The Housing Bubble

Paul Krugman pointed this out months ago, but few would listen.

In Fairfax City, (NOVA) the government just condemned a fully-occupied building and destroyed it. They intend to convert it to “green space” to complement the massive development project they have ongoing where the post office used to be. Nevermind that they could have left it intact and planned green space where an open lot already existed. No. That’s too easy and doesn’t allow them to flex their muscle and take advantage of the Kelso decision.

Unfortunately, I don’t see that as any particular genius or forward-looking action because it was planned a couple of years ago and because this particular council and mayor just aren’t capable of that kind of advanced thinking. They’re doing it because the builder told them to and because they have their heads so far up the builder’s backside they could floss his molars.

Government will not see any need to “soak” up inventory until inventory has become massive and they perceive a “need” to support prices. At that point they may intervene, but I think such intervention is counterproductive and would benefit only a very small class of people.

“Hi, I’m from the government and I’m here to help you.”

Run Away!!! Run Away!!!

Yes, one of the signs of a market downturn is increasing inventory. To put that in context, though, you need to look at demand, or in these case sales. You have to know if the increased inventory is being absorbed. In this case, demand is going down.

This has nothing to do with housing, per se, but with all free market economics. In 2000, for example, Cisco was producing tons of product to feed the dot.coms. When demand started to slow, they were still producing that same amount of product. What you saw, was inventory skyrocket, while demand was going down. So, that was a good sign of a downturn in technology. On the other hand, if they had been produced producing a ton of product (increasing their inventory) while demand was going up (as it was for a while), that would indicate a growing market.

Those combined –increasing inventory and reducing demand- are classic warning signs of a market top. The next phase is a period of contraction, which we are arguably in already.

If you want to take a look at inventory for the northeast, we did a post on that on 4/4/06. We also just did a post on mortgage application data on 4/6/04. Together, these show inventory and demand, respectively (inventory is up, and demand is going down):

BubbleTrack.blogspot.com

I do not understand range pricing. Why would anyone offer more than the lower end price? How is pricing a home at $750k-$800k any different than pricing at $750k?

“Instead of range pricing, San Francisco has developed a different way to sell property. “Rather than take the first offer that comes in, we set a date. We say we’ll look at offers two weeks from now,” then select the best one.”

Offer dates were great back in the old bidding war days. But if the offer date comes and goes without any offers the listing is marginalized.

Homeowners would love for a government buyout of land under the auspices of transit expansion, green space, etc. But green space is generally a concern only during expansive times, and the Orange Line is going nowhere west–ever; WMATA has no interest in spending $7 B to send heavy rail out to the Manassas Battlefield and the few big box stores. (It’s hard enough to find money to send it through Tyson’s Corner and then down 267.)

These developer crazes generally send their lenders down the tubes, with a giant government bailout to follow (but the last craze, in the 80s–small potatos comparatively–was only for $500 B). What’s never happened before is that the stock market is also near a historic high, and all of our jobs are being shipped to low wage countries. Lester Thurow once said a country can’t subsist on a service economy. It has to make “things.”

Of possible interest

http://tinyurl.com/kwzoe

Tangentially off topic but: In today’s Minneapolis Star-Tribune the prime page A3 full page ad is not, as it usually is, from Marshall-Fields or Macy’s or bloomingdales dept. stores. Instead, it’s an Edina Realty (the local bigwig) open house listing ad. Maybe not enough eyeballs making their way to the “home” section of the paper these days.

So, folks. While people document inventory, interest rates and market value the achilles heel becomes …(drum roll)…wind and flood insurance in addition to their mortgage payments. The next day or so will have all the articles from the Miami Herald addressing this problem. The Florida Keyes(translation: coastal properties) are f**ked. After this season the only ones standing will be those owners who have payed off their homes and choose to drop their coverage for the following year(s).
You CANNOT create affortable rates for billion dollar hits unless you cap coverages and then that opens the door to mortgage companies saying “no.”
Period.

“‘Time on market is a lagging indicator”

It’s almost a completely useless indicator because it doesn’t take account of either relistings or houses withdrawn from sale because they didn’t sell.

time on the market is only going to become important to the seller who doesn’t have time. That is going to soon separate the FB’s from those sitting pretty. Apparently in my area according to a mortgage survey (accuracy questionable) 33% of houses in my town have no mortgage… the rest are mortgaged, with 40+% being first time mortgage, and something like 20something% being HELOCed and 2nd mortgages…

Soon when the payments become painful and the houses are sitting and sitting… those folks will start to panic. Eventually they will either lose the house or sell at a steep discount… both will set off the panic in my area. Once someone KNOWS a person who got burned by real estate the talk of the town will shift. But until then the denial abounds. They don’t care what the stories say about other areas of the country in trouble. That just reinforces that it is different here.

This is the promised land, and we are the chosen people. Sonoma is different. Everyone wants to live here. ;-D

Time on the market will also become important to those who can hold on, as the FBs who need to sell will “screw up the comps.”

From the San Francisco Chronicle. “In another sign that the real estate market is cooling, but not collapsing, the inventory of unsold homes in California is roughly double what it was a year ago. Statewide, the inventory of unsold single-family homes in February was 6.7 months, up from 3.2 months in February of last year.”

What kind of inventory doubling rate would be indicative of a hard crash? Six months? One month? One week? I am not sure why they suggest a doubling in one year is no big deal.

At any rate, SD inventory has gone up by a factor of more than six since spring 2004, which means that it went up by more than double for two years in a row now (that would be 2 X 2 = 4…). So is SD crashing? There is no telling, because the SF Chronicle has no statistical yardstick to back up its assertions.

“Inventories have risen to 4.1 months from 2.3 months last year in San Francisco County, to 3.2 months from 1.7 months in Alameda County, to 5.2 months from 1.3 months in Contra Costa County and to 2 months from 1.5 months in Marin County.”

Those numbers all sound unbelievably low, probably because they somehow factor in the Realtors’ statistical lie of only averaging time on the market for the last period the home was listed, instead of from when it was first listed, and also because homes that never sell (that is, which stay in the market infinitely long) are conveniently ignored in that statistical calculation.

Since less than 3000 homes / month are selling in SD, with over 18K on the market, it looks to me like the prospective time on the market is over six months…

HELIBEN WILL SHOW NO MERCY FOR HOUSING

In a speech to the Economic Club of New York this week, he said he would not let a faltering housing market deter him from the necessary action to wring inflation out of the system.

In other words, no mercy now, and no bail-out later, regardless of warnings.

“In Santa Clara County, the median single-family-home price was $765,000 in February and should come in around $760,000 for March. The slight drop, (broker) Richard Calhoun says ‘is significant. Normally, prices are going up from February to March. I think in September we’re going to be talking about a number like $710,000. I see no upward pressure’ on prices.”

What he sees but does not mention is downward pressure on prices, as $760K down to $710K in six months is a 12.7% annualized rate of decline in the price.

Sacramento is exploding again this past week. We’re almost at our November 15th record. I suspect it will be topped next weekend. It’s about 130 homes short right now…but going up 60/day on average the past week.

one ZIP realty ad on mirmar, fl (miami) property:

such reductions will be more common and increase

Description
****below market by $200 000 *** owner says sell - 3700sqft + 3 car garage, completely remodelled 5 bedroom with granite kitchen in private gated harbour lakes, adjacent to sunset lakes. Large yard with room for a pool. Soaring 14 foot ceilings. Grand s

Sample Sonoma Valley listing progression

2/14/06 = 172
2/14/06 = 183
2/24/06 = 193
2/25/06 = 200
2/27/06 = 214
3/01/06 = 219
3/04/06 = 220
3/12/06 = 230
3/20/06 = 236
3/26/06 = 238
4/03/06 = 268

96 new listings in 7 weeks
13 listings per week
close to 2 per day hitting the market. (this is a small town. that’s a lot)

Sonoma has been selling on average of 4 properties per week according to SFGate at that rate looks like Sonoma has a 6 month supply of houses on the market. This doesn’t factor in ANY of the new home developments- these are existing homes only.

Sonoma County sample listings progression
3/20/06 = 1742
3/26/06 = 1766
4/03/06 = 1888

146 new listings in 15 days.
close to 10 listings per day

ps… today’s Sonoma Valley listings are at 274

From FT:

“Metal prices, like all commodities, they are cyclical, and I don’t see any reason to change the long-term planning price because prices are higher,” he said.

Most copper miners base investment decisions on a long-term planning price of 80-90 cents a pound. However, the price has quadrupled in the past four years to about $2.70 a pound.

But investors argue that mining companies’ conservatism is merely helping fuel higher commodity prices.

“You have this standoff between the producers who think these commodity prices are not real, and are therefore not investing enough in new supply, and the hedge funds who are putting more money into the commodity market because they see that the producers are not reacting quickly enough by bringing on new supplies,” said one hedge fund manager.

Note the producers, just like bubble believers, think that market is out of whack and will plunge back..
it all aligns with excessive liquidity that is slowly being withdrawn…it ties w/ many asserting that gold/oil are being subject to same forces.
utility index has been leading the downers…

ran into a realtor in the park this am,”sebastopol is different”,”higher inventory good for market” asked her effect of less than 7% affordability of median home,declining wages,rising rates?”it’s different here,prices don’t go down in sebastopol” i told her real estate was cyclical,she just looked at me and shook her head.an honorary blonde…hope no one tells her she’s pregnant.

” In the Nova/DC area where I live I can think of some good examples like expanding the orange line of the metro west which would require buying up land near I-66 that has houses on it.”

This is an ill-informed comment. There will be no impact on residential housing or eminent domain issues.

You can see the plans on http://www.dullesmetro.com. The metro will follow the toll road spur off I-66. It will detour through Tysons along 123 and route 7. Here it will be elevated and underground for a short segment thru the heart of Tysons. Ha-ha those crappy rental conversion condos (with about 25 for sale signs roadside on 123) next to Capital One will have double exposure to an elevated metro and the beltway on the other side.

There is no telling, because the SF Chronicle has no statistical yardstick to back up its assertions.

Which is why the word bubble / crash / hard / soft is COMPLETELY IRRELEVANT. It is a tool used to hide the numbers. It is the greatest trick Lereah ever invented. When we talk about words we can avoid numbers and the numbers are what is terryifying.

What is relevant is what your home will cost next year. But if feels good to say there isn’t a crash.

1. There isn’t a crash.
2. There will be a soft landing.
3. There’s no bubble.
4. Anyone who buys now will lose 20% of their home value in twelve months.

Which of the above four statements means something?

NW DC seeing lots of sold signs- They must be leaving them up past the 30 day limit- who would bitch

Athena, I think you hit the nail on the head. I live in Humboldt county, about 3 hours north of Sonoma. My prospective landlords, from Santa Rosa, bought four homes here for “investments,” while still having there main house in Santa Rosa. They asked why would someone with my income want to rent, and I told them flatly that housing was overvalued and was overdue for a significant correction. Both of them became defensive and almost hostile, saying that the “north coast is just like the north bay…and everyone wants to live here.” They both agreed, however, that real estate appreciation may be constrained to 5-8% for the next couple of years, then it will be back off to the races, because California “real estate never goes down.” Needless to say, I am not renting from these overleveraged fools who will one day have their heads handed to them as interest rates and falling demand eventually send prices down–even in coastal California (just as it already has in the Central Valley).

I found this little golden nugget on craigslist today, nice looking bungalow in pasadena. Ripe for a lowball?

The last half of the this article tell all of the Realtor strong hold on the market.

http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/04/09/BUGROI5P0K1.DTL&type=business

When I was in San Diego recently, I noticed that most homes for sale were listed not at a single price, but with a price range, such as $700,000 to $725,000. (Alas, no daydreaming in San Diego — prices there are almost as high as here.)

The people I talked to thought it was a response to Internet searching. If you list a house at $725,000, people searching Web sites for homes priced at $700,000 or less won’t see it; but if you price it at $700,000 to $725,000, they will. Or so I was told.

I did some research and discovered that the strategy, dubbed “value range marketing” was started in Australia and imported into the United States by Prudential Real Estate in the mid-1990s.

“It developed during a buyer’s market, which is what the nation is moving toward,” says Carlton Lund, a broker associate with Prudential California Realty in San Diego.

“When I first saw it, I thought it was kind of crazy. But the market was extremely slow. We were kind of desperate to get something going. I thought I’d try it on a property,” he says.

Lund experimented with a house that had been on the market for 93 days without a single showing. He switched from a low price to a range and had an accepted offer within 48 hours. The first-time buyer, seeing the low end of the range, was emboldened to make a bid, Lund says. Since then, he has become a leading proponent of range pricing.

In 1995, only 12 houses with range pricing sold in San Diego. Last year, the number was 23,000, or 57 percent of the market.

Lund says Prudential paid about $15,000 to have the multiple listing service in San Diego change its software to accommodate range pricing. He says Realtor.com, the Web site of the National Association of Realtors, has started accepting price ranges.

Prudential brokers who use range pricing must choose one of 100 predetermined ranges. That’s so they don’t choose a range that is too narrow or wide. The typical spread is about 10 to 12 percent.

Lund says a range makes sense because “it’s impossible to really know what the value of a property is. Property values change every day, just like the stock market. As soon as a new house in the neighborhood comes on the market, it changes your value.”

Supposedly, setting a range encourages a buyer to submit an offer at the low end and start a negotiation that might end with a deal closer to the high end. With a higher fixed price, the negotiation might never begin. Lund contends that houses with range pricing get sold 20 percent faster than fixed-price homes.

Not so, say three professors who studied 5,852 houses sold with fixed and range pricing in the Fort Worth, Texas, area between January 1999 and December 2000. They concluded that homes with range pricing sold for roughly the same price as comparable homes with fixed prices but stayed on the market 15 percent longer.

“I think it’s just a gimmick,” says Sheri Faircloth, an associate finance professor at the University of Nevada, Reno, who co-authored the study. If you want to start a bidding war, she says, “to me it’s more rational to (deliberately) underprice” a home.

Lund says Faircloth’s study was too small to be meaningful. “It’s malarkey,” he says.

Following is inventory in Portland, ME (04103) for single family, multi-family, condos, townhouses and coops from Realtor.com. The number of listings was 28% higher in mid-January and has been on a steady decline. Some of this is probably due to in-migrants from out of state.

16-Jan 232
30-Jan 218
7-Feb 220
16-Feb 228
25-Feb 226
8-Mar 211
22-Mar 193
29-Mar 189
7-Apr 181

ORANGE COUNTY CALIFORNIA inventory up 67.8% from 1/2/2006 to 12,163! Hmm I wonder if prices will come down in Irvine? =)

1/2: 7,245
1/10: 7,866
1/20: 8,169
1/30: 8,430___1/06 sold: 2,594___1/05 sold: 2,903
2/10: 9,735
2/20: 10,141
2/28: 10,420__2/06 sold: 2,672___2/05 sold: 2,890
3/10: 10,845
3/20: 11,218
3/31: 11,762
4/4: 11,955
4/7: 12,163

We’re so out in the sticks the local paper lumps our whole county together for sales figures. Still, I found it interesting that our county YTD was up (slightly) over last year. And the sales price was way up…$85,000 to $130,000 (33 homes sold) which probably just meant a home in a town closer to civilization sold.

Interesting front page story on Skaneateles, NY…its assessments went thru the roof and there is worry about pricing out the middle class. See link below.

http://www.syracuse.com/news/poststandard/onondaga/index.ssf?/base/corrections-0/1132134236242140.xml&coll=1