid positive cash flow can be had on an 80% LTV including vacancy and maintenance costs.
The only other groups that will come back, slowly, will be those who kept their powder dry to buy their retirement home or land as well as younger people looking to buy 1st home or trade up (in this latter case, only possible if they have equity remaining). Trade up will come to mean something different than in the past…it will mean location and quality as a priority over size.
3000 sf 4 miles from work is a heck of a lot better than 5000sf 20 miles from work (and so on). Indeed, the 3000sf home 4 miles from work will be worth well above what the 5000sf 20 miles from work will be and the latter may likely *never* recover its 2005 “value”.
“The investors won’t come back for quite a while and then only the smart income investors when a solid positive cash flow can be had on an 80% LTV including vacancy and maintenance costs.”
Smart is not enough. One also needs access to capital at the point when all the bankers have locked up their umbrellas in the vault.
“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.”
– Mark Twain –
They’ll do 80% or 75% LTV loans…and some will do 90% LTV on REO. Strong credit a pre-req. This was the case in Austin in 1990-92 as it bottomed out.
Damn straight.
Qualified buyers are soon going to be a very small and highly sought out minority in this USofA. The combination of cash, perfect credit, steady income and (last but not least) willingness to buy will be very rare indeed.
Why? Again, most sales are trade-ups, and — sorry for repeating myself again — you just can’t trade up negative equity. Those that choose to just walk away? They’ll be lucky if their credit allows them to buy a used Yugo.
What happens to a market wherein 90% of your prospective clients don’t qualify? Prices plummet to unthinkable depths.
Now that foreclosures/non-payment of mortgages are happening, people will not be so willing to bid down the risk premium and mortgage lenders have no more pool except those whose loans they were forced to buy back from the MBS - they are not going to go out and give a loan to these people again… I hope.
IMHO any rate lowering will simply be added to the risk premium.
Since prices are already up significantly from the last round of rate reductions, the effect of any lowering has to be far more muted than before. Prices shot through the roof people resorted to wacky mortgage schemes, anyone that could fog a mirror was given a loan. It seems as though the whole thing has been played out. I think at this point any lowering of rates will just slow the bleeding a bit.
Look at the distribution of income in this country. The reason the builders are doing what they are doing is that 90% can’t afford housing, so they are hoping the top 10% will buy 10 houses each, which they can afford. It seems to have worked for retail sales. Not sure about housing, though.
Winter driving/economy tip: When you’re on ice/in a debt choked economy, gunning the engine just makes the wheels spin faster. The speedometer may say you’re making good time but looking out the window will indicate that you’re spinning into a ditch.
This is truly the perfect storm, bearing down on us…
Another part of the puzzle, not really mentioned, is the amazing amount of folks that have owned their house for quite awhile, and in places like L.A., were/are sitting on potential profits of $200-500k, and were procrastinators, nothing more, in selling off the castle. When you buy a house for $265k, say 8 years ago and the current “market” is $670k and slipping, who has more leverege in pricing, the flipper that paid $620k @ the top of the market, or the long time house owner?
So, you were gonna make $350k, but you’ll probably leave the casino (er, that would be your house) up $200k, 8 years later. It’s still a big win, and believe you me, lots of people want to leave bubbly areas like el lay, anyway.
There are tons of these sort of people, perhaps a large amount of listings, currently?
Lot of them probably heloced though in the interim and pissed the money away.
I read that equity loans make up 6% of our GDP, on a percentage basis, how many of our homeowners dip into their piggy banks?
Many of them did HELOC much of the equity.
But then there are those with a fortune in equity. Many are my coworkers. Most cash out at retirment and move somewhere else into a home 1/4th to 1/3rd the selling price of their “working home.” Why do they cash out? Due to what *previously* was considered high home prices, their savings aren’t enough to retire in California.
Nothing about this market is going to make their savings enough to retire in California (of course, there are exceptions). So they’ll still sell. In fact, many will panic sell into the fall.
This gets interesting 2Q 2007.
Neil
Considering that the homeowner’s equity as a percentage of value has declined throughout the boom, you’d have to think a huge amount of equity has been “liberated”.
As somebody who bought in 1999, I’ll bet that a fair number of them will simply sit through the whole bubble episode. Even though rents are much lower than the cost of buying now, they’re not cheaper than continuing to pay a 2003 mortgage rate on a 1999 purchase price. Selling now means betting that nominal prices will significantly. (quite likely IMHO, but if we get runaway inflation…) And it means betting that intrest rates will still be low enough in a few years that I can jump back in to the market. And it means going through the trouble of moving and having a landlord again. Weigh that against a small mortgage payment and a house that will almost certainly be paid off 12 years from now and I’ll stand pat.
I was talking more in a get out of town, go to a cheaper locale, live a simpler life kinda thought. The whole equity locust thing, there’s lots of us…
If you like where you live and have a good payment or own free and clear, why sell? Your home is a home, presumably, and a consumable. Not an investment. This is especially true if you live in an area/location that has long term value retention potential…e.g., good location, convenient to where you typically travel, and no risk of nearby overbuilding.
We liked where we lived, we just didn’t like the idea of 25 more years of $3584.17 a month, in house payments…
We downsized to a fully paid house, in a beautiful area.
We liked where we lived;…Where then ???
in a beautiful area;…Where now ???
We lived in Rancho Palos Verdes, now live in Three Rivers, Ca.
Here’s the view from my computer:
http://people.tribe.net/tribe/servlet/a97e761b-eb82-4285-b28a-1d723690451a/photos?personid=a97e761b-eb82-4285-b28a-1d723690451a
Right next to a National Park to boot !!! Good for you for making the move…Un-like people who just talk about it (ME) you got fed up and did it..!!
And that’s why the boomer retirees won’t save Florida. There are plenty of nice and still cheap places to live in this country (or even out of it) if you don’t have to live near a job. Florida isn’t the only place to move if they don’t want to shovel snow after they retire.
Florida is strictly for east coasters that don’t get out much.
Dumb question (or not): Does the Fed monetize the national debt by either direct or indirect stock purchases? (That would be one possible realization of the Greenspan-Bernanke Put…)
I think that’s a good question. Too bad I don’t know the answer.
The answer is that they can and will if they think it is politically necessary. That’s the main reason for the “Plunge Protection Team” (nickname for the “Working Group on Financial Markets”).
I wonder how many think we will undershoot the mean on the way down and if so how far. Looking at Shillers graph it looks like the last couple bubbles only came back down to the mean.
By definition we’ll overshoot the mean. Unless you’re in Lake Woebegone, you can’t have prices that are always average or above.
Unless you’re in Lake Woebegone;….Where all the kids are above average ???
My number one pet peeve: getting good information.
Outside of Dataquick territory, we rely almost completely on realtors and their MLS data. But this data is highly flawed: no adjustments for pre-construction sales that never go through, no ability to search by our criteria (disaggregate data to fix compositional problems), no FSBOs, some missing new construction, no foreclosure auctions, and increasingly sketchy reporting. Given the importance accurate info, I sure would like to see the government do a better job with pair sales Case-Shiller indices in smaller markets, zip codes, etc…
Information is power, and I’d like to have a bit more on my side.
Agree. It’s really difficult if you’re in a non-sale-price-disclosure state with Zillow pretty much worthless (bad Zestimates and no comps), and media doesn’t report monthly RE data. Aside from waiting for 4-month old HPI data in the few “metro” areas, we’re stuck.
Have you tried tracking inventory and median asking price from Realtor.com? It’s better than nothing. There’s also a blog that’s been posting your town’s monthly RE stats. I’ll try to dig it up later.
If you can find a blog with monthly stats I’d appreciate it. I used to be able to get stats from friendly agents/brokers, but now they are all refusing to divulge. Kinda dumb as it is in their best interest to get sales moving with more accurate information.
Ben,
Is it possible that scammers have discovered a safe way to make money with this mortgage fraud, at least in “non-recourse” states?
Take this scenario. Houses in a development sold for as much as $500K last year. This year a seller puts his up for $400K. A buyer comes along and offers $500K, but demands $100K back under the table. The various parties find an appraiser who says, “Yep, it’s worth $500K,” so the mortgage loan is made and settlement occurs. The new buyer then walks, and never pays the first payment.
What federal or state criminal statutes have been violated?
Who faces potential criminal charges- the buyer, seller, realtor, mortgage broker, or appraiser?
If this is a crime, why aren’t we hearing of arrests and indictments, let alone prosecutions?
And people think the Fed will lower interest rates?
NEW YORK (AP) — Stocks fell Friday in thin trading, ending a shortened week quietly as the holiday shopping season began and attention turned to retailers and a steep decline in the dollar against other major currencies. The major stock indexes ended the week mixed, with only the Nasdaq composite index showing a gain.
It’s getting closer to the time when all debt falls due, and the dollar starts it’s final decent ………..look out below.
http://biz.yahoo.com/ap/061124/wall_street.html?.v=20
Many of us have debated inflation/deflation and what one should buy to safeguard our savings. Gold and other precious metals come up often, as to foreign currencies. Most people have very good points, irrespective of their positions — because none of us truly knows what will happen. However, I’ve been wondering if we should be looking at “productive assets” as a store of value. If the US defaults on its debts (via inflation), perhaps our creditors would be wise to buy up our companies, (especially manufacturers & basic resource companies), in order to protect themselves. A bit like buying gold, but having something that provides basic & necessary goods and services, especially multi-nationals, where they could work around currency fluctuations, perhaps. That way, it wouldn’t matter so much what the dollar does, as the very best store of value is production (maybe??), IMHO.
This might explain some of the seemingly nonsensical movements in the stock market, lately.
Any thoughts?
I believe the “PPT” is hard at work keeping the stock market from crashing as it should be doing. However, your point is also valid for those with gigantic numbers of dollars. The problem is that we can pretty much count on our elected “leaders” to try to stop the foreigners from buying up everything of value in the US. We’ve already seen some of that with a company that China wanted to buy (can’t remember the exact transaction), but it will only get worse.
‘I believe the “PPT” is hard at work keeping the stock market from crashing as it should be doing.’
Why is the super-legal manipulation of the stock market through quasi-governmental intervention a good thing? It seems to me like a recipe for a conundrum, where the stock market becomes a big gambling casino rather than a creator of national wealth. Of course, as HFA has pointed out numerous times, the house always wins in casino gambling operations…
I need to locate my copy of “Looking out for # 1″. The book has timeless advice that can help explain some of the past 10 years.