The Housing Bubble

The second look at rating the media and the housing bubble turns to the northeast. First, the good:

Concord Monitor in New Hampshire, May 2005. “Whatever happened to the $150,000 home? Not too long ago, you could buy a nice house for that kind of money. Today? Not in Concord. ‘Today, $150,000 is typically a very run-down ranch on a very small lot outside of town,’ Jim Knowlton, an agent in Concord said. ‘You’re looking at an old farmhouse that’s ready to fall down in Andover, a New Englander in Franklin. There’s a Grizzly Adams home on 40 acres in Danbury that sold for $110,000.’”

“‘It’s really a game of patience, being alert and ready when the house comes up,’ said Brenda Perkins Anukem, an agent with Kathleen Gallagher Family Realty. Anukem said at least three of her recent homebuyers decided to use an 80/20 mortgage. ‘That’s becoming more and more common. I’ve only seen it for the last year and a half. It’s just an option that keeps their payment cost down so it helps them afford a little more house. Not that it doesn’t scare me.’”

“But for many starting out, getting a home for less than $200,000 isn’t simply a goal - it’s a must. While median home prices grew nearly 14 percent between 2001 and 2003, salaries only inched up 1.4 percent, according to a statewide report on affordable housing. Mary Downes, director of education at the Concord Area Trust for Community Housing, said the $150,000 threshold is an important one because it’s what most average working people can afford. To make the jump from $150,000 to $200,000 means an extra $300 a month in mortgage payments.”

‘Caught in the gap, Downes said, are ’single-income families, whether they’re married with one person staying home, or a single mom and young people.’ ‘More and more people are being shoved out of the market, which means people in the market are paying more than they should in terms of their monthly budgets,’ she said. ‘Then people start making not-so-smart decisions about the kind of mortgages they get.’”

The Boston Herald, April, 2005. “Dorchester and Roxbury homeowners defaulting on mortgages rose 35 percent over the past year, said Anderson, of The Real Estate Analyst. And Dorchester single-family and condo prices are falling after record highs last year. Dorchester single-family home prices dropped during the same period to $320,000 from $370,000, while condo prices slid to $245,000 from $265,000.”

“An economist from the University of Massachusetts at Boston, documented in a recent study that found a 60 percent rise in so-called subprime lending in Boston neighborhoods. ‘There is a whole confluence of factors,’ said Anderson, a longtime Dorchester homeowner. ‘We’ve hit the wall.’”

Newsday in New York, May 2005. “Barbara Corcoran is even more of a symbol of the city’s obsession with real estate now. She’s on ‘Good Morning America’ and the ‘Today’ show advising people how to buy and sell. By September she hopes to host a weekly real estate show on national television. A newsletter from a group of Prudential downtown Manhattan brokers said recently, ‘You heard it here first: The market is slowing down and pretty significantly too.’ One of those brokers says people are reducing ‘really extreme asking prices’ for high-end apartments but that the market’s still strong.”

“Corcoran concedes there are periods when housing markets drop. Over a 3 1/2 year period beginning in 1987, city prices dropped about 32 percent. She admits there are some people who risk getting hurt badly in this housing boom.’Is it dangerous to be a flipper if you don’t have an educated eye? It’s ridiculous,’ she says.”

“Her advice? If you’re a seller, underprice your property by 10 percent and you’ll set off a buying ‘frenzy.’ If you’re a buyer, overbid to get the property you want, and the rising tide of the real estate market will protect you.’”

From Curbed.com in New York. “i just spent more than 24 hours camping out on the street to buy a condo…that’s what it takes this days to buy a condo pre-construction. i showed up at 9:30am on saturday morning for a sunday 11:00am..offering and was the THIRD person on the line…i had gone to walk around the neighborhood to reassure myself it was ok to buy so lost a spot on the line….crazy stuff happend through thte night too. we got eggs thrown at us from peole at 147 front street (where the sales office is located).”

“hundreds of people asked ‘what are you doing in sleeping bags on the sidelwalk in the middle of the day?’ and then laughed at us.”

The New York Post, March 2005. “Investors are so eager to get their hands on New York City commercial real estate that they’re driving up prices beyond what the rent rolls would justify…Average asking rents in office buildings were $47 a square foot last year, compared to $59 in 2001..there could well be some element of speculative buying.’”

“WRONG-WAY GREENSPAN STRIKES AGAIN…’These rate hikes are really a joke anyway. Even as he’s pretending to tighten credit through these rate increases, the Fed has actually been allowing the nation’s money supply to grow rapidly at more than 5 percent over the last year. If all that money is available, it’s going to be put to use — creating the next bubble.”

“The winner, I think, will be the housing bubble. If all these rate hikes finally take hold over a short period of time they will deflate home prices just in time for Greenspan’s Farewell Apology.”

The bad:

Indy Eastside in New York, May 2005. “George Simpson of Suffolk Research Service said, ‘Just close your eyes, buy some vacant land anywhere out here, and you can make an almost unbelievable profit. You can’t make one-tenth of this kind of return on investment with any other speculation.’”

“Chris Chapin of Prudential in East Hampton: ‘When you have people who don’t care what they have to pay for a parcel of land, they just want it, that affects prices.”

“Realtor Joe Kazickas; ‘What percentage of property owners do you know who can afford to buy the houses they live in now? I would guess the answer is about 30%. What’s going to happen in 20 years when the baby boom generation starts dying off? What happens when we are on the backside of that bubble? No one knows. But there won’t be the buyer base then that there is now.’”

The New York Times, May 2005. “‘In the last five years it seems like everyone wants to be a broker,’ said Diane Saatchi, a senior vice president for Corcoran . ‘There’s not enough time on the part of the senior brokers to really do the proper training because many of us are too busy making money.’”

“The National Association of Realtors says its membership has swelled to 1.1 million now from 766,560 in 2000, a rise of 46 percent. In Manhattan the number of brokers and sales agents has jumped 42 percent, to 26,220, in the same period.”

The Journal News in New York, April 2005. “The inability of buyers to afford houses appears to increase the demand for lower-priced condominiums and cooperative apartments, pushing those prices up as well. That’s what happened in Orange County. As potential buyers were priced out of what they wanted, they bid up lower quality homes. It really is just a mind game to convince yourself that the $300,000 house is now ‘worth’ $500,000.”

“The affordability of co-ops led Kyana Kelley to bid on a one-bedroom apartment for $90,000. She said she hoped to close in the next few weeks. Kelley, age 30, figures to sell the apartment and trade up in a few years on continued price strength. ‘It’s going to keep rising,’ she said.”

“Agent Bobby Palazzo said demand in Putnam was being fueled by people moving up from the Bronx, White Plains and Yonkers. ‘You can still get something decent up here for under five,’ Palazzo said, meaning $500,000. ‘Unfortunately,’ he added.”

The Boston Globe, March 2005. “Between 1997 and 2004, homeowners under the age of 25 jumped 11 percent; and now these youths make up one-quarter of all property owners in the Northeast. ‘I am young and property values are soaring,’ said 19-year-old Rayford Kelley, who bought a $560,000 fixer-upper in Roxbury with no money down. He had trouble leasing several units after he forced out tenants who refused to pay rent. Kelley agreed to lease one apartment to friends…He’s already worried about the number of visitors coming through the house, into which he has put more than $10,000 in repairs, but doesn’t want to say anything to his friends.”

“25 year old Paul Phadungchai said he probably overspent with $50,000 in renovations that include a whirlpool tub and granite kitchen countertops. ‘For a kid like me who had college taken care of and was able to save money a lot of the time, not being able to save money ever is really a life change. It’s all gone and now all I’m stuck with is a huge mortgage. You have to really think about that.’”

From CNBC, April 2005. “He’s a roofer and she owns a hair salon, and now Paul and Caren Matera are applying their entrepreneurial skills to New York’s red-hot housing market. After attending a $3,000 real estate seminar, last July the Materas bought a little bungalow on Long Island. They sold it two months later and made a 50 percent profit. Since then, the couple has taken equity from their own home and invested in a half dozen properties now worth over $1 million — much of it pre-construction properties in red hot Florida developments.”

“So far, Paul and Caren Matera haven’t seen any slip-ups in their real estate investments, but that doesn’t mean the roofer isn’t losing sleep over his retirement dreams. ‘Every time you close on a deal, you lie in bed worrying at night,’ said Paul Matera. ‘I don’t know how my wife sleeps at night. She sleeps pretty soundly while I’m lying there awake.’”

“Most of these Californian real-estate investors are looking for investments beyond the Golden Gate. Group member Tessie Cuy says she can buy real estate outside California for less than in her own home town. And Doug Boggs, another investment club member, says he is focusing on investments in the Sun Belt region: The southern and southwestern states of the U.S. ‘Florida, Arizona and Vegas — that’s where everybody else is going too. It’s kind of like the stock market, really,’ said Boggs.”

“That sort of attitude worries William J. Poorvu, a former Harvard Business School professor . ‘If you think you’re just buying a lottery ticket and putting down the amount of money you’re willing to lose, that’s one thing,’ said Poorvu. ‘If you’re investing your savings in something like this, I think you are making a mistake.’”

Market observers, the best: “Appraisers say there is pressure on them to inflate home values, and there is concern that if people pay too much for their homes it could lead to more foreclosures if housing prices tumble. A recent survey of 500 appraisers found that 55 percent of them personally feel pressured by sellers, agents, and even lenders to inflate home values by 10 percent. And one-third of the appraisers surveyed said they fear losing business if they don’t comply.”

“Jonathan Miller, CEO of an appraisal company in Manhattan, said he thinks 75 percent of appraisals are inflated. ‘The people who are paid on commission probably won’t be there when those problems come in the future.’”

You decide, May 2005: “The gap between income and Massachusetts home prices is the widest since the peak of the 1980s housing bubble, and that gap, intensified by rising interest rates, should cause home prices to dip later this year..declining about 3 percent. ‘It’s not going anything like the ’80s, but there’s going to be a correction,’ said Alan Clayton-Matthews, of the University of Massachusetts. ‘There has to.’”

“According to the Massachusetts Association of Realtors…the state’s median single family home price rose 11.9 percent to about $346,000 while the median condominium price rose 14.5 percent to about $265,000. John Dulczewski, spokesman for the association, said the group expects home sales to slow and prices to moderate this year, but not to fall. Even though mortgage rates are likely to rise, an improving economy and job market should continue to spark demand.”

“He added that supply remains tight. Last year, the state had only a 6.6-month supply of homes, compared to 8 months in a so-called balanced market when supply and demand are about equal. In 1996, shortly before the housing market began its recovery, the state had a 9.4-month supply. ‘We are still calling for price appreciation,’ Dulczewski said. ‘The supply just hasn’t kept up with demand.’”

“Economist Mark Zandi said, ‘The housing market is through the roof, way outside anything we’ve seen historically. The longer it goes on, the more significant a correction we’ll see.’ Zandi said the housing market, fueled by low interest rates, is becoming increasingly speculative in many metropolitan markets, including Boston. This means buyers, instead of basing decisions on fundamentals, are betting that prices will rise, leading them to stretch their finances and take out risky, short-term mortgages that are vulnerable to interest-rate increases.”

“In California, for example, two-thirds of mortgages in the first three months of the year were interest-only adjustable rate mortgages.”

May 2005, “Zandi said he’s worried about the vulnerability of the mortgage-backed securities industry, where hedge funds and other investors have made huge bets. That derivative industry funds many mortgages for home buyers, particularly for low-equity loans. Problems in the mortgage-backed securities market could result in a credit crunch for would-be home buyers.”

“‘If things continue on as they are for another year or even six months, the potential for price declines is that much greater and the risk to the economy is much more significant,’ Zandi said.”

“Yale University economist Robert Shiller, ‘I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history,’ he said in a telephone interview yesterday (May 23rd).”