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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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Damn Ben, you’re sure an early riser.
Our Arizona sunrises make it well worthwhile.
Nah, he just never goes to bed. Thanks for all your efforts, Ben.
The Chineese bought us a lot of houses: China held $107.5 billion in U.S. mortgage-backed securities as of June 2006, up from $3 billion three years earlier
Bloomberg
How long can the bull market last?
I think its a bull market around the world, and we are just getting dragged along with it. The Dow is being outperformed by almost every other stock market index.
Probably won’t stop until the consumer stops spending. Until we get some numbers that prove otherwise, the market will assume people are still spending. Look for retail sales, interest rate increases and credit market events (or lackthereof) to drive the market going forward.
Question for those in the know - does the DJIA account for dividends?
If not, then it seems to me like comparing it to most other indexes is apples to oranges. The DJIA is composed of mostly long-established companies that provide dividends - thus the gains in price won’t be as great because stock prices on companies that provide dividends don’t go up as fast as they otherwise would if the dividends were not given.
In other words - if you invested X amount in all the Dow companies, and the same amount in all Nasdaq companies, and after 1 year the indices rose by the same amount, you’d have more $$ gain on your Dow investment.
Excellent point. This is definitely a problem with the DJIA. There are other problems as well, like the weighting. (To be fair, all indices have some sort of bias. You choose you poison.)
http://siepr.stanford.edu/papers/pdf/99-16.pdf
The Dow’s only advantage used to be that it is really, really easy to calculate with no computing tools. Just add and divide. The S&P 500 is broadly the only index most managers care about.
The DJIA, NASDAQ, and S&P are adjusted for dividends, stock splits etc.
an example:
XYZ stock has a $1 dividend quarterly. The day before the stock goes ex-dividend (aka: ex) the stock is trading at $100/share. the next day the stock opens at $99 ex - this automatically adjusts the indices.
I don’t believe it does. I know the S&P index does not account for them. It’s actually pretty hard to find the performance of most indicies including dividends, for any length of time. Bloomberg systems have performance including dividends (TRA). The easiest way is probably to track the value of an investment in the index’s ETF.
We’ll test the retail sales number today. What a stinkbomb. -0.9% vs 0% expected
Re the worldwide bull market: Does anyone think it possible that other foreign consumers could soon be filling the void after we’re tapped? (IOW is it possible for markets to continue long after Americans are out of the picture?)
Is the stock market just a continuation of the housing bubble? That is, are the hedge funds akin to the house flippers and just bidding up the stock amongst themselves until the liquidity spigot gets turned off. I’ll bet J6P when invested in the market is smart enough to have been in the foreign markets, metals, t bills.
When will the housing market bottom? Is the bottom here, or will the housing recession flow thru to the whole economy and create another 2-3 years of housing decline?
The Sacramento Valley is just getting to the end of the second year, since it peaked in June 2005. New housing subdivisions are feeling substantial hits to value, perhaps down 25-30% from peak prices 2-years ago. There are many foreclosures still coming on line and a few of them are selling to greater fools playing their knife catching rolls on their way to new FB status.
What is interesting about Sacramento is there is still some in-migration and job creation in the statistics. That could absorb some of the vacant units. What you don’t see in the stats is all the illegal immigrants who no longer have jobs. There have been big drops in landscaping, framing, roofing, etc. Of course they sent a lot of their wages back to Mexico, so they did not spend it here anyway.
Commercial construction is saving the day, but could be substantially overbuilt in 24 months, with 15-20% vacancy in office and 10% vacancy in apartments. Retail seems to be plodding along in O.K. status. Industrial is holding its own, but impossible to expand, since land values need to drop, after huge price increases from 2002-2005. Luckily, Sacramento has the state goverment downtown, which moderates any downturn. However, state revenues could drop with the housing downturn and if housing drops another level, the state could initiate a hiring freeze.
It is too early to call a bottom and one thing is certain: Housing is showing no signs of an recovery and will almost certainly have a lower valuation 6 months from now. The home builders keep building into a market with 12 months of inventory and the lenders are tossing logs on the bonfires with discounted houses taken back in foreclosure. Record levels of inventory should be achieved in August.
This type of bust historically takes 5 to 7 years to bottom, though we are getting ready to enter the main downleg. Austin went 1985-1991 +/- . Maybe 1990 was the bottom…but no real recovery until 1992-93 and then 1985 prices weren’t seen again until 1996-7 for the best areas and 1998-2000 for the run of the mill (during a new bubble).
Our inmigration # have dropped each year after the boom in 1998.
Sacramento County
Yr Pop est est. gain
1999 1,184,586 17,887
2000 1,230,401 45,815
2001 1,266,762 36,361
2002 1,302,102 35,340
2003 1,330,044 27,942
2004 1,350,861 20,817
2005 1,363,423 12,562
2006 1,374,724 11,301
These are estimates off datasets that run July 1 to June 30 so 2000 really reflects part of the the growth from 1999. 1999 and 2000 were the big years.
So you can see that for Sacramento Co., are well past our peak of 2000. If you work the population change from 1960 to current, I’m guessing you see a similar wave pattern over and over and could then estimate wide this last wave was and when we’re projected to possibily have a negative return.
For example, the est for 1994 was 493.
Gwynster, Fascinating stats. Are they federal or state? I believe the state may have the best detailed info, but it could be biases for getting federal revenue sharing.
In 1992-1994, I believe the Sacramento area had negative population growth. People moved to the midwest and to other urban areas in CA for jobs. The northern Sacramento Valley was the worst, particularly in areas like Chico and Redding.
It is strange that the Sacramento Bee published an article on Tuesday saying areas around Sacramento will see a 100% to 250% increase in population by 2050 (CA Dept of Finance).
I remember the same type of state agency in early 2005 saying we had no danger of overbuilding. They stated California needs 230,000 housing units/year and we can only seem to build 190,000! A perpetual shortfall in housing. More like a perpetual shortfall in brain cell alotments!
US census population estimates. While they are estimates and we all know the feds release speculative data, I’ll take the Fed WAG over the CA dept of Finance release because they are funding related.
There are other datasets out there. I know that the research group I worked for made contributions of ours to Havard as part of the disemination requirement on all gov grants. USC is just the easiest to pull when I have a bone to pick >; )
The Sacramento area population does swing with the housing market over time since the only reason to come here is for cheap(er) housing. They sure aren’t coming for the high paying jobs. I have a hunch that the CDoF pulled some data points from the last peak and extrapolation it out to make it look better. They sure don’t want us to know that we’re currently in a decline.
I’ve taken to calling it a bullsh– market.
I’d like it if we could cobble together some useful links in one thread. Such as 1) Average income versus time (back 20 years or so) 2) Average household income versus time 3) Same as 1 and 2, but on a regional/city/state basis. 4) Housing Inventory for sale versus time (how high is the inventory now compared to past busts 5) Rental versus house price history 6) List of the members of congress who advocate a subprime bailout 7) Are any serious subprime bailout proposals floating around congress
trustworthy links to the magnitude of political contributions from the national association of realtors (they are #3 I heard)
If we can get lots of good info like this from trustworthy sources it would be very useful if one of us wants to write a letter to the editor or to our representative. Also it would help those new to the subject (i.e. what is a “normal” amount of your income to pay toward a home). Im not sure if there is concrete data you can point to for some things (renting vs. buying (mortgage) costs) but it would be nice to have.
Yes/No? Am I crazy?
I cobbled together a blog with this sort of information a couple weeks ago, but the nasty emails and the time investment to do it right were too much. Another nail in the coffin was discovering Robert Shiller had performed the same analysis in May, 2007 in a much better fashion. I have since taken my blog down, and I cannot locate Shiller’s paper from May - I’ll spend some time with Google in an effort to find it..
I would like to see a thread with contributions from readers in several states outlining the following:
1) What are the rules in your state regarding recourse and non-recourse mortgage defaults? In other words, it’s probably not as simple as just “mailing in the keys” in every state.
2) Are foreclosees required to be 1099′d in all cases in your state? I know short-sellers can be/will be 1099′d for the difference in the owed amount and the sales price, but what about foreclosures?
3) If the mortgage has been refi’d at any point, are all bets off? In other words, does that automatically make the defaulted loan “recourse?” Or are the rules different from state to state?
4) What about walking away from 80/20 loans? What is the foreclosee on the hook for?
I know this topic has been discussed here and there, but if we could get a standing data base on this, it might give us all a better idea of which states are particularly F’d.
– Judge Smales
“You’ll get nothing and like it”
Re #2: The 1099 is a IRS requirement for forgiven debt, so it’s federal not state-by-state.
One part that might be missing from your list is whether the is a prop-13 type law. That forms a strong incentive to hold the house in some other business entity, and sell shares in the entity rather than the house. I’ve been wondering how that will affect the foreclosures…
Does a foreclosure (change of ownership) reset the tax basis under prop 13? Thinking about the long-term homeowner (with a low tax basis) who heloc’s to the max and then gets foreclosed on… does the bank pay taxes on the old tax basis, or is the property re-assessed at foreclosure time?
In the majority of states (states that are not ultra-consumer based), all loans are recourse (purchase money and refi). In states such as Ca, only the refi is with recourse (meaning deficiency judgment).
However, all bets are off if you lie on the loan app and state “owner occupied” when you really intended to flip and have five properties that you are defaulting on. This is considered loan fraud and banking fraud, which are Federal crimes. The reason that this has not been prosecuted, nor wil it be on a wide-spread level, is that there would basically be millions of middle-class people put in Federal prison as a result (J6P and soccer mom). Thus you see the FBI doing nothing about this - we don’t have the money to cover the prison costs, nor can society handle mom and dad going to jail while the kids have to go live with grandma in nursing home…
In CA, what are the details with an 80/20 loan (two loans, full purchase price, no refi)?
In the past couple of months, I’ve talked to a real estate attorney and a tax adviser. The “80″ is clear cut, non-recourse. They seemed to think the “20″ is a second lien and hence recourse. However, given the way it was explained by each, I’m not confident in that interpretation. Is the “20″ recourse or non-recourse if it was only for the purchase price?
I would like to have a thread that explores the issue of REO’s. Specifically, how much exists, the reasons these are being held off the market and how much longer the banks can do so? Also, is it possible for this (large amount of held back REO’s) to be a coordinated effort by the banks or is this phenomenon just a result of standard business practice?
Second.
Third!
I would like to see the REO numbers quantified: Existing REO, possible REO remaining in 2007, then projected REO for 2008 & 2009. Compare that to actual sales. Will there be a time that foreclosures eclipse sales? That is how you define a Foreclosure Tsunami (c). (that means copywrited, since I am going to use the title for my new book….hahahhahaha.
Fourth.
REO is a term used by banks for forclosed property on their books. Are we using the wrong term here? Are the houses on Countrywides books REO or something else? This may seem like semantics but banks are not in the business of holding RE and must sell it quickly (?). Could Countrywide hang on until they get their price?
I agree with “is the stock market another bubble.”
I suppose there are two points of view.
The first is the “soft landing” scenario, in which the U.S. will benefit by growth in the rest of the world as its own consumers get tapped out, limiting our recession. The only pain will be increased competition for resources like food, oil, and investment, and thus higher rates and prices which of course do not exist for purposes of the CPI. The standard of living will slip a little but we’ll be OK.
The second is the liquidity machine is still running, the FED can’t stop it, and money that would have been going into houses is going into stocks, the reverse of 2000 to 2005. And, when the liquidity machine starts running in reverse, the FED won’t be able to stop it either.
It looks like we have been put in a situation in which we will be dead without Arab oil and Asian money.
I keep reading its mostly Japanese money thats adding liquidity to the USA.
Someone on CR came up with the same idea I had - Flight out of a dying currency.
Agree. This comes back to the inflation/deflation debate, IMHO. Time for another round?
With the stock markets, commodities, cost of goods, etc. all skyrocketing…are we witnessing a major flood of money coming from the central banks? Seems very likely, but would like to get the opinions of others here.
Personally, got tired of being mostly short (made money, but it’s been a difficult road) and now have pretty much 50/50, long/short (short & long different sectors) in an effort to get out of $$cash$$.
How about a topic as to why the federal government seems to be competing with private lenders for new bagholders.
’similar to you know your a redneck when? You know your subprime when? the borrower calls in and has a f i c o ( all spelled out) of Four’
‘You know your subprime when? When the Borrower doesnt know there loan amount, intrest rate or mortgage payments (no joke i just had one)’
‘you spend your closing cost money on a motorcycle 2 days before closing. happened last fall.’
‘you are adding your boarder’s kid’s ssi to the “household” income’
‘you are cashing out your equity to go on vacation. again.’
my favorite so far:
your FICO score and total assets are the same number.
BWHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA
‘you use “there” for “of them”, and “intrest” for “interest”.’
‘the borrowers’ “household income” incorporates more than 3 individual incomes.’
‘the interest rate on the refi is higher than the rate on the existing loan.’
‘your autostart list includes a browse of the implode-o-meter.’
‘your borrower goes to grab a McD’s meal for the signing, and can’t get it with the first credit card they try.’
‘you knew you were upside down on the first house you bought, so you bought a couple more, just to be sure.’
From the thread:
You know you have a subprime loan if…
- Your borrower wants to quit claim his 98 year-old mother-in-law to the property so she can be a co-signer.(happened)
- Your borrower walks in to your office in his Waffle House uniform and wants a stated income loan.(happened)
- Your borrower asks you if he can (personally) borrow the appraisal money. (HAPPENED!)
- You pull the borrower’s credit and instead of giving you a report it returns the message “Please retain applicant - Law enforcement dispatched” (No that didn’t really happen but it’s darn funny – this is a spin on my ongoing joke about the consumer who’s credit is so bad “he should be in jail”)
- When you ask your borrower for his last 2 tax returns he gives you 2001 and 2004 (because he ain’t filed the rest yet).(HAPPENED!)
- When your borrower calls and asks you to bail him from his foreclosure, but when you pull public records, the house was titled to the bank 6 weeks ago (happened).
Weekend topic idea:
Yesterday an angry troll chastised the arrogant HBB bloggers for wishing financial harm to the system. The point was that a recession or depression would hurt all of us and it would serve us right. First off, I disagree with this. Some people do very well during downturns. Remember how well Mr. Potter did during the Great Depression? When all others panicked, he was buying. The key to success during hard times is the preparation that one has taken in advance. What is the best way to prepare for a recession or even depression? Personally, I would say step number one is to treat debt like the ultimate evil. It would be nice to see what people think we terribly arrogant bloggers can do to ensure that the bad times are good to us.
LOL - If you are talking about Mr. Potter from It’s a Wonderful Life, I don’t think you’ve done much to improve the “image” of HBB bloggers.
I think this is a good topic because I feel like in many ways preparing for one hummer of a Depression is exactly what I’ve been doing recently. I’m not worried about the return on what capital I have as so much it’s return back to me. Given the 20% increase in my stock value over the last year, I think it’s getting close to time to bail on equities. What are other people doing?
I believe Mr Potter just died a couple of days ago. I guess he made out OK after all!
I think this topic would be very interesting. I would really like to know what other people are doing, excluding the militia-men crowd, well, maybe yes, they’re welcome, too, they may be closer to reality than we think. Ben, let’s do this topic, it’s a good one.
Well, I’ve got a shotgun, rifle, and a 4WD and a country boy can survive. Really, if the SHTF and it’s time to evacuate, I’ll play ‘row row row your boat, gently down the keys’ (to Cuba in a canoe - talk about reverse migration)
I’d also welcome this topic. I bailed out of stocks 2 yrs ago, have no debt, own my home and car outright, and have savings that will last me for 10 yrs. What else do I need to prepare for a severe downturn? (My hope is that a severe downturn won’t last too long so that I have enough cash to catch the stock mkt on an upswing.)
Is there any point where it would actually make sense for the government to start buying up the toxic waste?
I’m thinking of the stuff that’s attracting the 5 cents in the dollar bids. Surely at some price it would be worthwhile to simply stand in the market, buy the debt, and cancel it.
LTCM was easy to hide under the carpet…
A hedge fund with just 2 Nobel prize winners, as part of it’s brain trust.
The total loss 9 years ago?
$4.6 Billion
How’s that compare with the numbers bandied about, today?
IMHO the bids at 5% are for the stock shares in the hedge fund not for the underlying securities. A 10% drop in the value of the underlying security makes the stock worthless due to the Basel 2 agreement for CSE Haircuts.
An example: the current margin requirement (haircut) for AAA bonds is $0.50/$100.00 ; the current haircut for BBB is $4.80/$100.00 (per Basel 2). If these CDOs go from AAA to BBB the haircut goes from $0.50 to $4.80 - that is a lot of moneys to come up with very quickly.
This does not mean that these underlying bonds are not good, I will buy as will many others when these funds liquidate to meet margins. I have standing orders to buy upon liquidation. Currently these underlyings are trading at 70% of par. There are very few being liquidated.
a 100K bond yielding 6.75% that is trading at 70K has a yield to maturity of ~13%. A profitable transaction.
CBS news did a fairly succinct news item on it
from Youtube
http://tinyurl.com/29trda
You know your a subprime borrower when:
Your FICO and IQ are the same number
You know you are a subprime borrower when:
You boast of all the miles you’ll get on your creditcard, by paying your mortgage, with plastic.
You know you are a subprime borrower when:
The loan officer asks you about your liquid assests on the application and he says , I have 2 6-pack’s of Budweiser in my fridge!
You know you are a subprime borrower when:
‘You think that consolidating all of your bills into one “easy” payment, will save your bacon, somehow?’
you know you are a subprime borrower when you can not spell assets
Guilty
You know you’re a subprime borrower when you think assets are something to be viewed on web porn sites.
If there are some accounting and finance around, I’d like to hear what people think will happen to GAAP’s rules on revenue booking as the builders have more problems. I know some of those rules were changed after Enron, but apparently not enough of them.
oops. I meant accounting and finance people. *blushes*
it’s GAAP that is forcing all the write downs. i do not see a problem with GAAP.
Does the stock market always go up (unlike the housing market)?
GS, history’s being made here. Of course it always goes up, it’s a New Paradigm, AKA, manipulated market.
It’s high time to trash irrational exuberance and other psychological economic fooling games and revert to rational expectations, IMO.
‘The concept of rational expectations asserts that outcomes do not differ systematically (i.e., regularly or predictably) from what people expected them to be. The concept is motivated by the same thinking that led Abraham Lincoln to assert, “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” From the viewpoint of the rational expectations doctrine, Lincoln’s statement gets things right. It does not deny that people often make forecasting errors, but it does suggest that errors will not persistently occur on one side or the other.’
http://www.econlib.org/library/Enc/RationalExpectations.html
You know your a subprime borrower when:
‘You only bought a house, so you could earn money the New Fashioned way, in America… Heloc early and often.’
I think that most on this blog realize that we are headed toward some financial ‘black hole’ (unchartered territory). Each has their own idea of how to protect themselves such as buying gold, t-bills, bonds, specific stocks, or bank CD’s, but how sound is their thinking? Yes, I can buy gold now only to see it go down by liquidations sales of margin calls. I can put my money in CD’s only to find out that the FDIC protection is there but that it will take me 5 years to get my money back on an installment plan. Even payments on t-bills could be put in abeyance like withdrawals on the hedge funds downunder. I hear some on this blog advocate buying gold funds that retain the hard metal. Do you really know what is in their vault? If you own the metal, if it is not in coinage you have to pay an assay fee; if you own the coinage you need to own coins that aren’t counterfeit, remember the Krugerrand.
Krugerrands trade quite freely on the open market and i’ve never seen a counterfeit of one…
Gold in coin or bar form is an incredibly dense metal, not easy to counterfeit, as one would have to use a metal the likes of lead, in it’s place.
Then you haven’t done your homework. Sometime in the ’80’s or ’90’s they were counterfeiting Krugerrands. I remember reading in one of my dad’s weekly coin magazines that “Krugerrands were the #1 counterfeited gold bullion coin”. I don’t know if that is still true or not.
I weighed mine. They all weighed 1.0909 oz.
http://en.wikipedia.org/wiki/Krugerrand
I second this.
” Each has their own idea of how to protect themselves such as buying gold, t-bills, bonds, specific stocks, or bank CD’s, but how sound is their thinking? ”
In this vein of thinking, I’d like a discussion of where we should put the funds from an IRA or a 401K.
Regardless of fiat currency or hard money, I think the things that will get one by in a depression scenario that is often painted around here are mobility and common sense. If you have some kind of skill you can trade work with people, and if you are willing to walk away and not look back you have vastly opened doors. I know that I’m preparing myself to walk away from everything with just a laptop in my bag and the clothes on my back, not that I EVER want to have to, but it’s best to be prepared. At the worst, bring a stick along to break the first person’s legs who you see carting a box of beanie babies along with their kids.
…farmland & a way to protect it. We might see more co-ops or communes of one type or another, where multiple families farm a piece of land & defend it together.
Other than that, flexibility & having skills (to trade) would be a good idea, absolutely.
SD ziprealty.com is within 100 homes of the 20K milestone (SFRs + condos)
“Your search has returned the first 200 of 19908 homes”
what is the next thing that going to happen with the housing bubble? the commercialMBS take a hit as roubini pondered? will we see it spilling over to the Goldman’s of the world? is chanos right to short moody’s what should I short?