Housing Demand Declines On Higher Rates
Some reports on the state of the US homebuyer. “A growing number of homeowners in New Hampshire are being forced out of their homes by foreclosure. Foreclosure filings in the state jumped from 188 in February to 263 in March. In Strafford County, there were 19 foreclosures in January and February, compared to 40 during all of 2005.”
“‘There is an alarming trend occurring here,’ Strafford County Registrar of Deeds Leo Lessard said. Lessard and others who watch housing trends say the increases probably are due to rising interest rates and high home prices.”
“‘Home prices were so high, people borrowed so much money that if there was a blip in the economy, foreclosures were inevitable,’ Lessard said. ForeclosuresNH says 52 percent, or 98 of February’s foreclosure notices went to homeowners who purchased or refinanced their homes in the past two years.”
“‘Our analysis of January 2006 Massachusetts foreclosure filings confirms that 2006 is mirroring the dramatic pace set in 2005, with foreclosures running 39% higher than January 2004,’ said Jeremy Shapiro. ‘In fact, some areas in Massachusetts are seeing even higher increases.’”
“Foreclosures were filed on 1,075 Massachusetts properties in January 2006, while only 776 were filed in January 2004 and 919 in 2005.”
“Most real estate experts agree the market is slowing, but they maintain there isn’t a bubble in Southern California. But if you’re one of those who stretched your resources or perhaps the truth to get into the market, your bubble may be about to burst.”
“‘We’re running into more clients who are headed down that path right now,’ said (mortgage broker) Mark Prather in Cerritos. ‘The foreclosure rate is starting to grow.’”
“Foreclosure activity in California rose in the fourth quarter of 2005. Lenders sent almost 15,000 default notices to California homeowners between October and December, up 19 percent from the third quarter, according to DataQuick Information Systems. ‘We had three clients just in the last two weeks who are facing sale dates and they are in difficult trouble,’ Prather said. “Frankly, they overbought, and that is a big part of the problem.’”
“The average adjustable rate mortgage is now 6.03 percent, and Prather believes that rate is on its way to 7 percent. That means those with ARMs, adjustable-rate mortgages, may be doling out some extra cash.”
“For example, the average loan amount in the Cerritos area most recently was for $475,000, Prather said. ARMs a year ago started at roughly 4.5 percent, putting the monthly mortgage due at $2,406. When it hits 7 percent, that payment will reach $3,160. That’s another $754 each month.”
“Mortgage rates have hit their highest level in nearly four years, and that has a direct impact on home affordability…and home prices. The average rate on a 30-year fixed mortgage stands at 6.37 percent, up from 5.58 percent last summer.”
“‘I think it’s indisputable that demand in the housing market has declined in the past few months,’ says (economist) Richard DeKayser. ‘It’s very clear that rising interest rates figure very large in that decline.’ As rates rise, homebuyers who were already stretched need to demanding lower prices. ‘Low rates had offset unaffordability in past years,’ said DeKayser.”
The BLIP in economy is coming this fall with hurricane season.
Meet your new friends: Repo man, Bankruptcy Trustee, Mr Notice of Default and Mr Foreclosure.
For every 1% rise in mortgage rates, the corresponding monthly payment rises about 11%. Interesting how the math works out. Those resets are really going to hurt.
“But but but I thought a 1% increase in rates would mean a 1% increase in monthly payments…”
God, please tell me that no one with an ARM really thinks that 1% rate increase = 1% payment increase…
Unfortunately that seems to be a very common misunderstanding
I find it hard to believe that this point would be overlooked by our hard working, knowledgeable, RE professionals? Can there be any bigger statement made about our education system than when several million people go into foreclosure because they didn’t understand this simple calculation?
“The average adjustable rate mortgage is now 6.03 percent, and Prather believes that rate is on its way to 7 percent.”
Already there pal. If you have an average ARM (assuming the index is a one year t-bill) that has to reset this month, the fully adjusted rate is anywhere from 7.00-7.50%. There will be a lot of folks kicking themselves for not going with a fixed rate loan 3-4 years ago. 5.50% doesn’t look so high anymore, does it?
butbutbut… Alan Greenspan said it was our duty to get an ARM. If we stop spending we let the terrorists win! God has blessed us with the greatest country in the world and it is my right to spend all the money I want on toys I REALLY REALLY need!
Back to reality - Alan Greenspan should be jailed for his irresponsible green light of ARMs at exactly the point in the economic cycle when it made ABSOLUTELY NO SENSE to be taking out an ARM to buy a home. At historic, once in generation low in interest rates. But the idiots fell for it hook line and sinker. They can all live under a bridge for all I care. Because of their recklessness, we will all suffer the consequences.
This fall? Hurricane season starts in June!
This was just sent in:
‘The real estate bubble has not burst in Southern California, but it sure is deflating,’ said Serdar Bankaci, president and chief executive officer of Default Research, Inc. ‘The decline was bound to happen and so is the continued rise in foreclosures — the market is just adjusting itself right now.’ While San Diego had the highest foreclosure rate, Riverside County was a close second up 7%, followed by San Bernardino up 6%.’
That’s probably a generally accurate statement. In my area, there is currently only a slight increase in inventory that can be explained away as spring season. Nothing like the doubling or tripling seen in places like Phoenix. A few areas, like my zip code (90278) are showing a slump three months running, but very few signs of sellers panicking and slashing prices other than the little itty bitty token 3-5% reductions that have been standard for years.
So far I have not observed any catalyst here that could pull the rug out from under the market - like massive layoffs.
A few years ago there was a local news story about a prostitution ring consisting of “soccer moms” that was broken up. They wanted extra money to live the high flying lifestyle and pay off the credit card bills. I expect in the future to be seeing more stories of some kind of surreptitious activity in order to generate $$$ to be able to keep living in the bubbleminiums.
Bearmaster, do you have a link to that story by any chance? That’s a snide thought I’ve entertained more than once and it would be hilarious to read about it actually happening.
Ah, found it: google “South Bay Models”. This should make for some amusing afternoon reading.
It will retrospectively look like a bursting bubble on the compressed time line of history. Just look at the “all data” view of Toll Brother’s stock chart if you don’t grasp my point:
http://tinyurl.com/7r8fg
Stephen Roach, whom I read with respect, is becoming increasingly more pessimistic about the general state of the economy…it’s worth a read at his website, and those who follow him will appreciate this…he doesn’t address housing specifically, but really, the whole wedding cake is collapsing because of a multi-tiered effect.
Catherine
The house in Queen Creek that was listed on my companies for sale board for 324K is now listed with a realator for 310K. Just for fun I looked up how many houses are for sale in Queen Creek - 2,200. When I limited the serch to 400K or less there where still close to 2,000.
What is going on in Cave Creek. The inventory has gone from 240 to over 400 in just a couple of weeks. Have you heard anything?
Opps - correction Queen Creek is now up to 2,277.
I don’t know about Cave Creek, sorry…I have access to an entirely different MLS system (up north). But I’m in Phx all the time, and all I see are numerous “for sale” signs, regardless of the area. East Valley/Queen Creek/Chandler seem to be particularly…energetic…in efforts to unload property. The “word” from the real estate crowd in Phx is “get out NOW”….and they ain’t just trying to get the listing. And, in my neck of the woods I see ALOT of “agent/owner” listings….gee, ya think they know something their average client doesn’t?
Catherine
One of the girls I play golf with bought a Toll Brothers Condo and now has a house in Cave Creek for sale. I know that she paid 190K for it in 2001 because I checked the county records. She is in complete denial. Says the houses sell right away they just don’t take the signs down. I think she was thinking of listing it for 400K. I don’t think she will lower her price. I don’t really like her so I have not had the talk that I had with a few other friends who were thinking of making a purchase at the top of the market. Directing them to blogs like this and showing them the numbers. The next 18 months should be really interesting. I may get that house on a golf course yet.
I am most optimistic that if you are patient, you will be overlooking the green from a very nice home in just about any golf community you choose….good luck in your search - something I get a hoot out of is to google “price reductions on (fill in your own blanks)”…I started doing that last spring and the number of hits are increasing rapidly. Then I bookmark them, and visit them again in a month or so…some are very dramatic.
this can be done on craigslist.com also…go to real estate for sale in a particular area, and search for “reduced”
Catherine
How is the Cottonwood market? My boyfriend sold his house for a 100K+ profit in Feb of 05 and then it went up another 30K and he felt bad. How is that market doing now?
Just an observation from the west valley. In the few neighborhoods that my wife and I go walking in: In the neighborhoods with the large McMansions, nothing has sold since before Christmas but every week or so there are one or two more houses for sale. In the neighborhhods with smaller entry level homes, 1 out of 6 to 1 out of 7 homes has a realtor’s sign in front of it. Nothing seems to be selling but having 15% of the houses in a development on the market at once can’t be good. Is there someone out there who would consider this reasonable?
We’re running into more clients who are headed down that path right now,’ said (mortgage broker) Mark Prather in Cerritos…
…frankly, they overbought, and that is a big part of the problem.
How clean are this guy’s hands? How many of his former “clients” are in this boat?
For some reason the term “overbought” cracked me up. Many are most likely in very reasonable homes. They didn’t “overbuy”, they just “overpaid”.
That depends on what part of the country you are in. In many places the prices went up because of bigger houses being as much or more of the mix than inflation. Many of my friends live in houses of 4000 ft^2 or more. That’s overbought in my opinion. I was chatting with one of my friends and his heating bill was 2x mine. One of the bubble busters in the areas with “reasonable” prices (per square foot) will be maintenance/ AC and heating in addition to the flaky loans and weak underwriting.
So, do you think the folks with too much house will simply throw in the towel in foreclosure immediately? Or rent out a room to the local junior college student to hold up the potentially inevitable?
I suspect some of both.
The renting out of rooms will happen to some extent, somewhat dampening the largely expected effect of rents going up in many areas. This will keep the differential in cost between renting and buying up at the all time high for longer than people think, making it still more difficult to sell houses at such high prices in the face of rising rates.
oops forgot the link to Roach….
The Fed Officially Kicks Off the Next Recession
http://www.safehaven.com/article-4759.htm
Loved this article. Thanks.
NH recently ranked as most livable state in the country.
Great state-and I love the natives.
However, their state motto is a misnomer. It should read:
“Live Free or Die”*…but gimme a big-buck job in Massachusetts to pay the bills.
As the light mfg. base of northern New England has been laid to waste via the off-shoring of entire industries, the only thing keepin’ food on the table is a combo of import income; 2nd home money; and the selling of trinckets to flatlanders from Ted Kennedy country.
But MA is on the downhill slide with ungodly priced housing and out of control public employee unions resulting in it being the only state in the nation which lost population.
Hell to pay when you loose your claim to economic self-sufficiency.
I’m with ya brother. But lest we not forget the NJ slimers, NYC maggots and CT filth hiding amongst us natives. Their method of cloaking themselves aren’t working.
I recently paid a visit to Harrisonburg, VA, near the Shenandoah Valley. Used to have a lot of local charm, but far too many New Yorkers have oozed in over the past decade, bringing their NYC pestilence with them. Rude and obnoxious, the lot of them.
I’m with ya brother. But lest we not forget the NJ slimers, NYC maggots and CT filth hiding amongst us natives. Their methods of cloaking themselves aren’t working.
The downturn of the early eighties resulted in big problems with arson. Many homes got torched. People ended up going to jail instead of getting the insurance, but at least they had something to eat there.
Hi, I had to laugh I turned on my computer and AOL has a banner story titled, “Is your home decor scaring buyers?”, an article about sprucing up for showings. It was not to long ago that people on this blog were reporting going to showings with dirty dishes in the sink and dirty clothes on the floor. What a welcome change this is.
I was in the Tri Cities area of Washington state, and there are a few RE signs posted, but no sign of a panic yet. However, there are lots of big SUVs and diesel pick-up trucks parked near the road’s edge with “for sale” signs on three sides. Also, plenty of local radio ads looking for HELOC suckers; just imagine $30k in your pocket and no mortgage payments for three months! Pick up that telephone, now!!
I love the loan ad with, i think, ditech. Lady says i financed my home and paid all my credit cards off and i’m so happy I’m out of debt… are people this dumb,, she just moved un-secure debt to secure debt..
—AL
That she’ll be paying off for the next thirty years. Imagine that today you were just making the final payment on your first RCA color TV, complete with knob channel-changer, purchased in 1976.
John - Great illustration.
If the people I know are good samples of SOCAL buyers in the past several years, I would say more than 50% stretched their resources to the limit in these transactions.
we can all see it coming now can’t we? the game is starting to unwind. inventory is building up, more reductions. it’s all signs of the imminent end of this 5 year run-up in housing prices. while no one really knows how far for how long the prices will fall, what’s clear is the risk of buying today far outweighs waiting for additional fallout.
OT: http://www.post-gazette.com/pg/06067/666763.stm It’s about the City URA (Pittsburgh) Asking for Subsidy for PNC Plaza. “PNC Plaza III, on Fifth Avenue, is expected to include 361,000 square feet of offices, a 150-room hotel and 30 luxury condominiums.” PNC is a bank. now building its own hotel & condos. Thank goodness Bernanke sounded the alarm about bank’s commercial lending. Needless to say, realtors aren’t happy with this bank now becoming a developer.
Is the government worried about the housing bubble or mortgage bubble? Not on you livelyhood. But what are they worried about? Check this out from Fridays financial pages: WASHINGTON (Reuters) - A group of lawmakers on Friday said an industrial bank owned by Wal-Mart (WMT.N: Quote, Profile, Research), the world’s largest retailer, could threaten the stability of the U.S. financial system and drive community banks out of business.
In a highly critical letter to the acting chairman of the Federal Deposit Insurance Corp., obtained by Reuters, a group of more than 30 Congress members asked the bank regulator to reject Wal-Mart’s application to open a bank in Utah.
“Wal-Mart’s plan, to have its bank process hundreds of billions in transactions for its own stores, could threaten the stability of the nation’s payments system,” the lawmakers wrote.
Love them law makers watching out for my welfare!
The PNC asking for TIF for its real estate development is a little old. I searched for PNC & couldn’t find it. There’s something odd about a bank building a hotel & condos
The chart at the bottom of the CNN article is quite interesting. I’m not sure what the methodology of the study was, but at least according to the report the most overvalued areas seem to be in California, and in particular in the areas which are an hour or two from major cities (i.e., Merced, Stockton, Salinas, SLO). The authors of the report don’t seem to have any particular reason to slant the data (unlike the NAR).
Sometimes I wonder what the average homeowner makes of so much conflicting information. On the very same day that the NRA says that the market is evolving “nicely,” and all the major media outlets report that, CNN posts a report that essentially confirms that most of the country is in the midst of a huge bubble. Given that the family home has become the primary (sometimes only) asset for the average American family, the conflicting reports alone must generate a fair amount of anxiety (”Honey, we’re rich! No, poor! Let’s buy! No, let’s sell!”).
Believing the NAR’s assessment of the housing market is like believing the tobacco industry’s assessment of the health effects of cigarette smoking.
YYYYYYYYYYYYEEEEEEEEEEEEEEEEEEESSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
I agree.
Oops. Didn’t realize that would happen.
What, that smoking a pack would send you green?
The free market is for Joe Sixpack while regulatory schemes protect the upper classes from competition.
Yes, that is right. Free labor market but help protect my subsidies (farming, etc.) and don’t regulate my business (RE loans) even if we are making predatory loans, kickbacks.
From Ben’s link
Now spreading all over Southern California, Bankaci had pointed out the main reason for the dramatic increase in foreclosures in San Bernardino more than a month ago. According to Bankaci, the home appreciation rates are beginning to decrease and homeowners are no longer able to satisfy their debt by using equity built up in their homes.
“Many of the homeowners used ‘aggressive financing’ to buy homes they could not afford,” said Bankaci. “So, now many of the homes we see going into foreclosure have little equity left in them. I am sure the number of homeowners defaulting on their loans is going to rise as the appreciation rates on homes continue to slow down.”
I track the notices of default and notices of trustee sale, in the los angeles and san fernando valley. There has been a dramatic increase in the notices, not seen since the 1990’s.
I specalize in representing lenders in marketing their REO properties, and after years of none, I’ve gotten 3 in the last month alone.
The coming REO market will make the cycle in the 1990’s look like a joke. I read the WSJ article that said that 1 in 8 loans will end up in foreclosure, Wow!!!
sfv jim,
Thank you for your input regarding the LA market! LA is important to watch as they have a decent job market (diverse) and a lot of money. LA is always at the front end of most RE bubbles, and will likely show signs of what’s happening in So Cal (and the nation?), in general.
One really interesting side effect of how all the different forces are converging is that we could see falling prices, and flat to falling levels of affordability. Normally, falling prices have been met by falling interest rates, cushioning the fall. We may not have that luxury this time, as rates rise while prices fall. This will require an even greater price adjustment in order to bring prices in line with historical levels of affordability.
Or more savings so that you’re not borrowing so much money. If you pay cash the interest rate doesn’t matter.
Doesn’t a higher interest rate increase the opportunity cost? (i.e., you’re giving up more interest earnings by putting the cash into your house)
I live in one of the foreclosure areas mentioned, Riverside. My neighbor has drastically reduced her sale price of 480k to 430k! Her house has been on the market for over 6 months. I was hoping there was some idiot stupid enough to buy it that way I could use it as a comp when I cash out soon.
You might have waited a bit long to cash out.
The standard economic model of demand would not say that higher rates resulted in a drop in demand; rather that higher rates (prices) result in a drop in the quantity demanded (number of homes sold).
However, falling prices in formerly hot bubble markets will do the job of shifting the entire demand curve to the left, resulting in downward revisions in future price expecations and further reductions in demand. This feedback effect is what will result in the big price reductions over the next six years; the interest rate increases were more like the small explosions the ski resorts use to start avalanches.
Nicely put.
“Most real estate experts agree the market is slowing, but they maintain there isn’t a bubble in Southern California. But if you’re one of those who stretched your resources or perhaps the truth to get into the market, your bubble may be about to burst.”
I wonder if they bothered to ask anyone whose income does not depend on lying about the underlying reality…
“We had three clients just in the last two weeks who are facing sale dates and they are in difficult trouble,’ (Mortage Broker) Prather said. “Frankly, they overbought, and that is a big part of the problem.’”
Right. And the other big part of the problem is the unscrupulous realtors, appraisers, and mortage brokers who led the FB lemmings down the primrose path.
According to the recent WSJ article 1/8 ARMS from 2004 to 2005 will default. That is an absolutely amazing statistic when one juxtaposes it with the fact that in bubble areas upwards of 75% of the loans issued have in the past 3 years have been ARMS.
This will be an outright disaster in bubble areas. It already is, inventories are now beyond bloated and we’ve only just entered the spring rush to list houses. I have never in my seven years in the NYC vicinity seen this many homes for sale…and the party has just begun.
The last time I weighed in on the Fed raising interest rates, I said it would raise them two more times.
Not only am I not backing away from that, I think I may have to push it further.
The Fed wants to end ‘flipping’.
To do this, I believe they may CONTINUE raising rates until-
-DING-
The fall of 2006.
That means September.
From what I’ve been reading, the Fed is stuck between killing ‘flipping’ or stopping inflation.
Inflation effects more people than ‘flipping’.
Thus- you heard it here first-
The Federal Reserve will KEEP RAISING RATES until September.
Then-
-they won’t do anything…
…but watch.
The ‘Froth’ isn’t gone yet.
The ‘Froth’ is just SITTING THERE, at all-time ‘frothy’ levels.
The Froth Shall DIE.
Attention grabbing housing price reductions in August…
MAJOR price reductions in October.
Just my two cents.
I agree that the Fed is very likely to continue raising rates, but I disagree that it is because of flipping. With respect, I think flipping has nothing at all to do with rate rises beyond the next half-point. I think that instead, it is the competition from abroad that will drive it. All of a sudden Japan and a host of other countries are competing for the liquidity and we still have to sell tons of paper every month. It is “just” worldwide inflation at work.