The Housing Bubble

IMO the west coast of Florida - in particular the Sarasota, Bradenton, North Port, Fort Myers, and Naples areas. These have seen “official” median numbers and OFHEO HPI decrease by about 20% already - most of that last year actually, and starting back down again now this fall. That’s also where it seems like the highest concentration of flipping, fraud, and now builder and lender bankruptcy has been happening.

imo, GZero happened at the time of the first mortgage rate reset, which caused someone to miss a payment.
Defaults, foreclosures, downgrading of MBS, tightened lending, failed brokerages, property price drops and slowing sales followed.
Rather than a geographical area, i’d imagine it occured more or less simultaneously in various states, from coast to coast… kinda like the RE market waking up one morning with a peculiar reset-rash of tiny pink bumps from head to toe..

IMO it’s the west coast of Florida - in particular Sarasota/Bradenton, North Port, Ft. Myers, and Naples. Those areas saw about the greatest percentage increases, and subsequently have seen 20% declines already - most that last year even, and are starting back down again this fall after a pause. Those areas also seem like they’ve seen the most flipping, fraud, and now builder and lender bankruptcy.

At least that’s IMO where the most concentrated damage is happening. Certainly there are other candidates though - CA central valley comes to mind.

“Ground zero” in terms of the actual cause of the bubble is actually two places - Wall St. NYC, and Washington, DC.

I would vote for the east coast of FL (only because I don’t see the west coast every day, and the east coast in in BIG trouble) and the area around Orlando as some of the most bubbly in the nation. Add in the FL “fu*k the new guy” tax system, sprinkle some extremly high insurance rates on top, and then bake in a subprime oven….

We have all the problems of other areas (high prices, salaries that are nowhere near supporting the prices, massive oversupply, net out migration) and 2 of our own (Save Our Homes (taxing system), and extremely high insurance costs).

That, imho, puts S. FL on the top of the list for ground zero. If I had to pick a real local area, I would say that Miami will be ground zero, followed closely by West Palm Beach.

I’m not really sure there is a Ground Zero. So many areas have gone silly with prices, that’s it’s an easier job to pick out the areas that haven’t gone bubblicious than those that have.

GZ was 20 miles south of Smallville.

A little old widow named Ruby Crawford cashed a ten year old life insurance check from her late husband’s policy. Last year the bank figured the $500,000.00 check was lost and loaned the money to an FB. When the check was presented for payment the $500k shortfall rippled through the entire banking industry.

Or something like that

“Where is “ground zero” in this housing bubble bust? ”

My Ex-House.

Neil, Agreed good topic. I approached an agent who had a vacant property up for sale and I said the price is too high, but I’ll rent it w/ option to buy after a couple of years once the market settles. He said no, the seller wants/needs it sold now. I said fine and made a 90% offer w/ all closing costs. He said the seller would not even entertain the offer as they’ve already lowered the price over 25k & its current price is 65k less than 05 peak. I asked, well how many offers have been made. Agent said this was the first one. I said well it looks like the 05 peak really overvalued the property and that my offer represents what the house is worth as its the first and only offer since the home when on the market 6 months ago!! He said sorry, no deal. I said no problem I’ll rent somewhere else and wait. Since then they’ve shaved off another 7k from the asking price. They currently suffer from a negative ROI as it sits vacant. They paid 250k for the place in 2002, and now want ~450k, i.e 200k in profit for ~ 4 years of ownership. Insane, I was willing to give them 130k profit (400k+~20k in closing costs offer) which is also an insane gain for a little over 4 years of ownership. They can keep it and rot. When its still on the market in a couple of years for less that 400k because the finally got frustrated and tried to rent it out only to be annoyed by tenants that damaged the property and put it back on the market then I might consider making a 90% offer from that price. Until then I’ll keep my money invested and working for me instead of disappearing as housing prices continue to crash!!

your question makes me want to ask a question.. If my mortgage was chopped into little pieces and sold to a wide array of investors, and then my house is foreclosed upon, who then owns my house? Is it those many people who bought pieces of the mortgage?

Who would have the decision making power to put this house back on the market?

“Why are people still refusing to sell vacant properties?”

Because hope springs eternal. Because they hope the bottom is near and they don’t want to be the dummy that sells at the bottom.
This hope is kept alive by the RE industry and their shills. This hope needs to be throughly exterminated before capitulation can ensue; this takes time and financial pain.

“Do the schools no longer teach ROI?”

It doesn’t matter what the schools teach. This isn’t about knowledge, its about emotions. Many people deep down “know” what they need to do but their emotions won’t allow themselves to act. They will act only when externally forced.

Because they are in denial, for a variety of reasons. Some because of the emotional attachment to the property. Others because of how much money they’ve put into the property. Still others I think can’t acknowledge they’ve made a huge financial mistake.

Was talking with a church friend last night who has a vacant rental, a nice 3 bedroom. His partner was offered 155K for it in the spring. My friend said take it. Partner declined, because he wanted more “because of how much money they have in it.” Property now needs more work after the tenant left, and they’d probably be lucky to get 120-130K right now.

My friend is in his early 60’s and has been a real estate agent 25-30 years. His opinion of the current situation?? “I think it’s the worst I’ve EVER seen, and I don’t see it getting better anytime soon.”

These folks may be holding out hope for a bailout, which would use tax dollars to shore up the potential sale price of their homes above their current fire sale levels.

“Why are people still refusing to sell vacant properties? There are too many people in my life who could sell at a profit but are instead choosing to wait on selling vacant homes until the market recovers. ”

Short answer : GREED.

offers of cash money will talk loudest.. an offer that includes at least a big chunk of it will be one powerful incentive to negotiate, imo.

Forget SS for now. Getting everyone to agree on the loss amount is like trying to herd kittens. Just wait for the property to go REO.

Short sale gurus talk about how easy it is to do the deal, and there may be a few people who do SS’s on a regular basis, but they are the exception so far. I know a gal who earns a living doing short sales on retail listings, but even then the discounts weren’t huge.

To me a possible capitulation point is when a much higher proportion of short sales are accepted, especially on investor offers. We’re not even close to that yet IMHO.

That is a brilliant question! And as Hoz remarked yesterday, what effect will the boomer sell-off have on sale prices? There is a trend just waiting to be modeled by someone smarter then me >; )

Further, how did it come to pass that ‘bankruptcy reform’ occurred just prior to it all? And even further, unlike most bills these days, this one had almost unanimous bipartisan support?

The housing bubble is a symptom of the larger credit bubble which has been growing since the 90s. Many new credit products combined with central banks printing obscene amounts of money and the US and Japan holding interest rates near negative real levels.

Credit bubbles beget stock bubbles, housing bubbles, art bubbles, etc. It’s a misallocation of investment capital, and it is only coincidence that it happened at boomer retirement time.

“How did the HB coincide with what should’ve been the peak saving years of the boomer generation?”

The boomers mistook leveraged RE investment for a method of saving. “Look, I’ve saved a couple of mil by buying a bunch of low-down SFH and absorbing the negative cash flow for N years.” Sorry, buddy roll, you just wiped out your life’s savings.

We are very far away from fundamentals on both housing and stocks. I would say stocks are very bubbly and can crash anytime, for any reason.

The US stock average P/E is around 17, not terribly out of line
http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
Earnings seem to be decelerating recently though and some pull back
may be due. Even so its a lot better place to invest than housing.

Yes, it will. Housing will never go to 0, as plenty of the .COM stocks did.

Other then that, I don’t really see much difference. The land will always have value; but because of the leverage used, the fact that “houses can go to zero” in no way contradicts “you will lose everything, and maybe even have to bring cash for the tax bill”.

“This bubble is centered around shelter, one of our 3 basic needs”.

For this very reason, this bubble is all the more dangerous inflicting real pain into real lives. I met several dot.com refugees in ‘01 who were upset but seemed to be moving on with their lives. They were young, bright, and bounced with their circumstances. This bubble will send all spectrums of the population, at least temporarily, on the streets. Combine that with instilled American entitlement -what they still are teaching in schools- and the result is anyone’s guess.

How will it play out differently?

For one, home purchases are hugely leveraged in comparison to stocks. The average punter buying shares back in 1999 paid for the shares he bought; a few went margin, but even that was not many and not as heavily margined as houses.

A house purchase is almost always VERY highly leveraged, so whereas a stock needs to go to zero for you to lose all your money (and even then, you get a capital loss you can use or carry over to reduce taxes), with a house you can find yourself losing everything with only a 5% to 15% drop in prices. Heck, some people will lose money if the house price stays stable, what with transaction costs.

Add to that the running costs to maintain the house, and the average speculator can find himself in a world of hurt compared to stocks, most especially for empty houses that are providing no offsetting shelter value to the owner.

Being that their (over-leveraged) house is the often one and only investment and retirement plan that a lot of people have made, I expect that the effect of the housing debacle will be much greater on the average American than the dot-com bust ever was.

There is no means of avoiding the final collapse of a boom brought about by credit expansion.

The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. - Ludwig von Mises

So you see, it won’t be any different this time.

DC/Northern Virginia has to be a candidate for ground zero of retail/office overbuilding. In the Dulles area they are building offices and retail like you wouldn’t believe. On the office side of things if the government decides to stop the growth in defense/homeland security spending, these office buildings will be completely empty. If the government actually reduces defense/homeland security spending it will be worse.

Retail is kind of similar. I haven’t looked at numbers to see if the population is actually growing in Northern Virginia, but I can’t think that adding another Target three blocks away from one actually increases sales much less increase them enough to justify the cost of the new store.

In my little town there has been an explosion of new hotel, restaurant, and spec retail space, but no increase in population or jobs.

You must live in Loveland!

Good quote

” And if you wish to go on living, what you now need is not to return to morality — you who have never known any — but to discover it.”

Excellent quote. But I wonder how many involved have the ability to discover it. Ah, in my dreams sometimes, I’d love to see some members of the media, of the political structure, of Wall Street, et al, forced to live in the conditions they’ve created for others, with a little primer on how their actions or inactions had something to do with what they are now experiencing.

Still working my way through Pynchon but I may have to back reread Rand. Living in CA, I had thought a move to Fante would be appropriate.

Here’s my thought for an automatically adjusting money supply / social welfare scheme.

Every adult recieves a fixed stipend of fiat money whistled up out of nowhere. Everyone pays a flat tax on all earned and unearned income and capital gains in fiat which is collected and destroyed. When the system is in equilibrium inflow and outflow is matched and this is a pure wealth redistribution.

The stipend provides each individual with a share of the national wealth that they are free to spend anyway they want. All government handout and welfare programs are destroyed. Governement is cut back to it’s basic functions. I would think no more than 10% of GDP summed over all levels of government.

During economic contraction the stipend would inject cash to support economic activity as tax reciepts fell. During boom times the surging tax reciepts would pull money out of the economy and automatically cool thing down.

The London Gold fix is just that.

I don’t know about you, but a lot of people I know use the phrase ….until prices recover”. They are dead serious in thinking that this is a temporary glitch in the prices, and that prices will resume their upward climb sooner or later.

And if you count the “long term”, almost everyone agrees that house prices will inevitably rise. They aren’t considering real vs. nominal prices (i.e. inflation), nor running costs (taxes, maintenance, interest), nor opportunity cost (eh, opportunity cost, wassat?).

But in a nutshell, that’s why a lot of people are hanging on; they really do expect that they will be able escape later at the price they paid in 2005.

“…would there be enough participants to matter?”

That is immaterial. The big question is whether Congress can put the U.S. taxpayer on the hook for billions of dollars worth of toxic subprime debt which Wall Street has heaped on to the U.S. financial landscape, so that Wall Street can keep their party going and send a few campaign contributions back to the Congressmen who helped out.

Could this be because servicing agreements don’t allow for holding and renting? I don’t know.

This is the most moronic statement I have ever read.
The salary for an executive hired to run a company should indeed be much lower than the earnings of a hedge fund manager, who in many cases should have a significant amount of their own money invested into the fund. Hypothesize a 20B fund with a manager with 200M invested into it. Presume he generates a 30% RoR. His own position, not counting whatever fraction of the incentive fees/AUM fees are directed to him, would increase by 60M. I know several such people…. I’m not saying to get those net wealth figures something wasn’t wrong nor do I approve of the tax avoidance schemes I have seen, I’m just stating that the direct comparison as stated is worthless.

“The richest Americans’ share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers.”

Greed is not only good, but it has never been better!

This is why I would love to see a few Wall Street firms just up and die, and freak the rest of them out in the process.

“During this summer’s confusion over bond valuations, for example, it was especially difficult to know whether to buy or sell. Investors forced to fly blind sometimes resort to panic selling, which can produce wild swings in the markets.”

Investors who are looking for a safe place to park their money for a while: Vanguard Treasury Money Market Fund, Fund #50.
Liquid. Lending only to the US Treasury. No CP, NO CDOs, No CMOs.
Only $3k to get in.
I have part of my portfolio here.

~Misstrial

Mark-to-myth valuations work quite well for Wall Street in a world where lots of passive (aka dumb) money is hard-wired into asset purchases (e.g., 401(k) allocations). Mark-to-myth (as opposed to transparency) results in assets being sold at fantasy (over-)valuations to passive investors, who will not discover they are bagholders until many years down the road when mythical valuations are ultimately marked to market. Wall Streets’ perpetual money pump would not work nearly as well in a world with financial transparency that allowed rational valuation of financial assets.

“I have yet to read either in an online newspaper (LA Times) or hardcopy (I get the WSJ) or on any blog, an APOLOGY from any FB relative to the financial chaos they (and brokers/lenders) are responsible for worldwide.”

Don’t hold your breath, unless you want to turn blue.

If you believe in hyperinflation and have non U.S. Dollar backed assets, it’s a good question…

I’m looking for a pendulum like performance for homes, going under pre 2001 values by 20% or so and then creeping down slowly a bit more, before reverting to the mean, slowly.

Gotta have a place to live, eh?

If your eggs aren’t all in the U.S. Dollar basket, you’ll have some amazing buying opportunities.

I expect to buy a few very selected properties, for a few Cents on the Dollar of current values, on the basis of the Dollar dropping in value, along with the housing market tanking at the same time.

Repeating a comment I made somewhere above before reading Jas’s question …
Buy when price is no more than 120x monthly rent, if you are predisposed to buy. If you are NOT predisposed to buy (i.e., you like the landlord’s services better than planning your own maintenance/renovations), then buy when the price is 80x rent. If it ever gets to that.

Q: “How do you spot problems ahead of time, that kind of thing.”

A: Just my own experiences here, but we only rent from multi-millionaires. Small-time LLs are generally not able to come up with the funds to replace/repair items in need of attention, such as the water heater, roof leaks (in CA the ravens inadvertently chop holes in the roofs with their large beaks when they carry food to the roof to eat), ant control, etc.

So, when you are doing your walk-through of a potential rental, conduct this exercise as though you’re doing an *inspection*. Ask the LL how repairs will be determined/completed. Take a look at the water heater. Does it look older? There should be a tag on the side indicating age/purchase date. Same with the garbage disposer. Any rust around the under-sink-side of the disposer? Any water pooled on the bottom of the under-sink cabinet? Any swelling of the particle-board there? Same with the sinks/undercabinets in the bathrooms. How old do the toilets look? Any rust in the bathtub? How about the fixtures? Covered with lime/calcium buildup? The flooring, the carpeting? Any dead insects laying around in the kitchen? Open the cabinetry and have a look. Look up. any water staining/spots in the ceiling? If so, may be a roof leak. Generally, roof leaks get worse over time. Electrical switches? Loose? Dirty switchplate covers usually indicate sloppy tenants prior to you.

Beware of any LL that allows you to enter the premises on your own; that is, they have an unlocked door policy for prospective renters “Just go on in, the door’s unlocked”. If this is how they treat their investment, then you don’t want to rent from them.

There are several home inspection books out that can give you an itemized list of what professional home inspection services look for in a potential home sale situation. You may want to check into one of these books or do an internet search for such a list.

All the best to you.

~Misstrial

I would define a starter home as one whose price is in the 25th percentile of homes in an area. HousingTracker.net breaks down asking prices into the 25th, 50th (median), and 75th percentiles, along with graphs. I’ve found the site to be a tremendous resource, whereas most sites just have median home data.

I think that these distinctions can provide useful insights into the overall health/stability of the market. For example, in Sacramento (my home) the 25th percentile has fallen from $345k to $273k from 04/06 to 10/07. That’s a 21% drop. Meanwhile, the median has only fallen 17% while the 75th percentile has lost only 12%. In other words, the bottom rungs of the market have suffered greater than the upper realms.

In my opinion, the market won’t be in equilibrium until all strata of the market experience the same level of declines. So in other words, until the declines from peak experienced by the 25th=50th=75th, the market will still be in the process of correcting and therefore buying will be premature. The bottom will not be reached until stability is achieved, and we seem to be a long ways from seeing that.

My interpretation of all of these is,
US dollar worthless, stocks rally.

Having been in the process of selling four properties in the past few months, I have some insight here.

One SFH in San Diego, one mobile home (senior park) also in SD. One parcel of land (over 100 acres), one parcel of land (also over 100 acres) with a small/cheap house in “flyover country.”

The first three in CA are being handled by realtors. The farmland I sold to my cousin & worked directly with a bank that had in-house escrow services. The difference in paperwork was absolutely astounding. With the farm deal, I signed exactly 3 (three) pieces of paper and filled-out my SSN on one of them. That’s it. Funds were wired to my bank account for free! Absolutely no problems, whatsoever.

The other properties each have stacks and stacks of paperwork with tiny writing and small boxes check or unchecked — all of which needs to be closely scrutinized & each paged initialled/signed off.

Don’t know if it’s because the realtors are involved or if it’s the “California” factor.

Either way, most of the paperwork is CYA stuff for the escrow, title & RE companies. IMO, a RE transaction should require no more than 10 pages — and I think even that’s excessive. This is also one of the problems with the lending side. So much paper — much of it redundant — and the poor schlep who isn’t familiar with these transactions is overwhelmed by it all and makes mistakes/doesn’t read everything.

We need serious reform in this area, IMHO.