The Housing Bubble

Good morning everyone! The NAR started sending this email out to members earlier this morning. I suppose we’ll start hearing people use these canned responses soon enough; might as well have a bit of fun dissecting it!

Operation Tip-Off Publicity Alert
Responding to WSJ’s
“Why Your Home Isn’t the Investment You Think It Is”

March 14, 2007—Monday’s Wall Street Journal carried an article that reminded us why it’s called the “Wall Street Journal” and not the “Main Street Journal.”  Titled “Why Your Home Isn’t the Investment You Think It Is,” the piece contains a number of statements bound to upset Realtors® and homeowners alike.  
The author, a WSJ reporter named David Crook, barely gave lip service to the primary reasons most people buy homes–shelter, security, a sense of ownership, community and to raise families.  He focuses only on the financial aspects.
What made the piece even less credible is Crook’s almost complete dismissal of the costs (and benefits) of renting.  It’s as if he believes most people can choose between owning and bunking with mom and dad or camping out in the park.
At the core of his argument is an analysis of the “hidden” costs of owning, based on a 30 year ownership of a $290,000 house, which Crook argues would end up really costing $1,037,000 when you include $300 a month in maintenance (that’s a lot of grass to cut) and $300,000 for major repairs (What’s with that? A fixer-upper?).  He fails to mention that appreciation alone will net the homeowner a tidy profit, based on national averages.
Renting has its costs as well.  With higher occupancy rates in many area of the country, rents have been rising.  Crook failed to estimate any increase in rent or any other extraordinary expense involved in renting, like the cost of repair.
His most outrageous claim, however, is his comparison between the housing market and the stock market.  He cites the author of a “new study of home equity and retirement from the Fidelity Research Institute in Boston” to the effect that “Real-estate investments suffer serious and sometimes prolonged downturns. A real-estate ‘bust’ could be quite damaging to an investor nearing retirement who relied too heavily on home equity.”
Now…what is it Fidelity sells?  Oh, yeah.  Securities.  That means they compete with real estate for investors’ dollars.  Hmmm.  Reporters like David Crook are supposed to know that sort of thing and at least let their readers know they are using research from an organization with a huge conflict of interest.
Let’s get to some facts that you can use.
Crook’s Assertion:
“Houses cost more than most people make when they sell.”  
The Facts:  
• Not true for most people.  According to Harvard University’s Joint Center for Housing Studies, the rate of return on a housing investment dramatically increases the longer it is held. For instance, an owner whose home appreciates at a typical annual rate of 5 percent and who made a cash down payment of 10 percent generally will receive a 94 percent return on that cash after owning the home only three years. After owning for five years, a homeowner can expect a rate of return on the down payment to increase to 225 percent; after 10 years, the rate of return jumps to 623 percent.
• Consider the alternative. Homeowners accumulate significantly more wealth than renters. According to the most recent Federal Reserve Survey of Consumer Finances, the median net wealth of a renter household is $4,800, while the median net wealth of a homeowner household is $171,700. Clearly, owning a home is the best way for most families to build a nest egg.

Crook’s Assertion:
“Houses are not very good investments.”
The Facts:
• Since record keeping began in 1968, the national median existing-home price has risen every year, even during recessions and periods of sales decline, except for last year. Typically, in a balanced market, home values rise at the general rate of inflation plus 1.7 percentage points.
• Real estate is an outstanding investment.  House values rose 88 percent on a national average over the past decade.  The stock market has experienced wide swings in value over the past 20 years. During that time, overall home values have continued to rise steadily and contribute significantly to household wealth and spending patterns.
• The sharp changes in the financial markets since the beginning of the decade underscore the stability of residential real estate as a safe choice for consumers. Local housing markets may experience temporary price declines as well as rapid price increases in the short term, but over a typical six-year period of homeownership, home values typically rise at a normal, gradual pace. Exceptions to this general trend almost always result from prolonged localized economic downturns, often driven by job and population losses.

Crook’s Assertion:
‘It’s unlikely that homeowners in once-booming areas will see a return of skyrocketing prices anytime soon.’
The Facts:
• The operative word is “skyrocketing.”  Real estate rarely skyrockets, which is a good thing for the health of the local economy.  But it does steadily appreciate over time, and this year is no different.  Conditions are improving in many markets this spring and NAR predicts the national median home price will rise 2 percent this year.

Crook’s Assertion:
“Real-estate investments suffer serious and sometimes prolonged downturns.”
The Facts:
• Since 1968, the national median existing-home price has fallen only one year, last year.  That drop of 2.2 percent followed four record-setting years of price increases.  Mr. Crook, what downturns are you talking about?

Crook’s Assertion:

“Boom market or bust, home buying has so many extra costs — from upfront “points” paid to a lender to title insurance and appraisal fees — that over the first five to seven years, a renter who invests the equivalent of a down payment in stocks could easily do better overall than a house buyer. Compounding that problem: Most homeowners move within seven years.”

The Facts:
• Since 2000 the Dow has gained 10 percent, all in the last year.  In that same time, the average home has appreciated 88 percent.  Do the math, Dave.  It will take a lot of points and title fees to eat up the difference in that profit.

Can any lenders provide hard evidence of the subprime freeze/meltdown actually hitting the street, affecting loans people can get now? Are 100% loans really gone? The area I’m interested in is inner city LA.

Some intelligent, like-minded bloggers:

https://www.kitcomm.com/showthread.php?t=3734

Topic idea: so where are your retirement accounts these days? I’m re-evaluating the allocation of mine in light of the fact that I don’t see anything terribly great happening in the US economy over the next year or so, and would really like to hold on to what I have.

(me: single 27 year old gal, living in a country where a mere 20% down for a mortgage is a relatively recent innovation)

Zillow has gotten stranger still. They seem to know their Zestimates are not in line with the market so they’ve added “Recently Sold for _” with the Zestimate.
One house I’m watching in Satellite Beach sold for $720,000 in 1997, then 1.3 million December 2006, then $650,000 two months later! Still, Zillow’s zestimate is $1,476 million.
I know this is hard to believe but I can post the address if that’s ethical and permitted.

The news from Vegas isn’t encouraging:

(From the Review Journal)

“I could give you horror story after horror story over here of a maid owning eight rental properties, a Clark County worker making $30,000 a year who got into an investment club and now she’s got a $2.5 million mortgage in her name. At some point in time the purging process will be good for the industry. It’ll be painful as we go through it,”

Link: http://www.reviewjournal.com/lvrj_home/2007/Mar-16-Fri-2007/business/13189819.html

http://news.yahoo.com/s/afp/20070316/ts_alt_afp/useconomypropertymarkets_070316040811;_ylt=AvPl8NgSmrsgatjXlQipuE.mOrgF

As a group lets compose a succinct & educational letter to our lawmakers, with supporting facts, regarding the housing bubble and any type of bailout they may be contemplating. My thoughts on topics to be included:

Subprime loans are not a result of high housing prices, rather high housing prices are the result of loose lending.

High housing prices are not good. While they may give a temporary “wealth effect”, they dismantle communities and require an ever larger portion of income go to lenders rather than other items – including savings!

No bail out for irresponsible borrowers, many of whom LIED (committing Fraud) in order to get their loan. This behavior drove up housing prices and pushed responsible people out of the housing market. 90% of stated loans had income inflated, in 50% of cases income was inflated by at least 50%. (Anyone have the source for this?)

Everyone is running around like chickens with their heads cut off saying “we didn’t see this coming”, well just check out the numerous housing blogs on the internet and you’ll see that a lot of ordinary, responsible citizens did see this coming and we are not buying this line of excuses.

All any lender would need to do is look at historical data regarding FHA loans to get an idea of the default rate of subprime borrowers and price that risk into their product (historical stats on this?). No bailout for the lenders as there were very good historical guidelines available to them but they chose to throw them out in the pursuit of a quick profit. Furthermore, these lenders then sold these poor quality loans to unsuspecting bond buyers which makes them doubly culpable.

Many borrowers will come forward with a sob story regarding their loans, yet these same people often lied on their loan documents and hoped to cash in on escalating housing prices. These people are not victims, but essentially gamblers who made a losing bet (and drove up housing prices in the process).

While some type of action may be needed to help the economy absorb the negative effects of the bursting of the housing bubble, helping people who really cannot afford their houses to stay in them a little longer will do nothing but cost a lot of money and only put off the pain & ultimate loss of the house for a short time. A bailout should consist of something that is economically productive, such as jobs – throwing money at overpriced houses is not productive.

This is a suggestion for any “mainstream media” that might be lurking on this site.

When you’re writing your “human interest” pieces about the “poor” folks (flippers) who are struggling with mortgage payments right now… please make a point to at least mention something about how the problem wasn’t really these awful loan products, but rather the fact that these loans allowed prices to get far beyond historical norms.

I’m tired of reading these sad little stories about how people are struggling to get rid of their “investments” for what they are “worth”.

Please do a little research and at least mention that historically homes appreciate 3-6% (i think that’s right). 12%, 20%, 30%, 50%, etc. isn’t right. This is why there will be no quick recovery here.

There are many people like me sitting on the sidelines right now. I could buy a house tomorrow, but what’s in a historically reasonable range for me is a shanty in my area (DC). People like me aren’t going to pay these uber-inflated prices and are content sitting on the sidelines until they come back down.

Why wait? Until prices come back down (30% at least around here) i’ll just keep saving money, get a larger down-payment, pay my low rent and maybe treat myself to new tv over the coming months with the additional money i’m saving.

I would love to know how many places in the us has not seen a big difference in pricing yet. Or perhaps a bit of confusion?
In my town of Seaford, Long Island I went to three open houses: all 430-450k. One a 4br 2ba dormered cape with an illegal apt. upstairs, one tiny brickhouse 3br 1ba that had an even smaller backyard and a garage that sloped down into the basement (can anyone say “flood nightmare”) and the third was a 2 br 1 ba brick box with a leaning shed in the back yard, rotted out fence and all rooms were original 1960s. All the same asking price, all not moving but all not budging their price. in 2001 these houses were, TOPS, 250k or less.

A personal hyperinflation primer:

We are headed down the horrible financial path, that is hyper-inflation, I am fairly convinced. This means for the vast amount of middle class America, for a period of months or years, a great unraveling of wealth will occur, decimating the country and bringing about a new world order, it’s going to be scary, make no mistake about it…

The current textbook example for hyperinflation is Zimbabwe, formerly called Southern Rhodesia and it used to have incredibly rich resources, farms and more and is falling apart before our very eyes, (not that anybody notices anything that goes on, outside of our shores) thanks to the incredibly inept leadership of Robert Mugabe.

We have not had hyperinflation in this country since the Confederacy thought it could print as much paper money as it wanted, w/o hardly any financial backing, (well, they had the UK) whilst losing a bloody war.

A similar story of hyperinflation came with the growing pains of our young country in the 1770’s and 1780’s when fledgling states issued their own paper money, again without real financial backing. The paper money was called “Continental Currency” and a popular saying of the time was:
“Not worth a Continental”. Thanks to a great distrust in paper money, brought about by this early chapter in our history, Federal Banknotes weren’t even issued until 1860.

My Experiences:

Many of you have been to Mexico, I would assume?

When I was a kid, the rate of exchange between the Mexico Peso and the Yankee $ never wavered, it was always 12.5 Pesos to the Dollar. In the late 1970’s, inflation started beating up the Peso and when it was all said and done by the early 1990’s, the exchange rate had gone up to around 10,000 Pesos to the Dollar, 1/800th of it’s previous value. It took a dozen years of backwardation before 3 Zeros were chopped off and the rate has since been stable, around 10 New Pesos to the Dollar.

I was in Yugoslavia in 1982, in the early throes of hyperinflation and within a few years, it had become a full on basket case, with banknotes that had denominations in the Billions.

I was in Argentina in the early 1980’s a number of times and being there, in the midst of hyperinflation was a course you’ll not find @ any college or university…

I learned that if I booked a room at a hotel in Buenos Ares and stayed there a few weeks, initially the rate was equivilent to around U.S. $40.00 and thanks to the grinding, relentless power of hyperinflation, just a fortnight later, the room might have ended up costing me $9.00 per night. I watched merchants marking up their goods on a daily basis, just trying to keep up. This came on the heels of changing prices once a month, then once a week and when I was there, daily.

There have been hundreds of instances of hyperinflation the past 100 years or so and the result is always the same. It is ruinous.

What can you do?

It’s all about having wealth in tangible assets, in a form that everybody respects and gold fits the bill like nothing else.

Example:

In 1977, say you are a Mexican with a bit of wealth, and have 100,000 Pesos in a bank savings account. At the time, the value was $8,000, in U.S. Dollars. Had you bought gold with your 100,000 Pesos @ the time, you would have been able to buy a little over 50 Troy Ounces. Today the gold would be worth around $35,000.

Had you held onto the Pesos and done nothing in the same time frame?

You’d have around $10.00

OK Girls and Guys………what’s on the menu today?

Will the Dow drop?

Which lender will implode?

24 hrs is a long time for those underwater with their house mortgage wouldn’t you say?

well, back to the popcorn……..cheers

Here is my topic suggestion: are we all David Lereah?

It does seem that you have to shill to get ahead in America. You have our shilling and pandering politicians. You had the stock analysts and accountants in the dot.com boom. You have the mortgage brokers and real estate sellers today. If you are a lawyer, you are ethically bound to argue one side of the case or another, right or wrong. Doctors propose expensive therapies to inflate your income, and insurance companies tell you cheap ones are just as good. Journalists need to be mindful of where the advertizing dollars are coming from. And I doubt many car salesmen give the customer objective information on the relative cost and quality of their vehicles.

Just a thought.

Is Alt A really as shaky or siginificant as most housing perma-bears claim? What’s more, is it going to have the scary negative impact most doom and gloomers are predicting OR this meltdown contained to subprime? What the heck is Alt A anyway?

Here’s another one I just responded with in the bits bucket — is “core” CPI useful, and how should it be changed? Today’s reading — overall CPI up 0.4%, core up 0.2% excluding food and energy prices.

I think “core” CPI needs an overhaul. Yes food and energy prices are volitile, but by excluding them altoghether, you eliminate any measurement of whether they are rising or falling in the long term! Does anyone expect $10 a barrel oil anytime soon?

The fact is energy prices are structurally higher now than a decade ago, because parts of the world are developing that were not then; and because fuel efficiency measures were abandoned, and new sources of energy were not pursued, when oil and gas were cheap. These are structural long term facts, not just short term volitility, because given the long term nature of energy producing and using assets, energy use takes decades to change.

The right thing to do is to subject volitile compontents to some kind of moving average, not to exclude them altogether.

Weekend topic:

***Bubble bloggers, as Colbert would say, “reach into your gut” and lets get the city or metro area you are in, and whether housing prices in Mid-March 2007 are -

Increasing
Flat
or Decreasing

We will see with this blog’s well-qualified eyes on the ground a geographic picture of the bubble burst and how it is sliding around or progressing.
Thanks. I’ll start:

Greenville/Greer, SC - Increasing

Topic suggestion: March Madness?

Normally, unadjusted home sales increase about 40% between February and March. For both 2005 and 2006 this has meant an increase from almost exactly 400K to 550-560K.

This is the first leg up of the Spring bounce. So the seasonal adjustment factor the NAR uses for each month expects this February-March jump.

Normally.

Now this year, all the early numbers suggest the February numbers will be dismal, but IMHO the seasonally-adjusted March numbers will be worse, maybe much worse.

This is because the “normal” 40% increase in raw sales ain’t gonna happen, what with;
1. Subprime problems hitting the MSM bigtime right at the start of March.
2. Lenders tightening eligibility left and right.
3. Sellers not yet really biting the bullet on pricing.

The bubble peaked in summer of 2005. Fall of 2005 began the decline, even though it was largely ignored by industry happy talk and there were still some GFs around to sell to.

2006 was more or less flat, uncertain. We knew the bubble was over, but there was sort of a tug of war between bulls and bears.

March, 2007: Subprime melts down, leaving pretty much no doubt even in the minds of the MSM (not to mention the man on the street)that there had been a bubble accompanied by fraud.

So what now? Senator Dodd’s suggestion of bailouts is actually big news. It’s a milestone. How long have we been discussing on the blog that there would be cries for a bailout?

I have mentioned that stage 4 of the fives stages of a project is the persecution of the innocent. I wondered who the “innocents” would be and in listening to Dodd’s braying for a bailout, I realized with a shock that the “innocent” is us!!! The prudent folk, the savers, the renters, etc. And by God, if there is a bailout, we as taxpayers who never participated in the scam will be persecuted to bail out the fraudsters and speculators.

The joke’s on us. I think I’m going to be sick.

Is a REIC bail-out good for housing, bad for housing, or simply inevitable?

Does everybody remember how incredibly prepared we were for Y2K?

I get just the exact opposite feeling here.

I would like to have discussion about PMI and the prospects of PMI companies in the present and future housing environment.

What is PMI? Is it expensive?

Is it true that if you go 100% LTV i.e. 80/20, PMI is not required however if the 20 is equity you get hit with PMI?

What are the prospects of PMI companies–will they blow up a la NEW due to defaults or will they get more business due to the evaporation of 100% LTV? Where do PMI companies typically invest their assets–MBS?

Intro to PMI
http://www.bankrate.com/brm/news/mtg/20010601b.asp

I would like to have a discussion about PMI and the prospects of PMI companies in the present and future housing environment.

What is PMI? Is it expensive?

Is it true that if you go 100% LTV i.e. 80/20, PMI is not required however if the 20 is equity you get hit with PMI?

What are the prospects of PMI companies–will they blow up a la NEW due to defaults or will they get more business due to the evaporation of 100% LTV? Where do PMI companies typically invest their assets–MBS?

Intro to PMI
http://www.bankrate.com/brm/news/mtg/20010601b.asp

my weekend topic suggestion:
is it really different here? in nyc that is. it just seems people have
so much money and million dollar 700 sq ft apts are the norm.
is nyc really immune to all the chaos in the mtg. market?

% price drop
whose the leader FL , MA , CO ?????????
tia

HP says the subprime problem is “contained.” Is this just happy talk, or is there some kind of behind-the-scenes bailout playing out which justifies all the bullish sentiment projected by the likes of LB, BS and GS?

“After the first adjustment, Ricardo called Litton Loan Servicing (the company currently servicing the mortgage) to try to work something out. ‘They threatened us,’ he says. ‘They said, ‘If you don’t make your payment, we’ll foreclose.’”

I have not seen anything in the press about the loan servicing companies. This comment makes them look like loan sharks. Does anyone have anything to contribute about these loan servicing companies, positive or negative, and what is the business outlook for them?

I thought it might be fun to do a March Madness Housing bubble bracket.
This is my midwest regional
1. Detroit, MI
2. Flint, MI
3. Toledo, OH
4. Saginaw, MI
5. Will County, IL
6. Gary, IN
7. Indianapolis, IN
8. Chicago, IL
9. Minneapolis, MN
10. Milwaukee, WI
11. Grand Rapids, MI
12. Madison, WI
13. Fargo, ND
14. Rochester, MN
15. Columbus, OH
16. Des Moines, IA

I’m sorry but if a borrower feels they were a victim of a lender isn’t the remedy a lawsuit ? The real truth about these bail-out ideas is that the FB’s could not hold up in a court of law with their claims of being a victim . Can you imagine a borrower submitting a lawsuit where they lied on the loan application in order to get the loan .

I’m sure there are some cases of some borrowers being a victim of fraud by the loan company but you have to be able to prove it in a court of law and maybe some can .

What I don’t like is that some of these FB’s are going to claim that they were victims when they knew darn well what they were doing . Are you a victim simply because you believed the sweet talking hype of the REIC that it was a sure bet that you would make a profit in real estate ?
Maybe some slick lawyer will sue the REIC for giving fake investment advice/inducing panic buying to clients ,who knows .
It just seems to me like you can’t sue for making a investment gamble that didn’t pay off .
It seems to me like alot of these FB’s want to claim “victim “simply because they decided to not read their loan documents because they were caught up in the profit seeking real estate mania .

Given that 70 percent of Americans own homes, and most people (politicians, investors, builders, lenders etc..) want the bubble to go on for ever;

If Bernanke raises interest rates most people will be angry with him.
If Bernanke cuts rates, few will be angry (at least for a couple years)

So with the election only 1.5 yrs away, won’t Bernanke do the easier thing and drop rates 1-2 percentage points so that everyone can refinance and not lose their homes? Yeah there will be negative consequences but not until 2009 when all the politicians have been re-elected.

“…and thought something smelled about housing in early 2005, before I found you like-minded folks.”

That could be a good topic for discussion. What or when was your moment of epiphany that housing was out of control?

http://chicagobubbleblog.blogspot.com/

Ben,
I am grateful for this forum and appreciate all your hard work. I also appreciate the largely positive input from other psoters. This week however, I have noticed comments that were outright racist or at least covertly racist.

In order to ensure that the civil tone this blog has maintained thus far, is continued, a word of caution to some bloggers may be appropriate. And yes, I am aware of 1st. amendment rights.

BTW, years ago “gettho” was used to describe certain Jewish communities in NY and Europe.

How about a topic on how readers found this blog? I actually found Ben’s metals blog first and crossed over to the more popular HBB.

You’re not going to enjoy this one:
http://www.financialsense.com/fsu/editorials/sutton/2007/0316.html
BAILOUTS - A HISTORICAL PERSPECTIVE
by Andy Sutton

…final paragraph:
“The fact that there will be a bailout is a foregone conclusion. We should be more interested in the timing and ultimately the cost of any such bailout and who is going to bear the cost. It is my guess that most of the people reading this column will not like the answer to the last question.”

Could explain the subprime lender bounce?

What should the government do?

I agree that a bailout is coming so instead of railing hopelessly against it, how about demanding our share - 100K grants to renters with good credit who have saved up a 10% downpayment so that they can buy entry-level houses.

We’ve been focused on the subprime and its aftermath lately but hidden in the corner is the looming CC debt that cannot be erased with HELOC’s anymore and the interest rates compounded on these cards reach into the 30% range when payments aren’t made on time (see department store cards). I always pay off all balances each month but am now seeing billing statements mailed so late that the check needs to be put in the mail the date the statement arrives so that it will be received on time. Start for changes in your local bank.

Donald Trump’s “Apprentice” always had “self made RE millionaires” as apprentice candidates. I would love to see a reassessment of all of his prior candidates and their net worth now and when this housing debacle reaches is natural conclusion.

I would like to see a discussion on what you have sold or going to buy this or next year (with cash at a discount).
I look at Craigslist and see a lot of tools for sale. I see boats for sale and I know of a friend who is trying to sell a HD motorcycle for a very good price and he had not been able to sell it.

I sold a boat last year, beacuse I did not think I would be able to sell it in 07.

Let discuss what you sold or will buy (non-housing) related. Boats, coins, dogs, motorcycles, classic cars etc. and how much you will save or expect to save. I see a lot of carpenter tools on craigslist. What are you seeing for sale that tells you there is pain and panic in the air?

Now that things are picking up steam, it’s time to revisit our predictions for 1 year from now. Last year, the consensus was about a 10% drop YOY. Given the events of the past month, where do you think we’ll be a year from today?

My prediction would be -10% YOY average, up to -20% in bubbly areas.

I’d really like to know what it would take to set up an “anti-bailout” lobbying group.