The Housing Bubble

I’d like to hear some more analysis of the yield curve. People here predicted it would invert, and eventually it did, but it didn’t stay inverted for long. What do people make of the short time it was inverted and its current state?

For D.C. area folks, the Washington Post is running a special double sized real estate section in both the Saturday and Sunday editions this weekend. They will supposedly provide an in-depth discussion of the state of the housing market, where its headed, and whether or not now is a good time to buy or sell.

My guess is that we don’t see any reference to the 8% decline in prices since last summer, that almost all quotes will be from agents or builders predicted a soft landing, and that there won’t be one quote from someone saying a major decline in prices will happen over the next few years. It will be interesting to see how balanced the reporting is.

I meet a Portland, Oregon based realtor who specializes in bank REOs, work outs and short sales. Essentially her clients provide her with delinquent or defaulting loans, and she approaches the debtor with a program to liquidate or sell. She told me that the list of such folks has skyrocketed in the last month or so, and she is getting extremely busy. If this is going on in PDX, which so far has been a quieter market, what’s happening in markets with more obvious busts?

This may not be news related, but I want a topic on putting together a regional bubble party. I’d love to get together with my fellow bubble heads in Los Angeles for a night of drinking and death spiral debauchery.

I am interested in a thread on “non-bubble” areas, like North Carolina, Georgia, the midwest, etc. We all know that California, New York, Boston, Florida and DC are in for a world of hurt, but what about the non-bubble areas?

I am increasingly troubled by discrepancies in data being presented by “official” and nonofficial sources. For example, the NAR data yesterday suggested increases in sales and pricing nationwide, while folks here have been furnishing data which suggests completely different news. Questions: A) Are there discrepancies, errors or flat-out misrepresentations in reports from trade groups or official sources; B) if so, how severe are said misstatements; and C) how widespread are such misstatements. Possible follow-up: if Bernake and other sources at the Fed are basing their decisions on erroneous data, what consequences may ensue?

Here is an e-mail exchange I had with a SD area buyer-broker this week:
——————————————————————————
Dear Lane,

Please see my responses to your points below…

LPElliott1@aol.com wrote:

> Hi Stephen,
>
> It was great to meet your wife today and your thoughts on the housing market are always worth a listen. However, because of the tax deductibility of interest, which reduces your tax liability, it covers that 1/3 difference.

In order to correctly calculate the value of the mortgage interest deduction, one needs to compare the amount of taxes paid if Schedule A if filed (including mortgage interest) versus if the taxpayer takes the standard deduction. For most low-to-middle income individuals, the tax advantage of the mortgage interest deduction is negligible. Further, the interest is not fully deductible, and hence represents a net cost of ownership.

> At the same time, you are accruing appreciation on your investment. >Which you can not do with a rental. Experts over the years agree, if >you plan to stay in a home more than 3 years, you are losing money by >renting.

Many of the experts who agree with your statement also receive money from the RE industry for their support of opinions which boost purchase demand. I happen to disagree with your belief that one will lose money by renting for more than three years; by my back-of-the-envelope estimate, San Diego rents are currently less than 2/3 the cost of owning a comparable property.

>
> I do however understand the aspect of “The Down payment”, which for >a lot of individuals is very hard to save for.

No downpayment is required. Many folks are getting in these days with interest-only loan deals which provide 103% financing. I will not try to compete with buyers who have been provided the temporary means to purchase more house than they can actually afford.

> Hence the 80/20 loans, 80/10 loans, helping you cover the down >payment. We are very lucky in this area of San Diego…location, >location, location….schools, etc. A 6-10% appreciation is a normal and >good market.

Have you seen Robert Shiller’s book Irrational Exuberance? I put more faith in his estimates of the long-term return on real estate appreciation in a normal market, which is far below 6-10%. I don’t believe your appreciation rate properly reflects the interest, maintenance, taxes, insurance, or asset price risk which are necessary expenses of owning real estate, but please correct me if this is wrong.

> In recent years consumers have been accustomed to much higher >appreciation rates. I am a real estate investor. Once you jump over >the line, you will be happy you did.
>

I wish you all the best with your investments, but I must confess that I believe the Bernanke Fed will remove the punchbowl which liberally fertilized the Southern California real estate money tree to bear record high yields over the past eight years. If Bernanke turns out to be an inflationist, then your investments may do well, in which case I will stand corrected.

> Please let me know if there is anything I can do to help. I am an odd >commodity here. I am a buyer’s advocate and have been doing it for >over 10 years. I recently moved from the New York Metropolitan area >where I was also affiliated with Prudential Realty (please visit >www.buyersguide2realestate.com >). My associate in New York >is covering those referrals.
>

I like the buyer’s advocate concept. If real estate prices in San Diego ever reach a level of affordability which is in line with local incomes and rents, I will plan to contact you.

Best,

Stephen Stohs

> All the best,
> Lane Elliott
> Lane Elliott*
> **/”The Buyer’s Guide to Real Estate”/*
> *Prudential California Realty*
> 11939 Rancho Bernardo Road
> Suite 200
> San Diego, CA 92128
> Tel: xxx
> Visit my web site @_www.LaneElliott.com __
> E-Mail: Lane@LaneElliott.com
> Real Estate Newsletter Prudential California Realty, Lane Elliott http://www.laneelliott.com

My favorite topic is “What is the most fitting form of punishment for David Lereah?”

Suggested Topic: Real Estate Forecasts

On the OC Register blog, I (and others) questioned the legitimacy of real estate forecasts and commented on how the media appears to report these forecasts in a manner that is at best ambiguous and at worst misleading to the reader. For example, I have read that Gary Watts says 15% appreciation is in the books for 2006 and, as recently cited by the OCR, “Pat Veling, an industry analyst and president of Real Data Strategies Inc. of Brea, forecast that home prices will continue rising in the 8 percent to 11 percent range this year.”

While the media often suggests that these are forecasts from today’s prices or prices at the beginning of the year, these analysts typically forecast appreciation from last year’s median price (a price that may have been hit 8 months ago). In other words, the media may be inadvertently painting a rosier picture of the housing market than even the self-interested real estate industry.

I may be wrong but so far have not received any responses to my comments and requests for clarification on the OC Register blog.
Below is my counterargument to the Gary Watts clones (taken largely from my post on the OCR blog):

FUN WITH NUMBERS! How to forecast the housing market like a pro.

The real estate industry loves to predict home price appreciation and they pat themselves on the back for their Kreskin-like abilities. But predicting home appreciation is much like predicting where a cruise ship will be in an hour—if you stand on the bow and point straight ahead, you will be right most of the time … and if you tell everyone that your forecast is based on yesterday’s departure date and time, then your “forecast” will sound even more impressive.

Here’s a Step-by-step guide on how to forecast the housing market like a true real estate analyst:

Step 1: Look at yearly appreciation for the past three months as reported by DataQuick. Use this as your prediction for home sale appreciation over the next 12 months. There is no Step 2. The chart below shows how these predictions compare to Gary Watts over the past 5 years:

3 Mo. Ave. Watts Actual
2002…..12.5%……10.0%…16.8%
2003…..17.9%……15.0%…19.1%
2004…..18.2%……25.0%…24.8%
2005…..20.9%……15.0%…13.6%
2006…..13.5%……15-18%..?

As you can see, the 3 month average beat Mr. Watts 2 of the past 4 years and it looks like 2006 may provide another forecasting victory. I am clearly a FORECASTING GENIUS. To improve my forecasts I’ve considered adding inventory, sales and other data to the analysis. But why bother? I am not in the real estate industry and have no incentive to create a better MARKETING STATISTIC.

Why does this work? The problem with real estate forecasts is that they tell us very little about what’s going to happen to real estate prices in the upcoming year because they are largely based on old data—a comparison of the median price from one year to the median price of the next year. Pending sales data and current trends in sales volume, sales prices and inventory can probably buy a few months of certainty in the future because the housing market does not shift that fast. Any actual forecasting they may be done is a small part of the overall “forecast” and is further buffered by presenting the forecast as a numerical range (e.g., 15-18% or 8-11% appreciation).

For example, the market price of homes at the start of 2006 was already 5.75% higher than the 2005 median—compare $585k ave. monthly median for 2005 (per the OC Register) to Dec. 2005 median price of $621k per DataQuick. You can use other numbers if you wish, but the results are the same—the forecasters are playing with a stacked deck. Much of the predicted home appreciation is already built into the market. A forecast of 8% home appreciation (based on the 2005 median) is really a forecast of 2.25% home appreciation if based on prices at the beginning of the year.

WAIT … THIS JUST IN THE FROM OC REGISTER (March 7, 2006): “One of the most optimistic forecasters, real estate economist Gary Watts, said earlier this week that he may consider revising his own forecast of a 15 percent increase this year. Watts said if the higher-than-normal inventory level continues into the summer, he may revisit his forecast.” DAMN YOU GARY WATTS!!! I didn’t know we could revise our “forecast” in the middle of the year. The 2006 median sales price will probably be hit sometime in the summer of 2006 when you “forecast” its appreciation from the 2005 median price. That’s pure genius and all but guarantees you another successful year of real estate forecasting.

To further illustrate the absurdity of real estate forecasts consider a scenario where prices FALL from the Dec. 2005 median of $621k to a Dec. 2006 median of $608k, with a 2006 median price of $616k. Who would be right, those who predicted a 2% drop in home prices for 2006 or those who predicted an 5% rise in home prices? I would expect to see the following reports from real estate professionals in January 2007:

MEDIAN PRICE HITS RECORD HIGH OF $616K IN 2006!
HOME PRICES APPRECIATE 5% IN 2006!

Of course, the homebuyer who purchased in Dec. 2005 and sold in Dec. 2006 would have lost 2% (plus transaction costs). But hey, people are bad at math. If we repeatedly tell them they gained 5% they will believe it.

Why do all interday crashes taper off to a soft landing anymore?

For instance, it looked like the bond market was going to seriously invert on the news of the catastrophic drop in new home sales, but after the initial plunge, it tapered off to a nice smooth close as though guided by an angel stationed there to bear it up, lest haply that yield curve dashed its foot against a stone.

http://tinyurl.com/po8bx

Ok… the housing market is rolling over.

I’d like to hear from the minds on this blog if it will continue to do so, and why, if BB stops raising interest rates soon?

What if he starts cutting rates towards the end of this year like some are suggesting?

Could this MONSTER re-inflate ??

1989 vs 2006
whats the dif ?
also why are we different than UK ?

I’m curious to know if others are seeing what I’m seeing in my area (outside Philadelphia). That being that in addition to homes sitting for sale with little to no action, rentals seem to be doing the same. I’m seeing more and more “For Rent” signs popping up just as I’m seeing more and more “For Sale” signs. And none of them are coming down!

I hate my current apartment (enough so that I don’t think I can stay in it waiting for the “correction” ) so I’ve been looking for another rental. Looked at a condo today - wasn’t interested, but the guy was doing backflips to try to get me to sign a lease. Looking at a 2BR townhouse tomorrow that last week was going for $900/month and less than a week later, they’re asking $850/month. (For those who think this sounds cheap, it’s not a fancy townhouse - very basic - nothing special.)

Anyway, I find both of these markets seeming to suffer together interesting… Or is this a normal trend at the initial decline of a housing bubble?

The Republican part is ’supposed’ to be the party of personal responsibility. Why do so many people think, if and when things go south, the government will bail them out?

Here’s a topic for debate:

IMHO, residential real estate may never again reach the same price heights — adjusted for inflation — as during this bubble. [Nominally speaking, of course they will; future inflation is a lock.]

Why? Even after the economy recovers from the inevitable depression, the demographics of an aging population combined with globalization pressures will conspire to cap prices for the rest of our lives.

Here is a topic that is relatively new, but was broached in another thread: CC&Rs for these condo/townhouse/SFR developments where HOAs are involved. This document clearly maps out all the rules and regs that must be followed as a member of the community, one (rule) of which dictates the percentage of rentals that’s allowed in the community. Obviously, with all of the specu-vestors buying these properties with the intent to rent, they are violating those rules. How will that play out in the end? Why hasn’t this been more of a news item or a concern to the “real estate professionals”?

Quoting Housing Wizard:
These subprime lenders do not know anything about making loans .Violations of C.C.R.’s is going to come out in the wash also as it becomes apparent that Lenders didn’t have reasonable lending standards .

BayQT~

I’ve lost a couple of posts.

BayQT~

David Lereah - ranger host for the summer in Death Valley - wearing a full suit (dark colored), and a heavy hat. Winter - ranger in Barrow, Alaska for all of the night time visitors. Gives the night time stories of the area (in the cold and the wind).

Its always interesting getting more information on the extreme house inventory gluts in markets across the states . Florida and Arizona seem to be running neck and neck . Wish we could get more articles on what these flippers were thinking ,and what or who inspired them to take these risks ,( especially when it was such a ticking time bomb market ).

I’d like to see any or all of the following topics discussed:

1) Apartment-to-Condo Conversions - How prevalent, how successful, how will they affect the rents in different areas, and how will apartment rentals be affected by SFH rentals from frustrated flippers?

2) Trump/Kiyosaki et al. forums selling at $499 in SF, less in SD, and only $99 in LA. Tell us anything?

3) How do RE agents and brokers operate for so much less in the UK?

Thanks!

Here is a topic that is relatively new, but was broached in another thread: CC&Rs for these condo/townhouse/SFR developments where HOAs are involved. This document clearly maps out all the rules and regs that must be followed as a member of the community, one (rule) of which dictates the percentage of rentals that’s allowed in the community. Obviously, with all of the specu-vestors buying these properties with the intent to rent, they are violating those rules. How will that play out in the end? Why hasn’t this been more of a news item or a concern to the “real estate professionals”?

Quoting Housing Wizard:
These subprime lenders do not know anything about making loans. Violations of C.C.R.?s is going to come out in the wash also as it becomes apparent that Lenders didn?t have reasonable lending standards .

BayQT~

Ben - please spend few minutes to go over this innovative paradigm of 8% commission…make sure you go though all the 7 chapters and introduction listed under the publications on the left hand pane…it is quite interesting and will make a great discussion topic!

Ben…

My weekend topic suggestion is this: How many housingbubble bloggers would like David Lereah to come here and field our questions?

If he really believes what he says, he wouldn’t have a problem talking to us, would he?

It’s time for Ben Jones’ incredible blog to debate David Lereah.

The stakes have never been higher, the outcome never more unpredictable.

Would Lereah ‘convert’ us, or would we ‘convert’ him?

Would he refuse to come here?

And if so, why?

I’d like the blog to debate inviting David Lereah here to become an active participant.

That’s my weekend topic suggestion.

First- we need to debate whether we should invite him here.

Then, we need to figure out what to do, based on the consensus.

After that, we either invite him- or don’t invite him.

And…if he comes here, and kicks our butts- we don’t whine about it.

It’s time to lay it down, folks, and put our money where our mouths are.

I, for one, promise to be civil, and refrain from ’spitballing’ if he comes here.

From my point of view- it might be an ‘Intervention’.

And it just might do some good.

Ben,

I know this is from the UK, but have you been told about

?

Basically the BBC (roughly = PBS) sent some reporters undercover into a branch of a big Real Estate Agency (= Realtor). They found a lot of issues. The UK blogs like housepricecrash.co.uk (which you link to) have gone nuts over the show.

The declining US dollar, and how to hedge against it so us savers don’t get clobbered in the upcoming housing crash. I am not a gold bug, so I would like to heare other suggestions.

Mish’s Article: Imaginary Numbers May have something of use. Re: Yield curve -Also, the yield curve has been basically inverted for 3 months, with a few days off here & there. Even an extremely flat curve is predictive of a slowdown. Also, he definition of inversion changes: sometimes it’s the whole curve, sometimes just T Bills & 10 year, or 2 yr & 10 yr. IMO, it’s been inverted for 3 months. The days off are just an aberration in the trend. However, UK is much more inverted, and Aus is also inverted.

From Pittsburgh Metro: 2005: Allegheny County had 81% More Foreclosures Than 2000. Westmoreland County had 89% More. Washington County 119% More.

In a study released last year, the Pennsylvania Department of Banking reported that the state’s subprime mortgage foreclosure rate of 11.9 percent was fourth-highest in the country.

The article is dated March 5, 2006.