Housing Bubble Can’t ‘Outrun Market Reality’
A final Friday post to clear up the loose ends. “The once red-hot housing market in the Lompoc Valley has started off the year on a sluggish note, with sales down and the median price flat, echoing a trend felt throughout Santa Barbara County. ‘In the intermediate range, most sales are going through only after some reductions in the asking price,’ (realtor) Maria Slizys explained. ‘We’re also seeing a higher number of sellers offering to pay the buyer’s closing costs and other expenses.’”
“‘Some sellers who can’t find a buyer for their house have had to cancel their purchases of bigger homes in the newly built developments,’ Ms. Slizys said. ‘They have had to forfeit the deposits they made.’”
“I saw that our flexibility, creativity and cultural privileges were in part due to the reality of late 20th century coastal California real estate. ‘In the old days, taking out a second mortgage or an equity line had a certain stigma attached. ‘It meant you were the sort of person who couldn’t pay your bills, that you were living above your means,’ Michael Simmons explained. But over the past 20 years, he’s seen things change. ‘Taking out an equity line has become common, prudent, easy.’”
“JPMorgan chief economist Stephen Walters said the home loan data released yesterday by the Australian Bureau of Statistics was ‘unexpectedly soft.’ ‘Investors remain reluctant to enter a market where the rental income yield is unattractive, and the chances of sustained house price appreciation any time soon are low,’ Mr Walters said.”
“A large number of new housing development projects and a declining ratio of pre-sales last year has left northern Taiwan with a huge amount of empty units, and market insiders say that the excess inventory could have a depressing effect on housing prices beginning late this year or early in 2007. Unless either the inventory or the number of housing starts is somehow reduced, market insiders predict, housing prices in the county will drop by an estimated 10 percent this year.”
“Jordan and Linda Celkupa sold their apartment of four years for a 65-percent profit, and since then, they’ve been renting and waiting for the housing market to cool down. ‘If you look at the amount of money we spend every month, it’s just substantially cheaper to rent than own this place,’ Jordan Celkupa said. In almost every part of the country, it’s cheaper to rent than to buy. The cost of your mortgage and real estate taxes is likely to exceed what you’ll pay for a rental, so you’ll not only make a lump sum in cash, your monthly costs will go down.”
“The high for mortgage rates in ‘03, ‘04 and ‘05 was 6.5 percent; we’re almost there, and likely to rise above. The word ’seven’ may be in vogue by summer. The Fed always has trouble with the time lag from rate-hike to economic effect; its last experience with a housing-led recession was 25 years ago; it has never before tried to offset the effects of abnormally low long-term rates; and it has a rookie chairman. That’s a setup for an accident.”
“Home sales in the Twin Cities, Minn., area fell for the fifth consecutive month in February. Realtors reported 2,523 home sales last month, down 6.9 percent from the same month a year ago. Total inventory of single-family homes in the region ended February at 23,417, an increase of 35 percent over the previous February record.”
“The number of very overpriced housing markets grew in the last three months of 2005 from the prior quarter despite slowing demand and rising mortgage rates, a study released on Friday shows. 42 percent of the top 299 U.S. metro housing markets were considered ‘extremely overvalued,’ making them vulnerable to price declines.”
“Major U.S. homebuilders such as Toll Brothers have warned of slowing orders, while other data suggested that the home prices in some of the hottest markets may have peaked. The U.S. median price on existing single-family homes slipped to $213,000 in the fourth quarter from $215,900 in the third quarter, according to the NAR.”
“The most common mistake made when putting a property on the market is overpricing, according to a survey of home sellers. Michael Bearden attributes these mistakes to the desire to capitalize on rapid price gains during the housing boom, noting that ‘it’s not surprising that homeseller expectations sometimes outran market reality.’”
Another great week everybody! My thanks to those who support this blog with your donations and/or ad clicks. In case you missed my post, Jon Lansner wanted some more time to reply to the over-whelming number of questions; so look for his reply Monday. Please check back this weekend for news, market observations and your topics. (And maybe a photo gallery, if we can get the bugs fixed)
I have a pretty good bubble photo when you are ready!!
It may make a good idea in helping get the ideas to the sheeple here that prices are dropping.
Let me know when you are ready.
Luckily for the Taiwanese, there are only a billion or so Red Chinese snowbirds looking to cash out and move onto their island paradise. They’ll soak up that excess inventory, no problem.
a lot of Chinese investors already did that with the housing market in NZ and Oz; they can use their equity gains from down under to make a bigger boom in Taiwan (just like the British and Dutch buyers are doing in Europe and other parts of the world).
I am a Taiwanese but I am working in DC. Yes the red capital invasion has been the rumor for a while but it does not happen yet. My family bought a 1000 sq ft 3br 2 ba condo (Yes the normal room size in Asia is smaller than in US) in heart of Taipei, the Capital of the island, for NTD 20mm (USD 625K) at the peak of last housing bubble — 1996. It worhs about the same amount now. Given that we have around 3% inflation each year, it is probably 30% under water in the real term. Fortunately we pay all cash. Recently the condos above and below ours just got into pre-foreclosure — Maybe we can snap one up cheap for my brother’s new born daughter
“The most common mistake made when putting a property on the market is overpricing, according to a survey of home sellers. Michael Bearden attributes these mistakes to the desire to capitalize on rapid price gains during the housing boom, noting that ‘it’s not surprising that homeseller expectations sometimes outran market reality.’”
They especially have outrun market reality now that the market price has dropped in bubble-land!
They’re pricing the housing as if the speculators were still purchasing.
http://www.novabubble.blogspot.com
I thought Corcoran retired? Can’t she just go away? She’s gotta go on TV and say “real estate only goes up?” Geeze Louise!
Some of the stuff that Ben is posting is starting to scare me. 14,000 empty houses, in Phoenix, for Christ’s sake? Who the hell ever even heard of Phoenix, Arizona? I hate to be a chauvinist, but I can almost understand some of this stuff, in “sought after” neighborhoods close to big dollar industries, like maybe in New York and LA. I’ve been a huge bear and sold my own place almost two years ago, but it seems to have gotten worse than I ever dreamed.
Heaven help us all.
Amen to that
Drive in the early night around NW Phoenix where there has been heavy/rapid housing expansion. There are complete blocks with no lights on inside the homes. “Nobody’s home” takes on a true double-entendre in Phoenix.
Orange County Vacant 4Sale as a Pct of Total
OC City,OC Code,ZIP/MLS For Sale,MLS Vacancy,% Vacancy
Aliso Viejo ,AV, 232 , 43 ,19%
Anaheim ,ANA, 663 , 109 ,16%
Anaheim Hills ,AH, 227 , 38 ,17%
Brea ,BREA, 125 , 17 ,14%
Buena Park ,BP, 173 , 27 ,16%
Canyon Areas ,CA, 46 , 10 ,22%
Corona Del Mar ,CDM, 117 , 23 ,20%
Costa Mesa ,CM, 288 , 61 ,21%
Coto De Caza ,CDC, 132 , 11 ,8%
Cypress ,CYP, 126 , 28 ,22%
Dana Point ,DP, 242 , 53 ,22%
Fountain Valley ,FV, 115 , 29 ,25%
Fullerton ,FUL, 435 , 86 ,20%
Garden Grove ,GG, 404 , 86 ,21%
Huntington Beach ,HB, 642 , 170 ,26%
Irvine ,IR, 632 , 181 ,29%
La Habra ,LH, 169 , 36 ,21%
La Habra Heights,LHH, 41 , 10 ,24%
La Palma ,LP, 21 , 8 ,38%
Laguna Hills ,LAGH, 137 , 29 ,21%
Laguna Niguel ,LN, 384 , 100 ,26%
Laguna Woods ,LAGW, 423 , 292 ,69%
Lake Forest ,LF, 267 , 57 ,21%
Los Alamitos ,LOSA, 22 , 4 ,18%
Midway City ,MC, 14 , 3 ,21%
Mission Viejo ,MV, 661 , 151 ,23%
Newport Beach ,NB, 379 , 79 ,21%
Newport Coast ,NC, 107 , 20 ,19%
North Tustin ,NTUS, 93 , 16 ,17%
Orange ,ORG, 377 , 63 ,17%
Placentia ,PLA, 156 , 23 ,15%
Rancho Santa Margarita ,RSM, 348 , 66 ,19%
Rossmoor ,ROSS, 34 , 7 ,21%
San Clemente ,SC, 396 , 80 ,20%
San Juan Capistrano ,SJ, 194 , 38 ,20%
Santa Ana ,SA, 859 , 121 ,14%
Seal Beach ,SLB, 144 , 62 ,43%
Stanton ,STAN, 82 , 13 ,16%
Sunset Beach ,SSB, 9 , 3 ,33%
Surfside ,SURF, 1 , 1 ,100%
Tustin ,TUS, 200 , 30 ,15%
Villa Park ,VP, 17 , 6 ,35%
Westminster ,WTM, 169 , 33 ,20%
Yorba Linda ,YL, 314 , 59 ,19%
TOTAL,, 10,617 , 2,382 ,19%
Are these figures normal? 69% Laguna Woods probably not, but 20% everywhere else?
I’d imagine the high percentage in Laguna Woods is normal. The city is dominated by the Leisure World 55+ community. Units come on the market because someone dies.
Vinny:
That is an interesting data set. Please keep posting and upating that one!
26% for all of HB is about right but I would bet that 92648 (downtown near main street and the pier) is much higher near 40%.
92648 is up to 260 listings from 180 late last Summer.
After lurking for a number of months I think it’s time to post…
I have a real world example of how things are going.
My wife and I have just sold our house in Takoma Park MD, an inside the beltway DC suburb, and moved to the Bay Area. We wanted to move back here and fortunately work circumstances conspired to move us, and not a month too late in my view.
I have been following this blog and the market closely (many thanks to all who post, it has been an education!), and I am glad to have gotten out of our house when we did.
We listed a three (two really) bedroom in mid Jan, and on the advise of our realtor (one of the good ones) listed at $20K less than a house down the street, exactly the same as ours, went for last May. According to her the market has been “stone dead” since July ‘05. We had a weekend, two-day open house which was “a phenomenal success” with 70 groups coming through, and took offers the following Wednesday.
Even with that many people going through we were presented by one, yes one, offer, at $20K below asking.
As we were talking with our agent another realtor was looking through the house on the behalf of a client who works for the government and was out of the country. Fortunately she then went out to her car and wrote an offer there and then for asking + $5K. Phew!
We took that offer and finally closed Feb 28th. There was a bit of drama at the closing relating to the inspection, and I had to give the impression that I was willing to walk, while at the same time knowing that relisting the house was going to be the worst possible scenario, likely resulting in lower offers, if any, but things were worked out and we closed and flew out the next morning.
My impressions from this whole thing… there are going to be a bunch of disappointed (desperate?) sellers in the DC region this spring.
Our buyer, I am guessing, has not been keeping tabs on the market, so didn’t realise that over-the-asking offers are not the requirement that they once were (she also apparently lost out on a house she wanted to buy in the Fall, so that may have been an additional motivation).
So… Where does that leave us?
RENTING!
Oh and reading the Marin Bubble Blog, and expecting a ‘06 - ‘07 bloodbath.
albakes, thanks for your real world example. We sold our townhouse in the district last Fall and had a similar experience: one offer, 35k below asking and our asking price was 5k below the May comparables. At that time there was not yet any discussion of the then-emerging cooling market and we were totally taken off guard. Based on my observations, inventory has absolutely exploded in close-in D.C. in the last 10 days or so. I think you got out just in time.
good blog.
I got a call today, with someone asking me if I owned property at the address where I had rented before. When I said no, she asked if I had rented, and then proceeded to tell me how they can help me buy a house, and that they specialize in first time buyers.
Looks like the realtors are getting desperate. She would not tell me where she got my phone number (said it was public info). Needless to say I cut her off after that.
Well, the canary seems to be gasping for air.
It would of been interesting to hear what the realtors sales pitch was . “Buy now or forever rent ” Searching for buyers by digging up prior renters , hoping they haven’t bought yet . This is making me sick
I don’t understand why the Arizona inventory glut of homes for sale isn’t top national news on all the stations . In all my years I have never seen a inventory situation this bad . Last year Arizona was touted as one of the States that got a 39% increase in appreciation .
obviously the high appreciation and the current inventory glut have a common cause. And we all know where the paychecks for most of the news stations come from; don’t scare the sheeple.
People like Corcoran make me wish there were malpractice laws for realtors and ‘advisors’!
My sister-in-law actually works for that woman, and surprise! They are both total buffoons…
Sarah, I agree 100% with what you’re saying. This should not be something that realtors are allowed to say. They should be strictly regulated against making future gains. Their job is to show you a house that you can afford, not to sell you a “security.”
oops I meant against predicting future gains.
They did teach us in Real Estate school that you cant sell based on predicting future gains . All these real estate people are in violation of Real Estate ethics . However, alot of case law shows that they allow alot of ” sales puff” by realtors in case law on the books .
My agent told us last Spring (here in DC area, in hindsight, inventory was freaky low then) that if we didn’t buy she was afraid by next year prices would “get over our heads”.
Fortunately there are few left who are both dumb enough to believe this hogwash and also wealthy enough to act on those beliefs…
Here’s a great spoof on the San Diego condo situation . . .a little humor to start your w/e!
http://www.capitalstool.com/forums/index.php?showtopic=7644
Thanks for the humor ….I needed it .
“Major U.S. homebuilders such as Toll Brothers have warned of slowing orders, while other data suggested that the home prices in some of the hottest markets may have peaked. The U.S. median price on existing single-family homes slipped to $213,000 in the fourth quarter from $215,900 in the third quarter, according to the NAR.”
They had better ease up on those warnings. Otherwise, they may find the recent plunge in their stock price might continue to steepen… Maybe Robert Toll has joined forces with the shorts he used to ridicule at this point
http://tinyurl.com/7r8fg
Hi,
I have great respect & sympathy for bill gross. Too bad, he’s on titanic & he will sink too, like the rest of us.
ALl these smart guys know where we are, how screwed up we are, but politics dictates that they keep a straight face & keep speaking lies. There is still time, like there was time in 2002 to save housing, save the retired, the weak & control inflation. what happened. Nobody wants to give an inch before the whole house of card collapses.
Read this article from Bill Gross himself. He is the manager of biggest fixed income fund in US, & a well respected economist
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2006/IO+March+2006.htm
“pensions, healthcare, (and defense), are going to drain such an increasingly significant share of GDP in future years, where does the money come from to promote economic growth of the sort that will pay for all of this? And how can we believe that America’s value added/productivity advantage in the one sector where we remain competitive – technology – will continue if our math and science report card keeps getting a D+? Let’s talk turkey; let’s shoot straight, folks, without the requisite hyperbole that seems to define America’s modern age and current politics. We can’t do it all – not just because our reach constantly exceeds our grasp but because this time we have exhausted our savings, lost our competitive edge and squandered our educational heritage. We have grown soft – THEY have grown stronger. We have lost a sense of why we have prospered – THEY have learned to replicate our work ethic of yesteryear. The solution as the Council rightly suggests, is to save more, get smarter, trade more freely and to maintain a competitive tax base”
Oops, The URL did not go thru, read this
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2006/IO+March+2006.htm
The low interest rates took away incentive to save . The housing boom created incentive to invest in real estate . The stock market crash destroyed alot of wealth . People are confused not knowing what to count on anymore .
Low interest rates can just as easily encourage people to pay down debt, since it makes it easier.
The housing boom created get rich quick schemes, based on very little thought of risk and massive greed.
Lots of wealth was not lost when the market crashed, it was never there to being with. Once again very little thought of risk and massive greed.
People are confused because they are looking for the easy answer and there isn’t one.
There was a time when people did not spend more money then they had and recognized risk.
Its possible we are at the tail end of some very long economic cycle. An 80 year cycle possibly ?
please explain how low interest rates encourage people to pay down dept; I don’t see how. For paying off debt, the current interest rate is irrelevant. When interest rates drop the carrying cost of the mortgage can go down a little, but the debt stays the same.
Low interest rates (and especially negative real rates like we have them now in the US and EU) are the best possible incentive to take on more debt. Paying off debt is a thing of the past anyway, especially if the financial authorities at the same time stimulate asset inflation - people who take on maximum debt get a double profit.
I don’t know if this had already been discussed; and article from the FDIC, written in April 2005, titled “U.S. Home Prices: Does Bust Always Follow Boom?”
http://tinyurl.com/dyxw8
The writers came to the conclusion that, by the definitions of boom and bust that they used, busts following booms were the exception and not the rule. Their contention is that it may be necessary for both a boom and an outside shock (population outflows, layoffs, recession) to trigger a bust.
However, one caveat they stated was that we were entering into uncharted waters, what with the prevalence of exotic loan products and aggressive loan to value ratios.
Also, this one bit that caught my eye:
“The busts in California and the Northeast have been widely studied…As was the case in the oil patch, the last factor, population weakness, was probably one of the most significant elements affecting price declines in these markets.”
So one question to ask is, do we have signs of a population decline in these markets? Well, I do know that there seems to be a significant ghost population in these areas. What do I mean by ghosts? I mean houses bought by speculato, err, I mean “investors” that can’t be flipped for a profit, and can only be rented at below carrying costs. This ghost population has already begun to leave the “bubble” areas, now that the market has “reached a permanently high plateau”, rendering flips detrimental and leaving rents far below carrying costs. The builders that said, “a crash can’t happen again, we’re only building as houses go under contract” were selling a good portion of their houses to ghosts, and now the ghosts are leaving building. “Thank you, thank you very much!”
It will indeed be interesting to see what the future holds; it will also be interesting to see how much the evolving credit situation greases the wheels on the housing handcart…
I read that article long time ago. I seem to recall the data covers only 1968 to 2003(?) It’s not current.
Sometimes I think we are going to pull out of this somewhat ok. But then I read something like “Home Sweet Cash Cow” and I realize the last 20-30 years have been building up to a disaster. I think we’ll be luck to squeeze another 5-10 years out of it.
When did americans become so short sighted, I know we couldn’t have always been like this? We have done some amazing things.
Everyone knows they are *better* drivers than the other fools they see on the road.
Well said you guys
when I think about how much money is involved, you sort of wish for the dot com days! people believe RE only goes up and are heavily leveraged to a few homes and have neither the savings nor the income to be playing high-stakes financial games is a recipe for disaster…unless you want cheaper housing and a glut of BMWs.
condos and beamers for everyone!
Interesting story on the Marketplace program couple of days ago. Highlights the Japanese monetary policy change:
http://marketplace.publicradio.org/shows/2006/03/09/AM200603093.html
oy…almost forgot. One of the interesting bits they reported on about Japan was that their savings rate is now…..0….Gotta love equality!
I’ll cough up my predictions, since I’ve been pretty close so far. (I was saying in the fall of 2005 that the bubble had popped already, but nobody would admit it and blame the slowdown on winter.)
Summer 2006 - Price reductions
Fall 2006 - ARMs reset. Buyers juggle bills, watch for insider’s storied on the blogs about credit card debts maximizing.
Winter 2006 - Prices reach a short term bottom. Main stream media buys the “it’s the winter crap” from Realtors again.
Spring 2007 - Notices of Defaults skyrocket. (Commonly takes about 3 payments in arrears before the banks give up, and begin the process.)
Summer-Fall 2007 - Foreclosures take place in masse.
Winter 2007- REOs going on the books now. Banks failing.
Spring 2008 - Government intervention. Might be tax code changes, or a new RTC, or bankruptcy extensions.
not a lot of meat to this story, but the Washington Post shares a few nuggets about what condo developers are doing there to attract buyers:
http://www.washingtonpost.com/wp-dyn/content/article/2006/03/10/AR2006031000865.html
a realtor just bought up the street from me- paid retail for a listed property, not even a net deal wow, they are stupid
how does this vacancy / for sale rate compare to 1989-1990 ?
if you think houses in the US are expensive just check the prices in the Netherlands and enjoy your own bargains …
http://tinyurl.com/euxfd
just for the record: the cheapest ones are at the top and K.K. means that the buyer has to pay all costs (if you have enough for this, there must be more…)
Wow that’s cheap, 179 euros for an apartment.
)
Why do they add so many decimal points?
(just kidding
This is the crux of the whole thing, isn’t it? When people tell me I’m nuts to think prices will decline, that’s what I point out. If there is nothing for investors to gain by massive price increases, the investment dollars will go elsewhere.
Someone pointed to ‘ghost buyers’ above. That combined with loose lending standards contributed to this mess. I believe it is nationwide as well. Northern, and I mean northern Maine has even seen property values double when the average income up there can’t possibly support those prices.
If I’m wrong I will have to be a renter for the rest of my life anyway, so I’m not bitter about it, I just don’t know that many people who are making enough money to support the current prices.
it’s not nationwide, it is nearly worldwide.
and because of that I think a real ‘correction’ in the US will not happen as long as the other bubble blowers continue with their usual practice (all of the central banks are still inflating the money supply at maximum speed, although there are some signs that we will see a slowdown).
Novasold - Hang in there buddy. You are not going to rent the rest of your life. This thing is over, in Maine, too, according the press clips from Portland, anyway. It may take several years to unwind completely, but go ahead and try and catch the falling knife. When you’re comfortable with the rent vs. own cost ratio in your area, go ahead and pull the trigger - you’ll be alright.
Unexpectedly soft, also squishy and smelly, and very, very deep.
hopefully I just closed italics.
I tried. Sorry Ben.